Risk Management for Special Events

One of the more important risk management concerns for my community association clients is the management of potential legal liability risks arising from special events.  Whether an association hosts a special event itself or permits its members to use its facilities to host their own special events, there are a number of risk exposures to be considered and addressed in order to protect the event participants and the association.  Stephanie Dufour’s blog post, Safety Considerations for Your “SPECIAL” Day,  is an excellent overview of the risk management issues to be considered.

In addition to Stephanie’s excellent post, I offer the following, addressed to the risk management needs of the venue owner (typically, in my case, a community association):

  • In her 2nd point, Stephanie points out important considerations for the event sponsor regarding location selection.  For the property owner offering its facilities for use (a community association which permits use of its clubhouse for private parties, for example), a similar analysis is important.  The type of use and number of participants for which your facility is safely suited should be carefully considered, and described in your lease, permit or use agreement.  It should go without saying (but I’ll say it anyway ’cause that’s what we lawyer types so often do), that you should in fact have a written agreement for a member’s (or other third party’s) use of your facilities, and that agreement should cover the scope of permitted use, indemnity obligations, insurance requirements and liability waivers.  
  • In her 3rd point, regarding food service, Stephanie notes the importance of proper food preparation and handling.  From the property owner’s perspective, if food will be sold by vendors at an event held at your facilities (an Octoberfest, for example), your written agreement for that event should include appropriate requirements pertaining to any government-required licensing or food handling procedures.
  • Stephanie’s 4th point addresses risk management issues for events where alcohol will be served.  Whether the facility owner is hosting such an event itself or is permitting another party to host the event, Stephanie’s suggestions regarding procedures to institute to ensure the responsible service of alcohol are important.  In addition, liquor liability insurance coverage should be obtained (for a community association, this would typically be done via appropriate endorsement to the association’s commercial general liability – CGL – insurance policy) and, if alcohol is to be served by a third party host, by requiring appropriate liquor liability insurance coverage to be provided by the host via the property use agreement.  The potential need for a temporary liquor license should also be considered.  For example, a wine tasting event may require a one day liquor license.  Information regarding liquor licenses for special events in California can be found here (scroll to the 3rd page). 
  • I cannot endorse strongly enough Stephanie’s comments concerning vendors/collaborative events (Stephanie’s 8th point).  I would add only one thing to Stephanie’s comments - if there will be vendors (booths, entertainment, food, etc.) at your special event, which party will assume liability risks and provide insurance coverage should not only be discussed, but must be carefully memorialized in writing in a binding legal document. 
  • Regarding waivers (Stephanie’s 9th point), keep in mind that the law regarding enforceable terms, scope and format differs from jurisdiction to jurisdiction.  In addition, there are specific legal issues pertaining to waiver and release agreements pertaining to minors.  Do not rely on a form document found on the internet.  Seek the assistance of an attorney licensed in your jurisdiction with experience addressing these issues.
  • Similarly, laws vary from state to state regarding the meaning, scope and enforceability of indemnity agreements.  You need an indemnification clause in any use agreement granting a third party permission to use your property; again, seek the assistance of an attorney licensed in your jurisdiction with experience addressing these issues to prepare your agreement, to ensure that indemnity obligations are addressed in a manner consistent with the law in your jurisdiction.
  • Further to Stephanie’s 10th point, regarding photo/media releases, another issue to consider is how to protect your organization against potential breach/violation of copyright, license and/or publicity rights and similar issues.  One scenario in which a community association may be vulnerable to such claims is when the association hosts outdoor concerts.  Your contracts with live entertainment vendors must be written in such a way as to protect the association against such claims, particularly since such claims may not be covered by the association’s own insurance policies.  It is also important to determine whether there is a sound ordinance controlling the allowable decibel levels of the music, and be sure to address such rules in the vendor’s contract as well.  In my experience, such issues are rarely addressed in the entertainment vendor’s own contract (and when they are the issues are not addressed in a way which protects the association), so I would further add the recommendation that you have the association’s legal counsel review and negotiate the terms of that vendor’s contract as necessary.

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The Never Pay Insurance Policy

Earlier this year, attorney John L. Watkins posted an entertaining and very informative series of blog posts about what a business should do if its insurer denies coverage for a claim.  Now, I know what you’re thinking.  “An attorney, huh?  Sure, that means an overly informative series of blog posts.  But entertaining?  Oh, come on, now!”  But really, as dry (and scary) as the topic may be, Mr. Watkins made it entertaining.  I mean, he even quoted Monty Python, for goodness sake.  The only thing I can figure is that his ability to make this topic entertaining must have something to do with the fact that he hails from Atlanta, Georgia.  Interestingly, he and I share similar professional backgrounds and, though located on opposite sides of the country, are seeing the same trends when it comes to insurers’ denial of insurance claims (both for an insured’s own property damage claims and, more scary, when it comes to defending and indemnifying insureds against liability insurance claims). 

At any rate, the posts, here, here, here, and here, are very good.  I couldn’t have said it better myself good.  So, rather than saying it myself, I’m pointing you in their direction.

In addition to the important points Mr. Watkins raises:

1.  Treat your insurance policies as if they were valuable financial documents, because they are.  Keep every piece of paper the insurance company sends you, in chronological order.  You will likely not receive a new copy of the entire insurance policy every year, so keep all of the documents you receive the first year the policy is in place (which will be lengthy, and should include declarations pages, coverage parts – sometimes in the form of a booklet – and endorsements) and then all of the documents you receive after that.  Keep them forever. 

2.  Read your insurance policies! Don’t wait until you have a claim (or a claim has been made against you). Insurance policies are notoriously difficult to understand, particularly when it comes to figuring out how the parts of the policy (the declarations, coverage parts and endorsements) work together. Get your coverage questions answered when you first receive a policy, not when you need it to respond to a claim, because then it’s too late to change your coverage if that’s necessary.

3.  Report claims or events which may give rise to a claim promptly.  Don’t do it by calling or e-mailing your insurance broker.  It’s okay to do that, too (certainly you will want to keep your broker “in the loop”), but your insurance policy or policies will have a section that tells you exactly how and where you are to send notices.  Do it that way.  Exactly the way the policy says you should. 

With respect to a claim against you by a third party (as opposed to a claim you may make to your insurer for damage to your own business property), provide your insurance policies to an attorney with knowledge regarding insurance coverage, and have the attorney decide which insurers to tender a claim to, and how.  Don’t assume which insurers should be notified (commercial general liability or professional liability insurer, current insurers or past insurers too), or whether or not the claim should also be tendered to your umbrella carrier.   

While we’re on this topic, the question of what is (or is not) a potentially covered third party claim is not always clear.  Certainly, if you are served with a lawsuit it should be tendered to the appropriate insurer(s) immediately.  But what if you receive notice of an administrative law hearing, or you receive a demand letter that threatens litigation in the future?  Again, this is when you need to consult with an attorney, since failure to notify an insurer when you should could deprive you of any coverage you would otherwise have had.   

4.  If you ask an insurer to defend you against a third party’s claim, and receive a reservation of rights letter (a letter from or on behalf of the insurer telling you that you will be provided a defense but the insurer reserves the right to contest coverage), take it very seriously.  If you haven’t already consulted an attorney by now, this is absolutely the time when you should.  A number of issues arise from an insurer’s reservation of rights letter, such as (depending upon your jurisdiction), your potential right to independent counsel (instead of, or in addition to, the insurer’s choice of defense counsel) at the insurer’s expense, and/or the insurer’s potential right to allocate the cost of some (or, given the outcome of the litigation, potentially all) of the defense costs incurred by the insurer to you (yes, that’s right, you could end up having to reimburse your insurer).  Statutory and case law applicable to these issues differs from jurisdiction to jurisdiction, so you will need the advice of an attorney who knows the law regarding insurance coverage and claims handling in your State.    

5.  Rather than (or in addition to) a reservation of rights letter, your insurer may ask you to sign a non-waiver agreement.  This document should be taken just as seriously as a reservation of rights letter.  More seriously, even.  Here’s why.  Generally, an insurer has the burden of identifying all potential grounds for denying coverage.  Failure to do so in its reservation of rights letter to the insured may be held to be a waiver of any grounds not identified.  Among other things, a non-waiver agreement typically is written in such a way as to avoid such a waiver.  Do not sign it until you have consulted with an attorney who is knowledgable regarding insurance coverage.

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A rose by any other name . . .

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. . . is a problem.  (My apologies to Shakespeare.)

A problem I encounter on a fairly regular basis, I might add.  

Specifically, the problem is misnamed or unnamed insureds.  It’s a big problem for insureds who think they are but aren’t.  It’s also a problem for insurance agents and brokers (and their errors and omissions insurers).

Getting the name right isn’t always as simple as it sounds. 

Surprisingly, however, I have most frequently encountered this problem in contexts in which getting the name right should have been a fairly simple task.  For example, I recently discovered that the named insured was wrong on all of the insurance policies for a community association, and had been so for a very long time.  I’m not sure how this can happen, since community associations (typically referred to as “homeowners associations”) are generally incorporated in the State of California, and they have governing documents which include articles of incorporation and bylaws, so figuring out what the association’s legal name is should be cinchy (a technical legal term).  I just don’t get it.   

Here’s something else to think about (as if you didn’t have enough already).  When the insured’s name is changed, special attention must be given to any policies issued on a claims made basis.  This would include (but not be limited to) professional liability policies (what used to be called “E&O” or “D&O” policies), and even some general liability policies which are written on a claims made basis.  

What about when the name of the insured has been changed to reflect a change in the business structure?  This raises some issue which are too complex to discuss here.  To see just the tip of the iceberg, take a look at the “Who Is An Insured” section of your commercial general liability policy (if you can find it), and you will see that the named insured’s business structure determines who is covered.  Even more important, of course, is who is not covered.  For example, if your policy’s coverage form says that a partnership that is not named as an insured is not covered, changing your business form from a sole proprietorship to a partnership without changing your insurance policy to reflect that would be a really bad thing.  And oh, don’t get me started on what can happen to your commercial auto insurance policy if ownership of the covered vehicles isn’t described properly.        

Making sure that policies properly name the insured(s) isn’t only a problem with business/commercial insurance policies, either.  I often encounter this issue with homeowners insurance policies when the property is held in trust.  It is important for homeowners to tell their insurance agents how title to the insured property is held, and it is even more important (in my opinion) for insurance agents to ask.  In fact, I’m going to go out on a limb here and say that, since homeowners usually don’t understand how creating a family trust for estate planning purposes has an impact on insurance, but the insurance agent does (or, at least, should), an agent’s failure to inquire falls below the standard of care.  The real problem arises, of course, when the property is placed in a trust after the homeowners insurance policy is first written, the homeowners don’t tell the agent, and the policy just keeps renewing with the agent never bothering to ask if there have been any changes. 

Suffice it to say that upon putting your home in a trust, the named insured(s) on your homeowners policy must be changed.  Consideration should also be given to ownership of the contents of the residence and how they are insured, and to the individuals (trustees, beneficiaries, occupants) who require liability coverage (and how that will be accomplished).  Similarly, for all you business moguls who put your personal residences in an LLC for tax purposes, your homeowners insurance policy will also need to be changed (potentially in a major way, since some personal lines insurance carriers, considering LLCs to be strictly business entitles, will not issue their policies to one).  Oh, and don’t forget that any umbrella policies will need to be changed as well.  

Finally, just to add the cherry to the whipped cream, the California Court of Appeal recently held, in a case called Kwok v. Transnation Title Insurance Co., that when the Kwoks, who had formed the LLC which originally took title to a house and was the named insured on the title insurance policy, later transferred the property from the LLC to a family trust, they terminated coverage under the title insurance policy.  Which turned out to be a bad thing when they were sued by their neighbors over an easement.  (Go ahead, you can say.  I know you’re thinking it.  “What a Kwok.”)   

There, you’ve been warned.   

Properly naming a business entity isn’t just important for purposes of insurance contracts.  It’s important for purposes of any contract.  For example, let’s say you are a residential property developer, and your risk management process includes setting up an individual LLC for each project.  You use a number of consultants for each project (architects, engineers, environmental consultants, construction managers, etc.).  You have a contract with each consultant, and every one of those contracts require the consultant to protect you against legal liability arising from the consultant’s work through indemnification and insurance provisions, with some of the consultants required to have their liability insurance policies endorsed to add you as an additional insured.  These indemnification and insurance provisions are iron-clad, top notch, brilliant risk shifting mechanisms, providing you with every available protection against legal liability, because they’ve been drafted by a brilliant, insurance and risk management savvy, attorney.  Well, all of that effort may be for naught, if the contracts and/or additional insured endorsements don’t properly name all of the business entities.  

The devil really is in the details, or to put it in construction terms, “measure twice, cut once”.

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