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.

The Importance of Knowing That You Don’t

Further to my last post (here), regarding the complexity of commercial insurance policies, I was thinking that a concrete example or two may be the best way to illustrate my point.  (The point being that it’s important to know that you don’t know, and to consult a trusted advisor who does.)

Recently, I have been asked to analyze the coverage provided by “group” commercial insurance policies.  As such policies raise a number of issues which even sophisticated commercial insurance “consumers” can miss, I thought they would make good, concrete, examples of how a skilled consultant can help you navigate the complexity in a way that serves your best interests. 

By “group” commercial insurance coverage, I am referring to an insurance policy or package of policies intended to protect multiple, separate, unrelated insureds, all under one policy.  Over the past dozen years or so I have seen such policies referred to as group, blanket, master, pooled, or consolidated policies (and am sure they go under other labels I’ve not seen yet).  What they are called doesn’t matter much; what they cover and how they do it does, and it can take some expertise to figure that out. 

Before I go any further, let me be very clear that I do not sell insurance.  I have no financial stake in whether a client opts to obtain insurance coverage via an individual policy or as part of a group.  Others involved in the transaction do have a financial stake.  The client’s current broker stands to lose money, and the broker selling the group coverage stands to make money.  My job is to make sure that my client has the information necessary to make an informed decision.  Here’s how that works. 

Example #1:  A geotechnical engineer considering purchasing his professional liability insurance coverage (often referred to as “errors and omissions” or “E&O” coverage) through a group policy offered by a professional trade organization.  The advantage of the group policy is obvious – a substantial reduction in premiums.  The disadvantages are not as obvious.  That’s where I come in. 

Some of the coverage issues I identified were:

1.  Unlike his own separate policy, under which he is the named insured/policyholder, the trade organization is the named insured/policyholder (what we insurance geeks refer to as the “first named insured”) under the group policy.  While he would be listed on a schedule of parties covered by the policy, and would have his own coverage limits (which would actually be higher than what he had under his own separate policy), there were some rights he would give up under the group policy as a result.  For example, he would not have the same right to receive notice of policy changes, nor would he have any ability to negotiate changes to the policy to meet his particular needs.  If the trade organization negotiated or agreed to a change in the policy which he didn’t like, Mr. Engineer would be stuck with it unless and until he could replace the policy with one of his own again. 

2.  His coverage would be contingent upon remaining a member of the trade organization.  If he left the organization and had to go back to purchasing his own separate insurance policy, would he be able to buy “tail” coverage under the group policy to cover claims based on allegedly wrongful acts occurring during the time he was covered by the group policy but not made until after he left the group policy?  If not, he might be stuck with a gap in coverage in the future.    

3.  As with most professional liability insurance, both policies (the one he already had and the group policy he was considering switching to) were “claims made” policies.  The group policy would only provide coverage for claims which are both made and reported during the same policy period.  His separate policy provides coverage for claims made during the current policy period based upon alleged wrongful acts which occurred prior to the current policy period (back to the original inception date of his first policy, nine years prior).  It appears from the proposal for the group policy, however, that claims made during that policy’s effective period based upon prior acts would not be covered.  This would need to be clarified in order for an informed decision to be made. 

4.  While he would have his own separately stated coverage limits under the group policy, I pointed out to Mr. Engineer that the aggregate policy limits (the total amount of coverage the policy would provide to the group in its entirety) might be the more important number.  Although the group policy appeared to have a ginormous (that’s a technical legal term) aggregate limit (hundreds of millions of dollars), that number was meaningless in a vacuum.  Mr. Engineer can only know what the aggregate policy limit really means if he knows how many others are covered by the group policy, what their potential risk exposure is, and what their loss history has been.   

5.  The policy Mr. Engineer has now covers liability arising from “wrongful acts” committed in the course of providing “professional services”, and defines both terms very broadly.  He has always been confident, therefore, that none of his work falls outside the scope of the policy’s coverage.  I pointed out that unless the broker for the group policy is willing to provide him with a copy of that policy’s coverage language, he cannot have the same confidence about the scope of coverage provided by that policy.  Similarly, without a copy of the policy he cannot know what coverage exclusions there are.  Without that information, an apples-to-apples comparison of the coverage provided by both policies could not be made.  

(As an aside, I must say that in my experience it is particularly difficult to obtain exemplar coverage parts for group policies; in fact, under many such policies the scheduled insureds never receive a copy of the policy at all.) 

Example #2:  A community association (condominium homeowners association) considering purchasing all of its insurance coverage (including property, general liability and directors and officers liability coverage) through a group policy.  The board of directors wanted to know whether the group policy would in fact give the association “the same or better” coverage than it currently has under its individual policies.  Given that the premiums under the group policy would be substantially less than the premiums the association currently pays, one of the board members was concerned that the group policy might be “too good to be true”, and convinced the other board members that in order to fulfill their fiduciary duty to the association and its members they should consult a coverage attorney.  (That would be me.)

Some of the coverage issues I identified were:

1.  The first named insured on the group policy is the association’s property management company, and the group is comprised of associations under contract with that management company.  As with the group policy Mr. Engineer was considering, the association would be listed (along with the other associations in the group) on a schedule of parties covered by the policy, and would have its own coverage limits, but would not be the named insured.  So, as with the group policy Mr. Engineer was considering, the association would lose some of the rights it had under its own individual insurance policies, such as the right to receive notice of policy changes and the ability to negotiate coverage changes. 

2.  In considering whether to switch from its own insurance policies to the group policy maintained by the management company, the association’s board of directors would need to consider whether the group policy would satisfy the insurance requirements in the association’s Declaration of Covenants, Conditions and Restrictions (the “CC&Rs”).  Among them were the requirement that the association’s policies be issued to the association as the named insured, and that the association (as the first named insured) be the insurance trustee for each owner and mortgagee.  I pointed out that a strong argument could be made that the group policy would not satisfy these CC&R requirements.   

3.  In addition, the CC&Rs require the association to maintain its insurance coverage in compliance with the requirements of FHLMC, FNMA, GNMA and FHA (the federal mortgage guarantee agencies).  Given the fact that the agencies’ response to plummeting real estate values and soaring mortgage foreclosure rates has been to tighten their lending guidelines, I recommended that the board ask the association’s general counsel to provide an opinion letter regarding the proposed group policy’s compliance with those guidelines.  If such an opinion letter could not be obtained, it was my recommendation that the CC&Rs would need to be amended.  (As an aside, on December 16, 2008, FNMA issued an announcement clarifying its guidelines regarding “master” or “blanket” hazard insurance policies, indicating that “a blanket policy that covers multiple unaffiliated condominium associations or projects” is not permitted.  I am not aware that  FNMA has ever determined that multiple associations covered by a group policy are “affiliated” by virtue of the fact that they all use the same management company.)   

4.  With respect to points 2 and 3,   I pointed out that the group policy’s directors and officers (“D&O”) liability coverage, like the association’s current D&O policy, would most likely exclude coverage for liability arising from failure to maintain required insurance coverage.  This would put the board members at personal financial risk should they agree to insurance coverage for the association which does not comply with the association’s own governing documents.       

5.  The association’s coverage would be contingent upon remaining a client of the named insured (the management company).  The association would, therefore, face the same potential gaps in coverage as Mr. Engineer would should the board of directors ever decide to change management companies. 

6.  As with Mr. Engineer, I recommended that the board of directors obtain information about the other associations in the group necessary to evaluate the group policy’s aggregate coverage limits.   Since unlike the group policy proposed to Mr. Engineer the group policy proposed to the association included property as well as liability insurance coverage, I explained that in order to determine the sufficiency of the aggregate limits for the property insurance coverage it would also be important to determine how many properties share the property insurance aggregate limit, the replacement cost for all of those properties in the aggregate, and where they are located geographically (since if they are in close proximity to each other there is a greater risk that they may all be subject to the same catastrophe, such as an earthquake or flood).   

7.  Finally, as with Mr. Engineer, I advised the board of directors that without a copy of the group policy’s coverage parts, exclusions and endorsements, they could not make an apples-to-apples comparison.

(As an aside, I should note that there are a number of issues pertaining to the above which, had I been asked, I would have recommended the management company obtain its own legal counsel to resolve.  Obviously, as named insured the management company would be benefitted by the group policy, but it would also assume some additional responsibilities, accompanied by legal risk, as well.)

The Bottom Line:  A substantial reduction in insurance premiums can be a powerful motivation to change your commercial insurance coverage.  Keep in mind, however, that clichéd expressions such as “you get what you pay for” and “too good to be true” have a basis in truth.  The bottom line is that while the prospect of lower premiums may be the motivation to explore other insurance options, lower premiums should only be a deciding factor after you have first made an apples-to-apples comparison of your commercial insurance options.  Don’t know if you’ve been presented with an apples-to-apples comparison?  Consult a coverage expert.  In the long run, it costs a whole lot less than continuing not to know.

You can’t buy a box of insurance . . .

. . . no matter what that annoyingly “chipper” woman in the Progressive® advertisement says. 

Insurance coverage (particularly commercial lines – all of the various insurance policies which cover business organizations) is not a standard commodity.  To the contrary, commercial insurance policies are complex contracts comprised of declarations pages, coverage parts, covenants, conditions, exclusions, endorsements and schedules.  It is not unusual for a commercial insurance policy for even a modestly sized business to be in excess of one hundred pages long. 

The interpretation and application of the provisions of commercial insurance policies is the subject of millions of pages of articles, treatises and court decisions.  Notwithstanding this, what the particular provisions of such policies mean is the subject of litigation in every legal jurisdiction, and will continue to be, as these complex legal documents change over time to address emerging risks and liability theories. 

 In addition, while many of us purchase our personal lines insurance policies (for our homes and automobiles) directly from insurance companies through their agents, commercial policies are typically purchased through insurance brokers.  The distinction between an insurance agent and an insurance broker, and what that distinction means for the insured (or prospective insured) is a topic the thorough explanation of which would itself require a treatise.  Suffice it to say that generally speaking the law does not permit the insured to rely on representations made by a broker regarding the coverage provided by a commercial lines policy to the same extent that the insured may rely on an agent’s representations to bind the insurer. 

In a nutshell, as opposed to the insured who is a “consumer” of a personal lines policy, an insured under a commercial lines policy is generally expected by the courts to have a more sophisticated understanding of the insurance contract.  Given the high stakes involved (in terms of the potential economic impact of an uncovered loss or claim), large business organizations retain their own in-house risk management professionals to, among other things, understand and maintain the complex “web” of their insurance policies.  It behooves smaller organizations, which generally do not have their own in-house risk management personnel, to consult with an outside insurance coverage expert periodically, particularly when considering changing insurers or policies.

When was the last time you actually read your insurance policies in their entirety?  In my experience, most of my clients have never done so.  That is not a criticism.  Since insurance coverage is generally not their “business”, they hire me to do that, so that they can do what is their business.  In fact, some of my clients are other attorneys whose law practice does not include insurance coverage analysis. 

My smartest clients are the ones who know what they don’t know.

A rose by any other name . . .

. . . 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”.

Didn’t I just say that? New York Times article, “Insuring Your Business (and Yourself) Against Loss”

Hah!  I said it first! 

Before I was an attorney, I did other stuff, which I am sure I will get around to mentioning here and there on this blog.  I have a B.A. degree in English and Journalism (yup, I’m that old; graduated from college before they started calling Journalism “Communications”), and did some freelance news reporting.  Never for any publication nearly as prestigious as the New York Times, though.  So, that should explain why it is that I note with glee that I said it first.

Well, actually, the sources quoted in my 5/14/2009 post said it first, but I reported it first.  Well, blogged it, anyway.  So there.

Anyway, further to my post on May 14th, see yesterday’s Wealth Matters article in the New York Times, Insuring Your Business (and Yourself) Against Loss.   I had already planned to discuss some of the significant points raised in this article; now I’ll move those topics up in my blog plan (yes, I have one of those).  So, keep an eye out for my upcoming posts about:

• It’s not enough just to buy insurance for your business, you had better understand it as well.  What one hand (coverage parts) giveth, the other hand (exclusions and limiting endorsements) taketh away.  So if you don’t understand insurance policy coverage forms, exclusions and endorsements, it is important to consult someone who does.
• Claims-made policies (what they are and how they can hurt you), for those of you whose businesses involve providing professional consulting, advising and other professional services.  (Ummmmm . . . . with the exception of the oldest profession, that is.  As far as I know there is no errors and omissions coverage available for that yet.)
• Employment practices liability insurance, for any business that has . . . you’ve got it! . . . employees.
• The special insurance needs of nonprofits and their board members.