All insurance policies are not the same. For any given type of policy, numerous different "standard forms" exist. Moreover, the standard forms provide a bare minimum starting point for coverage. A company should (1) have its policy endorsed to substitute better policy provisions where possible, and (2) have its policies customized to fit its specific needs. Unfortunately, many companies receive policies off the shelf, with no improvements, resulting in inferior coverage. Additionally, many companies overlook the importance of having a savvy and knowledgeable insurance broker or consultant who will not only secure the broadest "standard" coverage available but will also identify coverage gaps that may be filled by specialized policies. This article discusses some of the problems we typically see.
Liability Policies
1) Are you protected against multiple deductibles and occurrences?
If your company has 10,000 similar losses, how many deductibles apply Ñ one or ten thousand? If a loss takes place over ten years, do ten deductibles apply? The current state of the law on these issues is extremely uncertain, and a policyholder must be protected by policy provisions that reflect its risk profile. A "best practices" tip: negotiate for an absolute cap on deductibles on a policy by policy basis.
2) Intellectual Property & E-Commerce
Disappearing Coverage for Copyright and Trademark Liabilities
Historically, the advertising injury section of the general liability policy provided substantial coverage for intellectual property liability. Often without notice, insurance companies have either substantially cut back or entirely eliminated this coverage. Every company should perform an audit of its IP exposures to see if they are insured, and if not, whether coverage is available.
Website coverage
Websites are a great way to communicate with clients, but they also can attract lawsuits. Do you have insurance coverage if you are sued for defamation or infringement based upon your website? Here too, insurance companies are reducing or eliminating coverage under general liability policies, and insureds may need to investigate specialty policies.
3) Notice
Under many circumstances, you can forfeit coverage if you delay too long in giving notice of a claim to your insurer. For many policies, however, endorsements are easily available to help avoid this harsh result. Do you have such an endorsement? A best practices tip: provide notice early and broadly to preserve insurance for all actual and potential claims.
D&O Policies
As a general rule, Directors and Officers insurance policies provide much less insurance coverage than directors and officers expect.
1) Reimbursement of Defense Costs
These policies usually contain provisions permitting the insurer to seek reimbursement of defense costs that it has advanced if the ultimate liability is not covered Ñ which is very often the case.
2) Insured v. Insured
All D&O policies exclude claims brought by one insured against another. This significantly limits coverage, since many D&O lawsuits are brought by unhappy former directors and officers.
3) Do you want entity coverage?
Entity coverage provides insurance coverage for the company under the D&O policy. Providing coverage to the company can deplete the coverage available to the directors and officers, since the company shares a single limit with the directors and officers. Also, struggles have arisen in recent bankruptcies over whether the coverage belongs to the company or the directors and officers.
4) Severability
Insurance policies historically stated that the bad acts of a single director or officer excluded coverage for all insureds. A few years back, when the D&O market was "soft" and competition among insurers was high, the concept of "severability" became a staple in most D&O forms i.e., allowing innocent insureds to retain coverage despite the misconduct of a few "bad apples". In the wake of such scandals as Enron, Tyco, and WorldCom, as well as the onset of the "hard" insurance market, the ability to retain the severability provision became more difficult. Recently, however, the market has begun to settle. Bottom line: severability is worth a few negotiating chips on renewal; your board of directors will thank you for it later.
5) Rescission
Policies now state that the insurer can rescind if there is a misrepresentation in the application, which includes such documents as the 10-K and Annual Report. Some insurance companies have asserted that, for example, a restatement of earnings entitles them to rescind the policy for all insureds. Here too, steps must be taken to protect the innocent insured.
M&A Coverage
1) Representations & Warranties Coverage for M&A
Many companies are unaware that they can purchase insurance for representations and warranties made in a corporate transaction.
2) Does the Insurance Asset Follow the Liability?
In today's "grow or implode" corporate culture, more and more companies find themselves involved in merger and acquisition deals of all different varieties: sometimes a straight merger transaction, sometimes a stock deal, other times an asset purchase. Insurance is the often overlooked "hidden pot of gold" in the deal. Time and again we see the aftermath of an inadequate due diligence that entailed nothing more than securing a list of current policies from the acquired entity. Worse yet, the agreement memorializing the transaction almost never contains a clear articulation of how insurance rights will be treated once the deal is consummated. These are often costly mistakes for the acquirer, when years later it is named in product liability and/or environmental suits and it neither has copies of the necessary policies nor a clear right of action under policies purchased by the acquired company. This is particularly true in an asset transaction where case law nationally is very unclear regarding whether and how rights to insurance proceeds can be assigned. Another best practices tip: If your company assumes liabilities in a transaction, you must make certain that your company has acquired the matching insurance.
Property Policies
1) Business Interruption
The basic business interruption policy is extremely limited Ñ generally, it covers lost income resulting from physical damage to the policyholder's property. Important coverage extensions are available at little or no cost. For example, many standard form policies establish a period of restoration that ends when a company reopens for business. However, many companies find that it takes time to win customers back after a lengthy shutdown. Some insurers are willing to address this issue in an "extended period of indemnity" endorsement. Another valuable coverage enhancement is a "by order of civil authority" endorsement that provides for coverage when your business is closed because, for example, the police deny access to your building. In addition, companies should customize this coverage so that the measure of damages for business interruption accurately reflects the company's business needs.
2) Co-Insurance
This key provision puts the onus on the insured to purchase sufficient coverage to avoid incurring a "penalty" for being under-insured. Unfortunately, the provision is poorly understood by brokers and policyholders alike, particularly in the context of business interruption coverage. Brokers may forget to update the value of the property. You do not want to discover that your property was underinsured when you are trying to recover from a loss.
3) Coverage for Lost Computer Data
Standard property policies ordinarily do not cover lost data and other intangible property, but cover only tangible physical assets. Even when policyholders purchase policies which purport to cover these risks, with names like "Technology Policy" or "Media Coverage," major gaps typically remain. Policyholders must audit and quantify these risks to see if appropriate insurance exists.
4) Scope of Coverage
The first thing you should do after reading this article is examine your property policy to make sure that all of your business interests are "insured locations" under the policy and/or your policy contains a "miscellaneous unnamed location" catchall provision. The next thing you should do is examine the "statement of values" to confirm that it accurately reflects your risk exposure. Finally, to establish reasonable expectations within your organization when a loss occurs, you should know the answer to the question: do we get repair, replacement, or agreed value in the event of a total loss?
Environmental Insurance
1) Do You Know Your Environmental Exposures?
General liability policies broadly exclude pollution loss. Many companies that are not in the chemical industry do not realize that they have exposures such as underground storage tanks. You should review your risk management profile for these risks because "new" environmental liability policies are available to cover such liabilities.
2) The Broad Scope of the Absolute Pollution Exclusion
Moreover, most people assume that the absolute pollution exclusion only applies to environmental exposures from hazardous waste or chemicals. In fact, many courts have interpreted this exclusion extremely broadly to apply, for example, to fumes from boilers and adhesives or to silica claims. They have even applied the exclusion to products and completed operations claims. If your company has such nontraditional pollution exposures, it may need an additional endorsement or policy.
The Role Of The Broker
Having an unsophisticated or inattentive insurance broker or consultant may leave you without insurance coverage when you need it most. As noted above, the insurance world has become increasingly complex and nuanced. If your broker does not remain abreast of the most comprehensive coverage available and/or does not take the time to learn your business and the particular risks to which it is exposed, you may find yourself uninsured for a significant loss. Indeed, within the last few years, we have seen a marked increase in the number of broker malpractice claims brought because the policyholder did not have correct or sufficient coverage. A final best practices tip: Rather than buy your company another lawsuit in the future, take the time now to find a broker or consultant that has the resources, knowledge, and desire to place the best coverage possible to protect your business needs and interests.
Conclusion
Our society believes in the spreading of risk through insurance. The preferred remedy for any loss is to sue someone, under the assumption that the person sued will have insurance. In the past 25 years, the courts have created wholly new liabilities Ñ environmental, asbestos, employment - and more will surely follow. Insurance companies work constantly to exclude as many liabilities as possible from the policies they issue. In response, every company must do its utmost to position itself so that it can transfer any liability, whether old or new, to insurance.
Published June 1, 2004.
