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Monthly Archives: August 2011

Trusts

The Wood family, December 1970

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Family, Living, Revocable or Irrevocable.

More and more individuals are establishing Trusts, Limited Liability Companies (LLC) and even creating shell Corporations and purchasing property in the name of the entities formed. When writing insurance for these entities it is important to have a general understanding of their purpose and how to name the entities on the various insurance policies.

General Purpose
Trusts are a vehicle created to direct how an estate will pass on to heirs or non-heirs such as charities. Placing property in the name of a Trust can reduce or avoid taxes and in some cases avoid probate. There are three legal parties to the trust: the trustor, the trustee and the beneficiary. The trustor creates the trust; the trustee manages the trust by administering the property in trust and the beneficiary is the person/party that receives benefits from the trust. One of the most common reasons for forming a Trust is that the trustor can put conditions and/or restrictions on the rights of the trust. Individuals that form a Trust purchase real and personal property in the name of the trust in order to maximize the benefits.

Insurance for Trusts

The Trust MUST be added to the Homeowners Policy and any other personal lines policy that insures property or provides liability insurance.

1. Adding the Trust as the Named Insured:
Some insurance companies will add the Trust as the Named Insured. Many insured’s request that the Trust be the named insured. Adding the Trust as the Named Insured is not the best method for providing appropriate protection. Most carriers will not and should not write Homeowners in the name of the Trust. One of the most important points to remember is that the personal lines policies must be written in an individual’s name, not an entity name, such as a Trust. The insurance companies are unwilling to provide worldwide liability coverage for the Trust.

2. Adding the Trust as an Additional Insured
A proper method of protecting the Trust is to add that entity as an Additional Insured. Many insurance companies will either add the Residence Held in Trust endorsement or add the Trust and amend the policy. The Trust should have coverage for both property and liability exposures.

Limited Liability Company (LLC)

General Purpose
A Limited Liability Company (LLC) is sometimes referred to as a hybrid of a corporation and partnership. A LLC, like a corporation, is formed for a number of reasons. The common goal for forming the LLC is to protect an individual’s personal assets and providing tax benefits that are allowed by law. LLC’s are more common when individuals purchasing high valued property want to protect their personal identity. Specifically high-profile individuals, such as those involved in the entertainment industry, may form a LLC and purchase all of their properties through the LLC.

Insurance for a LLC

The LLC should be added to the Homeowners Policy and any other personal lines policy wherein property was purchased in the name of the LLC.
1. Adding the LLC as the Named Insured has the same problem as the Family Trust which is that the coverage would be too broad. The Named Insured should still be individuals.
2. If the LLC is owned 100% of the owner of the property, some insurance companies will name the LLC as an additional insured.
3. Some insurance companies refuse to add a LLC to personal lines policies even when the insured is the 100% owner.
4. LLC’s may be used to purchase vehicles. Typically, the named insured on the Personal Auto Policy will be the individual (s) and the LLC would be added as an additional insured if acceptable to the insuring company.
5. Verify with the insurance company underwriter that an insured using a LLC to pay residence employees will not be construed as a business risk, thereby removing coverage for domestic employees. This becomes more problematic if the LLC is being used to pay residence employees and to acquire or hold property.

Shell Corporations

General Purpose
Shell Corporations are sometimes referred to as Loan Out Corporations. This is a term common in the entertainment industry whereby the production company forms the loan out through which they are paid. Additionally they may use these entities to buy property. This is, in large part, to shield the identity of the individual and for tax purposes.
Insurance for an Shell Corporation
1. Some insurance carriers who specialize with high-profile or high net worth clientele will name the Shell Corporation as the named insured on a Homeowners Policy. Again, the same concerns exist here as outlined above under Trusts and LLCs.
2. Some insurance carriers will add them as an additional insured and, there are carriers who will not name them at all.

~Laurie

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A Plastic Injection Molding Firm

Factory 1

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The insured was a plastic injection molding firm.

They had borrowed money from a bank in the amount of 1,800,000 dollars for the purchase of their equipment. The equipment collateralized the loan. The bank had requested that the agent add them on as a loss payable; provide them with notice of insurance; and provide that the insurance was non-derivative of any actions, acts or omissions of the insured. Both the request for the notice of cancellation and “separate” insurance were in the detail on the back of the bank’s standardized form for a secured loan of this sort.

The insured had become delinquent on their payments and after several months the bank representative personally went to the location and discovered that the business had vacated the premises and the equipment was gone. The bank immediately made notified the insurance company and took over the payments of the premium as coverage was still in force. What was clear was that the insured had absconded with their equipment. What also became clear was that the insured denied the bank coverage because they had been identified on the policy as a Loss Payable rather than a Lender s Loss Payable as their requirements for coverage would have dictated.

Often time a bank will request to be added as a “loss payable”. What many agents do not realize is that a “loss payable” endorsement has three separate choices as to how the policy will pay which is indicated on the Declarations Page of the policy: Loss Payable; Lenders Loss Payable and Contract of Sale. In this situation, the agent named the bank as “Loss Payable” which, according to the endorsement only provided that the policy would pay any claim for loss or damage jointly to the insured and the Loss Payee as interest may appear. This loss was NOT payable to the insured, the plastics manufacturer, as they had stolen their own property. What should have happened was that the bank be named as a Lenders Loss Payable. This clause provides: “If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part this loss Payee will still have the right to receive loss payment if the Loss Payee: (1) pays the premium due and (2) submits a sworn proof of loss within 60 days….” The last choice is for a contract of sale for situations wherein the loss payee has entered into a “contract” with the insured for the sale of Covered Property.

The mistake here was simply that the agent did not provide the coverage that was requested by the bank. The agent had received a copy of the request but failed to review its terms and requirements. The choice to name the bank as a Lenders Loss Payable would not have cost any more premium dollar then to have named them as Loss Payable. A word to the wise, when a bank has lent money, specifically on equipment they are requiring the Lenders Loss Payable Form. In this case it was a 1,800,000 dollar mistake.

~Laurie

 

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“Bomb Threat Closes California Bridge”

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Published USA TODAY 11/12/10

Haven’t you ever wondered when you read the paper and there is a threat of something happening if there is any coverage for the financial loss of a business or bridge that had to close. Sometimes these closures are as a result of a weather alert. We see on our TV the words Warning Weather alert. The hurricane is set to hit the Florida coast by 8am tomorrow morning. The authorities have asked everyone in the area to evacuate the area immediately. And then the hurricane never hits but stores have been closed for days in anticipation of something happening. Maybe it is the bridge, as in this article, that closes due to a threat and all the money the bridge would have made by charging tolls would not be earned during the closure.

So where’s the coverage. The answer is simple–there is none. At least not with the vast majority of insurance policies. If we were going to look for coverage we would be looking at the Business Income Insurance but we would find no coverage there. Yes, the insured may be able to prove they have lost money but what they cannot prove is that they had physical loss to the premises insured by a peril insured on the policy. It is that simple. And even if, and that is a huge if, they could prove coverage exists, almost all Business Income Policies have a waiting period or a time deductible that would preclude coverage. Typically it is 72 hours but can be reduced to 24 hours or eliminated entirely.

So next time you read an article and it says there was a threat or that a business should batten up the hatches because a storm is brewing.

~Laurie

 

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What do the Columbine Murders, OJ Simpson, and President Clinton all have in common?

Umbrella

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Odd question–but, an eye opener in terms of the Homeowners Policy and a Personal Umbrella Policy (PUP).

Yes, all three of these cases were covered in one fashion or another on either the Homeowners Policies under the Liability section or PUP. Homeowners Policies offer some of the broadest coverages available on both the Property and Liability Sections of the policy. The Personal Umbrella provides additional limits AND additional coverages subject to a minimum retention. Even with all the limitations, exclusions, definitions and modifications from one form series to the next, the coverage under both policies is still very comprehensive. It often times comes as a complete surprise to policy holders that their insurance policies would pay for defense or judgments for civil lawsuits. That clearly was the case with the Clintons.

Clinton and his wife were probably like typical American homeowners. Even though they are both lawyers, neither had any idea of the hidden bonus in their policies, Bennett said. It was he, Bennett told reporters, who made the discovery. “The president and the First Lady were totally unaware that they had these policies,” Bennett said. “I think it came as quite a surprise to them.” (ProQuest Information and Learning Company)

Let’s begin with the basics. The liability section of the Homeowners Policy is titled Personal Liability. The coverage is far broader than just a “premises” liability policy. The policy responds to claims that are made or suits that are filed against an “insured” as defined in the policy for damages due to “bodily injury” or “property damage” caused by an “occurrence” to which coverage applies. There are two distinct parts to the coverage: damages for which the insured is held legally liable and a defense for such claims that is outside of the limit of liability provided on the policy. It is the defense part of the policy that often provides coverage that is most unexpected. The ISO Homeowners Policy defines the defense coverage as:

“We will…Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when our limit of liability for the “occurrence” has been exhausted by payment of a judgment or settlement.”

Now the question is how this applies to Columbine, OJ Simpson and President Clinton.

Columbine Highschool Murders: Columbine Victims Get $2.65 Million Settlement (Reuters)

The Columbine High School shooting occurred April 20, 1999 in Littleton Colorado. Two teenagers that were students at the high school killed thirteen people and wounded twenty others and then shot themselves to death. One of the shooters was 17 years old and the second shooter was 18. Their death removed them from potential criminal and civil action and left the parents as the primary remedy. The parents of the dead and injured students sued the parents and the lawyers claimed the parents were negligent in their supervision of their children AND the gun supplier was negligent for selling them the weapons used in the shooting. In an out of court settlement, the student’s parent’s insurance policy paid a reported $1.6 million settlement to the victims that were covered on their Homeowners policy. Insurance company payments on behalf of the people who supplied the guns used in the killings bring the total of the settlement to about $2.5 million. (http://www.slate.com April 24, 2001). The settlement for this case is for damages and there is no mention of what the costs were to defend the suit and what amount was paid for under the Homeowners Policy for the defense.

Now you are no doubt thinking that “murder” is an intentional act and that intentional acts are excluded on the Homeowners Policy. And clearly that has always been the intent of the policy. Remember that this loss occurred in 1999 so we need to go back in history, for a moment and re-visit the Homeowners Edition date that was in effect at that time. That would take us back to the 1991 form using ISO as a reference which was used by most states until the revision that took place in 2000. In the 1991 form the “intentional act” exclusion was very short and stated.

1. Coverage E—Personal Liability and Coverage F—Medical Payments to Others do not apply to “bodily injury” or “property damage”:

a. Which is expected or intended by the “insured”;

“In this policy, “you” and “your” refer to the “named insured” shown in the Declarations and the spouse if a resident of the same household.”

The definition goes on define “insured” to include relatives in the household. There are those reading this that might doubt this interpretation but remember the claim was paid under the policy. To add weight to this argument, the new definition of intentional act is much broader in scope—specifically because it was too vague in the prior editions. The language from the 2000 edition date of the Homeowners Form reads.

Coverage E and F do not apply to the following:
1. Expected Or Intended Injury

“Bodily injury” or “property damage” which is expected or intended by an “insured” even if the resulting “bodily injury” or “property damage”:

a. Is of a different kind, quality or degree than initially expected or intended; or
b. Is sustained by a different person, entity, real or personal property, than initially expected or intended.

However, this Exclusion E.1. does not apply to “bodily injury” resulting from the use of reasonable force by an “insured” to protect persons or property;

Notice the change from “the” insured to “an” insured and how broad-based this exclusion is. So in the case of Columbine it was a combination of alleged negligence of the parents and the ambiguity of the intentional acts exclusion that allowed for the $1,600,000 settlement.

The OJ Simpson trial and Former President Clinton both involved payment of defense costs for their respective trials.

 

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Q: I am having a problem with the CGL form (CG 0001 0798) with a carrier. I am asking but how policies should work (or not work).

Questions & Answers

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Q:  The client’s lease calls for “Tenant shall provide Landlord with a Certificate of insurance naming Landlord, Landlord’s lender (if any), and Realty Corporation as additional insureds, provides for a waiver of any right of recovery by way of subrogation against Landlord in the event of any loss, and provides for a thirty (30) day written notice to Landlord prior to cancellation or material change of coverage”.

Of course the standard fire insurance allows for the waiver if in writing before the loss.   Do you think this means  for liability too?   We contacted the GL carrier and they said they don’t endorse a waiver on the GL.  Is there an automatic waiver section in a GL policy similar to the property section?

Any help you can offer is appreciated.

A:  Yes, I do believe that the language you have quoted brings in every line of insurance, including property, auto, liability, work comp, etc.

ISO GL (any edition) does not require the Waiver of Subrogation endorsement CG 24 04.

The CGL Condition #8 – Transfer of Rights of Recovery Against Other To Us in the GL form demands that the Named Insured does nothing AFTER loss to impair the insurer’s rights of subrogation.  Therefore, the Named Insured may waive rights prior to a loss occurring and not violate the policy conditions.

8.  Transfer Of Rights Of Recovery Against Others To Us

If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them.

The Business Auto language is the same – the condition # is 5.

The WC policy is a problem and would have to be endorsed and the insured will have a premium charge that could be significant.

If the insured is carrying an Umbrella policy, check the form.  Many standard markets follow the underlying ISO language, but others do not.

I hope this is helpful.

 
 

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Murder! Covered or NOT Covered on the Landlord’s Policy?

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This is a question debated more often than you might think.

If a murder occurs at a premises, when and to what extent is the landlord held legally responsible for the loss and if the landlord’s liability policy will respond to the claim. This is not a new question but one that has been adjudicated in various states over the last decades.

Let’s begin with the case of Rosales vs Stewart in 1980 ( 113CA3d130,169 CR 660.). The tenant (plaintiff) brought a wrongful death action against their landlord (defendant) on the grounds that the landlord was responsible for renting to a tenant who fired a gun on the premises that resulted in the death of the plaintiff’s daughter who was on an adjoining property at the time. In this case the court held that a landlord can be held responsible for the acts of their tenant if two tests are met:
1. The landlord knew of the tenant’s propensities for violence before leasing to him or renewing a lease or;
2. The landlord could have terminated the tenancy after acquiring such knowledge before the act was committed.

The issue of responsibility and the test imposed by the court is only one part of our concern. The second part of the question is whether this is covered on the landlord’s liability policy. Needless to say, the specific insurance policy written would have to be reviewed in order to determine this answer on a case by case basis.

By way of example we will look at a case from the New York Court of Appeals: Agoado Realty Corp.et.al v. United International Insurance Company, Appellant, et al-Court of Appeals of New York June 20, 2000 733 North Eastern Reporter 2d213.

Let’s begin with the facts of the case. The insured owned a building in which a tenant was murdered by an unknown party. Ten months later the estate of the victim filed a wrongful death action against the landlord alleging negligent security along with other causes. The landlord (defendant) had a CGL policy covering Bodily Injury and Property Damage if caused by an “occurrence” that occurs on the insured premises. In the policy the term “occurrence” was defined as an “accident”. As is typical in a CGL, the policy excluded “bodily injury that was expected or intended from the standpoint of the insured. The landlord’s policy did not have separate language excluding “assault and battery”.

In this case the higher court held that “murder” constituted an “accident” under the policy. While the murder was “intentional” on the part of the assailant, it was an accident from the perspective of the insured. The complaint went on to allege that there was negligent security and demonstrated that the incident, the murder, was unexpected, unusual and unforeseeable from the “insured’s standpoint”. The end result and answer to the “certified question” of this case on appeal was whether murder was an accident under the landlords’ policy and therefore, covered. The higher courts opinion was that murder was a covered occurrence and the policy exclusions did not apply to the circumstances presents.

We have to give some importance to the last part of that sentence being based on the “circumstances presented” as each case has its own set of circumstances and, of course, its own policy language. Also with the understanding the various states may treat these issues differently.

 

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Q: When would a client need the Total Pollution Exclusion form with Hostile Fire CG 2155?

Business Fire

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Q: When would a client need the Total Pollution Exclusion form with Hostile Fire CG 2155?  I am underwriting a risk for a commercial glazier and the agent is requesting this form, in lieu of CG 2149 Total Pollution Exclusion.  This is her example of why they are requesting this coverage.

Agent wants this coverage in case the insured’s building burns down due to a hostile fire and the vapors were to pollute the air and cause BI or PD to an adjacent property or individuals.  They want to make sure there is coverage to the 3rd party.  I believe the agent is off on the coverage, but I need a resource that explains this coverage.

A: 

Your agent is correct.  I even like the example provided.  Here’s the issue:

Over the past decades, the courts have ruled that inhalation of smoke clearly falls within the definition of “pollution” which the policy states as:  Any solid, liquid, gaseous or thermal irritant or contaminant, include smoke, soot, fumes, acids, alkalis, chemicals and waste.

Due to premises and operations risk, a property occupier can be held legally liable for injury arising out of that occupancy, which would include a building fire that results in smoke inhalation and injury.

The original policy language provides an exception granting coverage for “hostile fire” that results in bodily injury or property damage.  When the Total Pollution Exclusion endorsement (CG 21 49) is added, this coverage is removed along with the other exceptions for coverage under exclusion f.  In fact, the agent is asking for CG 21 55, which leaves intact the Total Pollution wording you desire to add, but provides this limited exception for coverage and is a commonly used compromise by insurance underwriters.  In fact, I typically recommend that the agent ask for CG 21 65, which provides an exception as well for breakdown of building heating, cooling and dehumidifying equipment as well as mobile equipment spills.

While there are many environmental pollution concerns that rightfully should be covered under a pollution policy, in fact, that part of the industry typically does not cover hostile fire as it is most often covered by the standard CGL.

I hope that this is helpful.  Please let  me know if more assistance is needed

 
 

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