common mistakes and exposures

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Common Mistakes and Exposures

Disclaimer

Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state.

This book is intended as a general guideline and might not apply to a specific

situation.

Information which is copyrighted by any proprietary to Insurance Services

Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO

Material is limited to ISO Participating Insurers and their Authorized

Representatives. Use by ISO Participating Insurers is limited to use in those

jurisdictions for which the insurer has an appropriate participation with ISO.

Use of the ISO Material by Authorized Representatives is limited to use

solely on behalf of one or more ISO Participating Insurers.

The author and any organization for which this seminar is conducted shall have

neither liability nor responsibility to any person or entity with respect to any

loss or damage alleged to be caused directly or indirectly as a result of

information contained in this book.

marjorie@segaleconsulting.com laurie@insightinsuranceconsulting.com

Reduce Mistakes – Reduce Agency Risk and Loss of Client

90% of E & O claims are caused by a mistake (error) not an omission

More than 50% of all E & O claims derive from failure to recommend coverages, failure to identify exposures or reduction of coverage due to re-marketing at renewal

Today – any account is open to competition

Client Cycle

Transaction Cycle

Account Review

No Assumptions

Claim Example

Benefit Plan (401K) changed Client created new plan Fiduciary policy written to cover a specific

plan name only• New plan was not included

Several employees sued employer• No coverage• E & O claim resulted against agent

Claim Example

Client uses a commercial warehouse to store inventory

Never advises agent – agent never asked Fire at warehouse – Warehouseman’s

coverage did not pay (no legal liability) Client sued agent for E & O – failure to

advise• Claim was settled by E & O carrier

Claim Example Client establishes a new company Agent fails to ask about new companies or

ownership at renewal New building is acquired by the new company

and added to the policy• Nobody asked specifically about the owner of the

building

The location and property description is added to the policy – sustains a $500k fire loss• Claim denied

Claim Example Building

• A woodworker is a long term tenant in a building where he has operated his business for in excess of twenty years.

• The building owner did not carry fire coverage on their building.

• The woodworker client requested that their agent added the building to their commercial package program.

• The account handler asked for the information regarding the building in terms of value and whether their was any lender. At no time did the account handler ask if the woodworker “owned” the building. The building was added to the policy.

Claim Example

• The building burned down• Claim denied as the building was not

owned by the insured and was not required by the lease to insure the building

Claim Example

Insured has 16 vehicles insured on a Business Auto Policy

Remarketed the account at renewal• Post-renewal, employee calls agent

advising that his bank needs evidence of physical damage coverage

That call triggered a question as to the ownership of the vehicles

Claim Example

The agent determined that all 16 vehicles were owned by employees and lease back to the insured by written contract

Solution—Employee Leased Auto

Who Is Insured

Claim Example

The insured was a plastic manufacturer The insured purchased $1,200,000 worth

of equipment for which they secured a bank loan with the equipment securing the loan

The bank sent a standard notice to the insured and insurance agent asking that they be added to the policy as a loss payee

Claim Example

Within the language of the request they specifically required the attachment of the Lenders Loss Payable form which is “standard” in a collateralized bank loan.

The agent attached a Loss Payable clause instead of the Lenders Loss Payable option.

Claim Example

The insured was late on their payments to the bank

The bank went to the insured’s location only to find that they had vacated the premises and all of the equipment gone—presumably taken (stolen) by the insured

The bank filed claim under the insured’s policy for their interest as a “lender loss payable”

Where Coverage Is Provided

Mailing Address v. Premises Insured—Suite #, Floor # Property coverage Time Element coverage Liability coverage when Limitation to

Designated Premises endorsement is included

Mailing address match with first named insured

First Interstate Bank BuildingMay 4, 1988

Where was the property located Are all owned, leased, rented

locations covered Are all locations within the

coverage territory of the policy—Foreign Cover

Are warehouses identified and covered

Mare Island Warehouse FireVallejo, CaliforniaOctober 12, 2005

The three-alarm fire at Wines Central sent plumes of smoke more than 700 feet high that could be seen for miles. The blaze could not be controlled by firefighters because the Mare Island building structure that once housed Navy torpedoes -- had steel doors and 3-foot-thick concrete walls and a concrete roof that could not be penetrated.

Wines Central converted the 1942 military fortress three years ago into a 240,000-square-foot specialty warehouse that stored more than 500,000 cases of rare vintages believed to be worth up to $100 million, officials said. Clients included wineries, private collectors and some other businesses.

The scene confronting vintner visitors to Mare Island last week, writes Trent, "was unbelievable. Wine and mold everywhere, the smoke smell almost made me gag and the destruction took your breath away. There are piles and piles of wine from pallets falling over due to water damage, our library area was just a bunch of ash.

Small Mistake

Failure to put the warehouse location on the policy

Failure to add Brand and Label, Control Salvage, Preclude Salvage

"Insured Location" Provisions Have Winemakers Over a Barrel

Begin with fledgling winemaker Allan Christensen, whose first-ever vintage Napa Valley Viognier, which was to have been released under the Amazon Ranch label, is no more. Though the couple paid a premium to insure all of their wine, their policy specified the location where the wine was to be stored -- the Christensen's home, not a warehouse in Vallejo, Christensen explained.News and Comment on California Insurance Law, the Politics of

Insurance, and Other Risky Business 12/21/05

"Insured Location" Provisions Have Winemakers Over a Barrel

The 'site-specific' policy would have covered the couple's wine at a different location, had the couple merely notified the insurance company of the change.Some insurance companies are starting to take the hard-line stance that they will only reimburse clients for the quantity of wine that was, according to the fine print, designated for the warehouse.

Limitation of Coverage to Designated Premises This is an unacceptable endorsement

but sometimes the only way the underwriter will take the risk The endorsement language limits

coverage to the described premises – broader description helps, but does NOT overcome the inherent concerns with this endorsement

What is Covered

Property is insured Property is not insured

• Foundations—no on prop• Foundations—yes on EQ• Foundations—yes for BO

Property insured on the wrong policy• Computer vs. computerized equipment

Property insured on more than one policy• Computer vs.computerized equipment

Building Valuation

COPE information – review limit Covered Property definition – values too

high or too low Underground foundations, underground

piping, excavation, backfilling, pavements, patios, sidewalks, installed refrigeration equipment, outdoor furniture, etc. all excluded

Policy not endorsed to include Limit is adequate – coverage is not

Stock Valuation

Tenant’s Improvements

Trade Fixture vs. Improvements• Removable or not• If not - improvement not trade fixture• Which party should insure – owner /

tenant?• Check lease agreement

Tenants Improvements & Building Ordinance

Owner Tenant

Business Income Valuation

Financial statement Include worksheet for underwriter to

suspend coinsurance Do NOT use for calculation of limit Discuss down time with insured and

extra expenses to relocate• Period of restoration• Additional extended period of indemnity• Additional Increased Period of

Restoration

Coinsurance / Blanket

Margin Clause

CP 12 32

A. This endorsement applies to loss settlement on property that is subject to a Blanket Limit of Insurance.

A Blanket Limit of Insurance is a single Limit of Insurance that applies to any of the following as shown elsewhere in this policy:

1. Two or more buildings;

2. Building and contents;

3. Contents of more than one building; or

4. Contents at more than one premises.

CP 12 32B. Margin Clause

With respect to property that is subject to a Blanket Limit of Insurance, we will determine a maximum loss payable for each building and for the contents of each building or the contents at each premises. The maximum loss payable is determined by applying the applicable Margin Clause percentage indicated in the Schedule to the value of the property as shown in the latest statement of values reported to us. If the statement of values does not state individually the value of each building and the value of contents at each building or premises, we will determine individual values as a part of the total reported values prior to application of the Margin Clause percentage.

Building Ordinance

HowCauses of Loss

Falling Objects

Earthquake

Utility Interruption

Steam Explosion

Spoilage

Claim Example

A cheese manufacturer was insured by Aetna for several years

In 1998 Aetna was acquired by Travelers The insured suffered a contamination loss

in 2001

Claim Example

The 98-99 renewal used the Aetna form and the 99-2000 and 2001 renewal switched the coverage to Traveler’s form.

Traveler’s form contained an additional perils exclusion 2.d.7. • We will not pay for loss or damage caused by

or resulting from the following: for personal property… Evaporation, Loss of Weight, Contamination

Claim submitted under the Traveler’s form was denied and resulted in a $450,000 loss not paid

Occurrence Forms

Coverage triggered due to injury / damage during policy

Liability is assigned to the policy in force at the time of a covered loss, though an event or condition that eventually produces the loss may have existed at an earlier time when a different policy was in force.

How Long?

Claims Made Forms

The trigger of coverage in this type of form is the date of the “claim”

The claim must be made during the policy period or any extended reporting period provided by the policy

Claims Made Forms

The policy will define what a “claim” is and will often include language regarding an “incident” and the rights and obligations of the insured to report an “incident” to reserve the policy for any ensuing claim

Claims Made and Reported Forms This is a more stringent version of the

Claims Made form Many professional liability forms are

written with these requirements TWO triggers

Claim made to “insured” Claim reported to carrier BOTH must happen – same policy

period to trigger coverage

Claims Made/Claims Made & Reported

A misconception of many agents is that there is automatically a short extended reporting period for 30 to 60 days built into the policy NOT true

Claim Example

D & O policy 1/1/08 to 1/1/09 On December 27th process server serves

summons and complaint The only person there is the receptionist On 12/29 Company VP comes in and

sees the summons, hands to receptionist saying send this to our broker

Claim Example

Broker comes into the office after holidays on 1/3 and finds the claim and immediately sends it to the insurance company

Claim denied Solution

Place with Claims Made coverage Basic Reporting Period – 60 days

Next – Contract Concerns

Limits, deductibles/retentions Endorsements as requested Endorsements added by company Restrictions and limiting endorsements

and coverage language• Be aware and educated• Learn how to communicate these

issues to the insurance buyer

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File Management and Processing Issues

Proposals

Critical document Describes coverage

Cover letter with binder should state binder replaces proposal

Use carrier quotes / proposals when possible

Audit your files for compliance with procedure manual master proposal

Proposals

Default proposals in AMS often are non-specific and too expansive for actual insurance company being issued

Review of renewing insurance company proposals and comparison to prior year’s policy and endorsements Proper coverage Identified correctly

Claim Example

Middle aged woman is hired at her new position

Her benefits begin on the first day of the month following 30 days of employment

She completes the paperwork immediately and send it in

Claim Example

She sets up a physical at her new HMO a week after the effective date of her policy

She does not have a benefit card yet but HR says go ahead

She goes in, has the physical and they discover she has cancer

Claim Example

The health insurance carrier never received the enrollment from HR they will accept subject to underwriting which means with cancer now as a pre-existing she has no coverage

Claim Example What do you think the EBL will pay

• She is billed $450/visit as a private pay patient

• The HMO, if it had covered it, would have negotiated that bill down to $150.00 and no remaining would have been billed.

• Because she did NOT have the HMO the full $450.00 is due

Would EBL pay the $150.00 or $450.00?

Fiduciary

Look at Fiduciary policy you are selling Two insuring agreements

• Wrongful Act, Error or Omission (EBL) $150.00

• Legal Liability $300.00

Employer is absolutely legally liable for the financial harm to that employee (ERISA)

Employee Dishonesty

Verify if using temporary employees or leased employees

If so, check definition and modify as needed

Policies vary and very important if changing carriers

Proposals

Excess Liability vs. Umbrella Always verify the type of coverage form

being requested and received Do NOT use the phrase “following form”

excess unless it really is. Most excess policies written today are NOT following form

A true follow form is 2 pages long—no separate insuring agreement, etc

Proposal Example

The proposal from the prior correctly showed that an umbrella had been issued.

At renewal, the account was re-marketed and the incoming carrier was unwilling to issue an umbrella and instead provided an excess liability policy

The proposal was re-created using the prior year’s template and this change was not noted to the insured and still reflected an “umbrella” was being provided.

Applications

Most asked question—who is supposed to sign the application• Accord• Supplemental Application• Warranty Application

Second most asked question—who is supposed to complete the application (BI worksheet, Reports of Value)

Applications

Lack of detail for coverage requests or endorsements

Lack of underwriting information Factual representation of client’s

exposures Property Omission of coverage requests

Applications

Statement of values• Must get signature from authorized

representative• Request agreed value from insurer

BI Worksheet Liability

• Total Pollution Exclusion vs. Exclusion with exceptions

Warranty Applications

Agency completing and signing or agency completing and client signing• Either method is incorrect

Client completing and signing is the proper approach• If the CLIENT completed last year’s

application in its entirety, provide a copy to the insured and ask them to complete the new application with correct information

Applications

Comparison of coverage offers among quoting insurers

Show all admitted as well as non-admitted Retain information of insurance company

rejections• Reasons stated• Notate that information to the client in

writing

Coverage Review Example

Application requested Business Income With Extra Expense

The proposal showed BI With EE to the client

Policy was checked Coverage was provided for BI Without EE No correction made

Binders

Incorrect company name• I.e. Travelers when the issuing carrier is

Travelers Indemnity Co of Illinois• Always using Chubb as the company• Binders must be specific to the insurance

company that has agreed to provide the contract

Binders

When placed with Surplus Lines broker• No authority placed with broker• Must have written authority provided by

Surplus Lines broker

Policies

Coverage requests after policy issue• Document insureds request to the

carrier and confirm to the insured Review of coverage issues Identify insurance solutions Follow through with endorsement request

Summary

Getting it right is difficult Identify risks / exposures Design insurance program Market – obtain company quotes Proposal accurate Corrections made Policy issued and corrected

Lot of work to be proud of

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