insurance course 101
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Insurance for LawyersRisk Management and First Party CoverageTRANSCRIPT
Insurance for Lawyers 101
Understanding Commercial Lines
Kevin J. Connolly
Basics—Insurance
• What is insurance?– It’s a contract– One party, the Insurance Company, agrees to
“confer a pecuniary benefit”– Upon the Policyholder– Upon the occurrence of a fortuitous event– In which the Policyholder has an insurable
interest
Basics—Risk Management
• “Risks” are exposures to potential losses and are managed through a multi-phasic approach:– Recognition: you cannot manage a risk if you fail to
realize its potential to cause losses.– Prevention: an ounce of prevention is worth a pound
of cure.– Mitigation: You can’t prevent all losses, but you can
minimize the impact of a bad occurrence.– Financing: When all else fails, use other peoples’
money to pay for the loss. Gene’ corollary: use other peoples’ insurance, too. More on this later.
Basics—The Role of Insurance
• Insurance is a loss financing tool– For an agreed price, the insurance company
takes on the loss and the costs of defending against the claim.
– Lawyers do not provide advice about the amount of insurance that is needed.
– We can and do advise about two distinct functions of insurance, empowering the policyholder-client to make an informed business decision.
Basics—The Role of Insurance
• Don’t Bet the Company: Insurance can hedge against catastrophes that could put the business OUT of business.
• Help the Bottom Line: Insurance can bring predictability and regularity to handling the routine day-to-day claims that arise in any mass market business.
• Some of these situations call for advanced risk management techniques. Some of these techniques involve lawyers as observers, and others as active participants.
Preview—Advanced Topics
We will return to these topics in later courses, but you should be aware of these concepts
• Self-insurance is actually no insurance at all.• Fronting uses a primary insurance policy in which the
deductible is equal to the limit of liability.• Large Deductible Plans resemble Fronting but usually
are found in particular contexts, especially construction.• Large Deductibles go hand-in-hand with Retrospectively-
rated policies.• Captive insurance companies are owned and controlled
by the policyholder. This is an especially tax-advantaged technique
Property-Casualty Insurance
• Property-casualty is an amalgamation of many distinct “lines” of insurance.
• Insurance Lines are used by regulators to control the activities of insurance companies. They used to be integral to financial security laws that tried to firewall different parts of the insurance industry, so that a bad hurricane season would not imperil coverage for fidelity bonds on Wall Street.
• New York recognizes thirty distinct lines of insurance.
Lines of Insurance in New York• Life Insurance• Annuities• Accident and Health Insurance• Accident and Health Insurance (Not
including non-cancelable policies)• Accident and Health Insurance (Non-
cancelable policies)• Fire Insurance• Miscellaneous Property Insurance• Water Damage Insurance• Burglary and Theft Insurance• Glass Insurance• Boiler and Machinery Insurance• Elevator Insurance• Animal Insurance• Collision Insurance• Personal Injury Liability Insurance• Property Damage Liability Insurance
• Workers' Compensation and Employers' Liability Insurance
• Fidelity and Surety Insurance• Credit Insurance• Title Insurance• Motor Vehicle and Aircraft Physical Damage
Insurance• Marine and Inland Marine Insurance• Marine Protection and Indemnity Insurance• Residual Value Insurance• Mortgage Insurance• Credit Unemployment Insurance• Financial Guaranty Insurance• GAP Insurance (Subsections A thru D)• Prize Indemnification Insurance• Service Contract Reimbursement Insurance• Legal Services• Involuntary Unemployment Insurance
Property-Casualty Insurance
• Property-casualty is an industry classification.• Property insurance is a cohesive group, and
basically covers tangible items that have a definite or ascertainable location.
• Casualty Insurance means insurance that covers against ‘bangs’ that are similar to the occurrences that property insurance covers.
• Then there are a few ‘overhanging’ topics, such as surety bonds, which are considered to be part of P/C insurance even though the ‘bang’ is different.
ISO Commercial Package Policy
• This is the workhorse of the commercial insurance world.
• Combines a range of coverage in one convenient package. – Comes with a 15% premium discount as long
as there is at least one property cover and one liability cover in the package
– Can also be used to deliver a monoline policy
ISO—Insurance Services Office
• ISO is a trade organization that develops and files insurance forms
• Filing and approval of forms is one of the ways in which states regulate insurance companies
• ISO makes life easier for the insurance companies because ISO handles the filing of the forms and negotiations to get them accepted.
• ISO makes life easier for the states because they have to deal with a single filing.
• It’s even easier because for the most part, ISO files with NAIC, which then extends approval to all of the members of ISO and all of the States that are in the NAIC program.
Commercial Package Policy
• Bundle of Coverage Parts• Each coverage part looks like a distinct
insurance policy, with declarations, policy terms, endorsements.
• All of the coverage parts are tied together into a package policy with a Common Declaration that identifies the policyholder and the coverage parts and other documents.
• The first step in deciphering a CPP is to break it into its coverage parts and interline documents and keep them distinct. Fail to do so and here open the gates of hell.
Anatomy of the CPP
Property Insurance
• First Party/Third Party Dichotomy
• Property Coverage Part: CP 00 10 BPP
• Anatomy of the Coverage Part– Declaration– Coverage Form– Causes of Loss– Commercial Property Conditions– Endorsements
Anatomy of the BPP
• Declaration identifies the parties, identifies the covered location, documents the elected coverage options and enumerates the policy documents.
• Coverage Form is the bulky document that makes up most of the volume of the policy.
• Cause of Loss form is of two basic types– Stated Risk– Open Risk
Anatomy of the BPP
• Commercial Property Conditions– This often-overlooked form contains several
poison pills.
• Endorsements are like riders that are attached to tailor the policy as needed.
The Insuring Clause
• We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.
• What is “direct” physical loss of or damage to?– It’s not indirect – Roughly equivalent to proximate causation
The Insuring Clause
• Covered Property– Three broad groups
• Your Building• Your Business Personal Property• Personal Property of Others
The Insuring Clause
– Your Building• Completed Additions• Fixtures, including outdoor fixtures• Permanently-installed machinery and equipment• Personal property used to maintain and service the building
and premises– Fire extinguishing equipment
– Outdoor furniture
– Floor coverings
– Appliances for refrigeration, ventilation, cooking, dishwashing or laundering
• If not covered by other insurance– Additions under construction, alterations and repairs
– Materials, equipment, supplies used for making additions, alterations and repairs
The Insuring Clause
– Your Business Personal Property• Furniture and fixtures• Machinery and Equipment• Stock• All other personal property owned by You and used in Your
business• Labor, materials or services performed or arranged by you
on personal property of others• Your use interest as tenant in improvements and betterments• Leased personal property for which You have a contractual
obligation to insure, unless otherwise provided-for under Personal Property of Others.
The Insuring Clause
– Personal Property of Others• Property must be in the care, custody or control of
an insured party• Payment is made to the owner, not the
policyholder• Broader (and more expensive) than Legal Liability
coverage.
Excluded Property: “Land”
• Land• Water• Bridges• Roadways, walks,
patios and other paved surfaces
• Retaining walls that are not part of a building
• Bulkheads, pilings, piers, wharves and docks
• Cost of excavating, grading, backfilling and filling
• Foundations below the lowest basement
• Underground pipes, flues and drains
Excluded Property: Outdoor
• Outdoor grain, hay, straw and other crops
• Outdoor trees, shrubs and plants (unless these are stock)
• Outdoor radio and TV aerials including satellite dishes, wirings, masts and towers
• Outdoor signs unless attached to a building
• Outdoor Fences
Excluded Property: Miscellaneous
• DEMCABS– Deeds– Evidence of Debt– Money, including food stamps– Currency– Accounts– Bills– Securities and Notes, excluding lottery tickets
Excluded Property: Miscellaneous
• Vehicles, Watercraft, Aircraft (unless stock)
• Animals unless stock or boarded
• Valuable Papers and Records
• Property otherwise covered
• Airborne/Waterborne Property
• Contraband
Covered Property: The Location
• Property insurance covers things that stay in one place and don’t undergo fundamental change
• Coverage is restricted to the covered location
• Materials, equipment, supplies and temporary structures used to add, alter or repair the insured building can be off premises but within 100 feet
Amounts Payable
• Repair or Replace• Salvage• Valuation
– ACV– Replacement Cost– Valuation Disputes
• Limits of Liability• Deductible• Coinsurance
– ((Should minus Did) ÷ Should) × Loss– Alternatives
Amounts Payable
• Extensions and Additional Coverage– Debris Removal: 25% limit + $10,000 outside– Pollutant Cleanup and Removal $10,000 P.A.
sublimit (outside)– Preservation of Property (unlimited but inside)– Fire Dept. Service Charge ($1000 outside)– Increased Cost of Construction: an advanced
topic.
Amounts Payable
• Extensions– Newly-acquired or constructed property
• 30 days• Low Limits but outside the limits
– Personal Effects and Property of Others• $2500 sublimit. Outside the limits
– Valuable Papers and Records• $2500 sublimit. Outside the limits
– Outdoor Property• $1000 per occurrence/$250 per plant
– Non-owned detached trailers• If policyholder is contractually obligated to insure
Miscellaneous Loss Provisions
• Notice of Loss
• Police Report
• Safeguard against further loss
• Inventory and Inspection
• Proof of Loss
• Examination Under Oath
Covered Causes of Loss
• In the beginning, all property insurance was fire insurance. – Hostile Fire was the sole covered cause of loss– However, if a fire resulted from a non-covered cause
of loss, the insurance paid for the resulting loss IF the policyholder could show what losses resulted
• Lightning was added as a covered cause of loss in the 18th Century.
• “Supplemental Coverage” and “Extended Coverage” arrived in the 1930s in response to pressure from Inland Marine companies (who covered “all risks.”
Covered Causes of Loss
• Extended Coverage = W.C. Shaver• Vandalism and Malicious Mischief were
added in the 1940s• Many old forms call for property insurance
to cover fire, lightning, EC, VMM.• In 1986, when ISO issued the CPP, this
term was technically obsolete except for the unwillingness of the legal profession to join the 20th Century.
Covered Causes of Loss
• This kind of named-peril coverage is found in the “Basic” causes of loss form, which covers Fire, Lightning, EC, VMM, leakage from sprinklers, sinkhole collapse and volcanic action.
• ISO also offers a “Broad” causes of loss form that adds falling objects, weight of snow, ice and sleet, water damage from appliances and systems.
• Collapse of a completed building can be covered as an extension under the broad form, but it responds only if collapse is caused by the Broad Form perils, unknown decay, unknown insect damage, weight of people or personal property, weight of water on the roof or the use of defective materials or methods in constructing, remodeling or renovation.
Covered Causes of Loss
• Both the Basic and Broad forms also have excluded causes of loss.
• There are two kinds of exclusion: those that override covered causes and those that can be concurrent.
• “Absolutely” excluded are:– Ordinance or Law (but can be overcome with ICC Coverage)– Earth Movement– Governmental Action– Nuclear Hazard– Utility Services, but if the loss is caused by on-premises
casualty, there is an exception and coverage attaches– War– Water (flood)
Covered Causes of Loss
• Additional Exclusions (no anti-concurrency language)– Artificially-generated electrical current– Explosion of Steam Boilers– Mechanical Breakdown– Neglect
• Other than neglect, these exclusions can be covered with Equipment Breakdown/Boiler & Machinery insurance
Covered Causes of Loss
• Special Causes of Loss “All Risk”
• All Risk was (still is) characteristic of marine insurance
• Covers every cause of loss except those excluded.
• Special Form has a better than 90% market share
Special Form ExclusionsWeather damage to the interior of the building unless the building itself
is damagedWeather damage to property in the openSmoke, vapor and gas from agriculture or industrial operationsContinuous seepage or leakage (14 days)Collapse unless due to weight of people or propertyMaintenanceTheft, including uninstalled building materialsEmployee DishonestyVoluntary PartingUnauthorized instructionsInventory Shortages and Unexplained DisappearanceLoss of Use
Special Form Coverage Extensions
• Property in Transit– Limited causes of loss (WCShaver + Theft of
complete packages from secured storage + Collision and Upset
– Tearing Out Coverage
Optional Extensions
• Earthquake• Flood• Ordinance or Law• Utility Services• Spoilage• Radioactive Contamination• Pier & Wharf Additional Covered Causes of Loss
– Floating Ice– Collision of vessel or object
Break
CGL
• Scope of Coverage– Premises-Operations– Products and Completed Operations– A few intentional torts
• Anatomy– Declaration
• Identifies the named insured,• The Insurance Company• Limits of Liability
CGL Coverage Part Anatomy
• Coverage Form– Three basic coverages
• Bodily Injury & Property Damage• Personal and Advertising Injury• Medical Payments
– Supplementary Payments– Who is an Insured– Limits– Conditions– Definitions
CGL
• Insuring Clause– We will pay those sums that the insured becomes
legally responsible to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.
• “Comprehensive”– The Comprehensive General Liability policy was
introduced in 1941– It covered both premises-operations and
products/completed operations– Covers all locations and all operations within the
coverage territory
CGL
• Payment of Damages– The insuring clause requires that the insured
be legally obligated to pay damages.• Voluntary payments are not covered.• Fines, restitution—anything that is not money
damages—are not covered.
– The damages must result from bodily injury or property damage
– The terms of the policy must apply to the injury or damage
CGL
• Additionally, the injury or damage must result from an “occurrence”
• The injury or damage must occur in the policy territory
• Occurrence or Claims Made– Under an occurrence policy, the injury or damage
must occur during the policy period– Under a claims made policy, the claim must have first
been asserted during the policy period or an extension “tail”
CGL Anatomy
• Duty to Defend– The insuring agreement also expresses the
insurance company’s duty to defend the insured against any suit seeking covered damages
– Duty to defend is broader than the duty to indemnify
– Equity suits are not covered unless joined with an action for damages
CGL
• Supplementary Payments– Covers investigatory expense– Cover defense costs– Miscellaneous coverages include cost of
bonds to release attachments up to the limit of insurance, prejudgment interest on the part that the insurance company pays, postjudgment interest on the entire judgment until the insurance company pays or offers to pay up to the limits of coverage
CGL
• Who is an insured?
CGL
• Limits of Liability