Valuation – The “Courts” view of Under Insurance Cases

 

The “Courts” view of Under Insurance Cases
The Good, the Bad and the Ugly!

 

The Good…..

 

We are going to start with the good which is hard to find in cases of “under-insurance”.  The good news is that California, at least, has learned its lesson after years of massive fires; earthquakes; and, we can’t forget, riots.  Whether natural disasters or man-made we have seen our share of CAT losses and learned firsthand what underinsurance; incorrect insurance or failure to place coverage, at all means when a major loss occurs.

 

So, what is the good news?  The good news is that  last year, the California Department of Insurancepassed and enforced new regulations that require all insurance agent/brokers that write residential insurance to take a class specifically in residential valuation and comply with new regulations for estimators and record maintenance.  This regulation was made as a direct result of a demand made against the California Department of Insurance by the claim ravaged insureds of the San Diego fires to go after the culprits—the insurance

 

 

representatives—who sold (or didn’t sell) the correct coverage. This is good news because now the agents have the tools to use for estimators and a better understanding of the legal requirements.

 

This is clearly NOT a California problem only.  As I write this article, my TV is updating the status of Hurricane Isaac.  It was only a month ago that Colorado was hit by wildfires where insurers expect to pay out nearly $450 million to victims of the Waldo Canyon and High Park fires according to the Rocky Mountain Insurance Information Association. Whether it is a single property loss or one classified as a CAT loss, the insurance industry faces the question of whether the insurance written was adequate from both a coverage and limit perspective. The majority of these claims come from homeowners who have lost their homes.

 

The Bad…..

 

The “bad news” is that no matter how well we try to write the residential coverage to value, it is a guessing game at best.  Let’s begin with the basics:  how do we decide what limit to write for a homeowner? Here are a couple of the methods or a combination of approaches:

 

1. An escrow company or bank demands that a certain limit be written to cover the loan on the policy
2. An insured may request a limit of insurance to cover the amount they paid for the home
3. An insured might request the same limit that the prior homeowner had on their policy
4. The agent or representative may base the amount on the issuing insurance company’s worksheet. What we have all experienced is that there can be a significant difference from one company to another as to the amount of insurance that is being required.  What do we do then?
5. The agent or representative may base the amount may provide a secondary cost estimator based on other resources such as Marshall & Swift which provides yet another amount for the home insurance
6. The agent or representative may personally go out and inspect the property and do an on sight estimator.  The reality is that most individuals in the insurance industry have minimal knowledge of what goes in to a home inspection
7. On rare occasions there is a formal appraisal performed for insurance purposes—again another number then the one we calculated with the insurance company’s estimator
8. And we cannot forget the plea from our insured to write the very lowest amount possible so they can save money.  Trust me they will not remember that discussion when the house burns to the ground.

 

Regardless of how we determine the values, all methods have one common element which is that amount of insurance is probably too low to handle a total loss that involves all the unknown costs we never took into consideration.  This coverage deficiency is especially true in a loss that involves more than just a single home, such as in the wildfires or hurricanes, where the cost of reconstruction skyrockets with the escalated cost of labor and shortage of materials. To make these matters worse, the other coverages provided in the Homeowners Policy are percentages of the limit that was set on the Dwelling—if that amount was underinsured then the other limits may prove inadequate, as well.

 

The good and the bad……

 

The insurance industry solution to the chronic problem of underinsurance in residential property was twofold:  Guaranteed Replacement Cost or Extended Replacement Cost.

 

• Guaranteed was basically a limitless policy for the Dwelling—“guaranteeing”, as the title suggests “full replacement cost”.  But that form fell short of “full replacement cost” or any guarantee. We learned that the hard way in the aftermath of San Jose, California fires when we first “learned” that “guaranteed” did not mean the policy guaranteed to pick up the cost of all the new ordinance or laws in affect at the time of loss. This left the insureds without funds to bring their homes up to the building code requirements mandated for replacement.
• The use of “Guaranteed Replacement Cost” on residential is not readily available by most carriers.  Even if the companies are saying they are writing “Guaranteed Replacement Cost”, they are most probably issuing an Extended Replacement Cost Endorsement referred to as ERC.  ERC extends the coverage over and above the policy limit by a percentage indicated in the policy.  Typically 25% is the minimum increase.  The Extended Replacement Cost does NOT include Building Ordinance which must be written for a separate amount of insurance typically by endorsement.

 

The Ugly….

 

You are sued.  Short and simple, the claim did not go well and your client has decided to sue you and anyone else they can name in the lawsuit.  Discovery now begins often times going back years and years when you first wrote the coverage.  You will answer such questions as:

 

1. Who set the limit of insurance initially (very possibly does not even work for you anymore)
2. Who else was involved in setting limit during the term of the policy (we are talking everyone who touched that file AND the producer(s) who spoke with the insured.
3. Was the insurance reviewed annually and a new estimator completed and reviewed?
4. Is there a clear documentation trail? We are talking not just the old fashion hard copies but all the laws regulating electronic discovery.
5. Did the insured ever receive any of the estimates in writing? This is now required by law in California but best practices was that we always provided our insureds this information
6. Did the insured acknowledge receipt of the estimator and verify in writing that the amount was acceptable?

 

The reality is that, in most cases, insureds rely on their insurance agent/broker to set the policy limit and to make sure they are “fully” covered.  However, the general rule is that an insured is responsible for the establishment of the policy limit. Case law in California has, historically, been kind to the  insurance agent or broker in finding that they do not have the “duty” to suggest or volunteer that an insured should purchase higher limits or additional coverages. (Fitzpatrick v. Hayes, (1997) 57. Cal.App.4  916.  So far this sounds like good news but it is about to get “Ugly”

 

There are important cases that were decided before Fitzpatrick v. Hayes that weighs heavily on the obligation of the insurance agent/broker in setting limit.  One of the most important was Jones v. Grewe (1987) 89Cal.App.3rd 950. This case involved third party liability and the court held that an insurance agent could NOT be held liable for failing to obtain sufficient limits on a third-party liability policy.  The Jones case held that an agent could not reasonably forecast the upper limit of liability that an insured might need.  The case went on to reason that if liability were extended to agents for not obtaining sufficient liability limits that it would amount to an insurance agent being put in the position of an excess insurer.  It is important to remember that this case dealt with liability and not setting limits on property.

 

In 1992, the Jones decision was followed by Free v. Republic Ins. Co (1992) Cal.App.4th 1726.  This case involved a homeowner who specifically asked his broker whether his policy limits were sufficient to cover his home for a total fire loss.  The broker affirmed that he was “fully insured to value”. The insured sustained a loss for which he did not have adequate limit and sued his broker.  The broker was held liable. In the Free v. Republic case, the court made a distinction about “misrepresentation” in setting limits on a first party (property coverage) as opposed to a third party (liability coverage) as held in Jones v. Grewe.   The court reasoned that a broker/agent can objectively determine the amount of replacement cost value for a dwelling in the event of a total loss which is not the case of the subjectivity concerns in a third party policy.

 

In 1996 the court ruled in Desai v. Farmers Ins. Exchange, (1996) a47 Cal.App.4th 1110.  In this case the insured requested that his agent provide him with “100% coverage” for his home in the event of a total loss. The insured issued a policy for $150,000 which included earthquake and there was no Guaranteed Replacement Cost provision.  The insured suffered damage in the Northridge Earthquake with a cost to repair the home at  $546,757. The court held on appeal that the agent negligently represented that the policy provided 100% replacement cost and that the language in the policy representations found in areas such as the “value protection” clause and inflation protection that gave more credence to the assertion the insured was fully covered. .

 

Back now to   Fitzpatrick v. Hayes. (a997) 57 Cal.App.4th 916,    which was referenced in the beginning of this article. The Fitzpatrick case had the precedent cases of Jones, Free and Desai to rely on its opinion. The Fitzpatrick case set the three recognized exceptions, under California law, to the general rule of whether agents and brokers could be held liable for under insurance.  The general proposition is that an insurance agent does not have a duty to volunteer to an insured the need to procure additional or different insurance coverage UNLESS one of the three following situations occurs:

 

1. The agent misrepresents the nature, extent or scope of the coverage being offered or provided;
2. There is a request or inquiry by the insured for a particular type or extent of coverage; or
3. The agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.

 

In looking through these criterion, and understanding that only one has to apply for an agent to be held liable, it is easy to see how an agent could fall in the trap.  The questions would be:

 

1. Did the agent represent to the insured that the limits were adequate
2. Did the insured specifically ask the agent if they had adequate coverage; full coverage; 100% coverage or any other qualifier of this type.

 

We spoke earlier of the practice and requirement that agents use insurance company’s estimators to arrive at a minimum amount of insurance to be offered the insured. As we go through this process with our insured, it clearly gives them a false sense of security that we know what we are doing.  It is an understatement that we have to be cautious as to how we communicate the estimator’s figures—emphasizing this is an “estimator” and this is an “estimate” only NOT an appraisal of property.  What the Fitzpatrick case cautions us is that if the insured requests full coverage or questions the agent to affirm that the coverage is adequate, and we say “yes” that the agent will fall within one of the Fitzpatrick exceptions.  There are, of course, situations where an insured never spoke with their agent about the policy limits. This may not get us off the hook, however.  This lack of communication may be because the insured has relied on the insurance agent’s expertise in the area of estimating the value and did not feel they had to get any further involved.  Even though the agent may not have had any oral or written communication concerning values; courts will check to see if there is any advertising, such as on a website, or other promotional materials that would portray the agent as “holding himself out” as being an expert. The reality is that the very first thing we do, as expert witnesses, is check out the agent’s website to read the representations that are being made.

 

The cases cited in this article are from California; however, every state has their own case law as relates to an agent or brokers responsibility for underinsurance. The legal issues we discussed here will be the same issues that each of the cases of underinsurance will contain.  I believe that other states will follow the requirement set by the Department of Insurance to mandate education and regulate how records are to be maintained.

 

The Good, the Bad and the Ugly was a lot funnier when viewed as the movie  about a bounty hunting scam to find a fortune in gold buried in a remote cemetery. (stared Clint Eastwood, Eli Wallach and Lee Van Cleef in 1966).   Unfortunately, there is no humor in a court of law regardless of what state you are from.

Witten By:
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR
President, Insurance Community Center

 

 

New Commercial Property Forms for 2012

The ISO has submitted significant changes for the Commercial Property Forms that have an effective date of 10/2012.

The changes include:  new edition dates of existing form numbers; forms that are being withdrawn and new forms that are being introduced. The information, upon which this article relies, is the ISO Circular dated January 3, 2012.  This multistate revision will be applicable to the following jurisdictions:

Alabama	Kentucky	Ohio
Alaska	Maine	Oklahoma
Arizona	Maryland	Oregon
Arkansas	Massachusetts	Pennsylvania
California	Michigan	Rhode Island
Colorado	Minnesota	South Carolina
Connecticut	Missouri	South Dakota
Delaware	Montana	Tennessee
District of Columbia	Nebraska	Texas
Florida	Nevada	Utah
Georgia	New Hampshire	Vermont
Guam	New Jersey	Virgin Islands
Illinois	New Mexico	Virginia
Indiana	New York	West Virginia
Iowa	North Carolina	Wisconsin
Kansas	North Dakota	Wyoming

Many of the ISO changes have already been adopted in insurance company forms while other changes represent clarification of the “intent” of the form.  We will include a listing of the forms that will be part of the 10/2012 edition date.  Specifically we will highlight those changes that have any significant impact and new endorsements to the form series.  This chart is a summary of the form changes and each form must be reviewed in its entirety to understand the impact of the changes. As you review the impact of the form changes you will note that there are many instances where there is no change in coverage.  What this means, typically, is that the language of the form has been modified by adding or removing a word or substituting a word that is clearer.  There is no change in the intent of the form.  Some changes result in acoverage increase typically in a sub-limit that is provided.  Some changes result in coverage being reduced for example removing am extension or sub-limit that appeared in a prior edition date.  Some changes will show coverage is broadened which typically means that form language has been added to make the coverage more comprehensive. There are some new endorsements that are being introduced that we will discuss in more detail as they are new to the form series.

NEW ENDORSEMENTS:

Exclusion of Loss Due to By Products of Production or Processing Operations (Rental Properties) CP 10 34

This endorsement is as a result of the landlord/tenant business risks relating to the rental of the property.  While the landlord may enter into a lease that holds the tenant responsible for damages arising from a variety of causes, the insurance contract is not intended to compensate a landlord for the expected consequences of usage of the rental premises as intended. One example provided by the ISO in explanation would be when a premise is leased for use as a restaurant and there is damage from the residue of the cooking operation.  This is deemed a business risk innate to the occupancy not loss compensated by insurance.  This question becomes much more interesting and complex when the property is rented for illegal purposes such as the rental of premises that is used as a methamphetamine laboratory in which the damage from methamphetamine “cooking” operations can be likened to the residue from cooing operations in a restaurant.  Needless to say there are many issues at the heart of this discussion that goes beyond the coverage issue such as:  did the landlord know about the operation; should the landlord have known about the operation and so on.

A case in point that the ISO used in their circular was the Graff v. Allstate Insurance Company, 113 Wash, App.799; 54P.3d 1266 (Wash, Ct. App.2001).  In the case the insured filed a claim for cleanup expenses after a tenant’s methamphetamine laboratory damaged his rental house and the insurer denied the claim citing the policy’s contamination exclusion.  The insured sued and the trial court held in favor of the insured finding that his insurance policy covered the cleanup expenses.  The appellate court affirmed the lower court’s decision and stated that the operation of a methamphetamine laboratory is vandalism and therefore covered under the policy. Thus both the contamination and vandalism issues came into play.  The Insurance company,  (plaintiff),  contended that coverage is not intended to extend to the inevitable effect of a production operation which is emphasized in the language of the Special Form.  As a result of this case and similar claims, the ISO has introduced this endorsement to be attached to all polices issued to owners and tenants of rental property.

Equipment Breakdown Cause of Loss CP 10 46

Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment CP 1047

The ISO is introducing a new Cause of Loss form for Equipment Breakdown that is compatible with the Special Cause of Loss Form. Currently in the Special Cause of Loss Form there are three major categories of exclusions that relate to equipment breakdown:  artificially generated electrical current; mechanical breakdown; explosion of steam boilers…  By use of this new endorsement those exclusions are eliminated.  There are limitations specific to Equipment Breakdown coverage that is then added in the form language.   Ammonia Contamination and Hazardous Substance amounts of insurance can be scheduled on the form. Because of the introduction of the new Equipment Breakdown Form, the ISO has also introduced the Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment to allow the insurance companies to either suspend or reinstate coverage for certain pieces of equipment.

Increase in Rebuilding Expenses Following Disaster CP 04 09

This endorsement is introduced as a response to nationwide disasters and catastrophic events that have tested the limits of the policy as relates costs of labor; cost of materials due to demand and limited resources (demand surge). The ISO circular references Hurricanes Katrina and Rita wherein estimates per square footage of housing reconstruction quadrupled in the first six months after the events.

The new endorsement provides an option for insuring additional expenses when the costs of labor and/or building materials increase as a result of a disaster AND the total cost of repair or replacement exceeds the applicable limit of insurance.  Some significant sections of the endorsement include:

1. Buildings to be insured are indicated on the endorsement
2. Coverage will only apply as a result of an event that is declared a disaster as well as damage resulting from an event which occurs in close proximity to the disaster
3. Coverage is on an annual aggregate basis
4. The maximum amount of additional coverage is determined by applying a specified percentage to the limit of insurance for specific insurance.

Dependent Properties in the Supply Chain (Business Interruption)

Dependent Property Coverage is written by scheduling the business locations that the insured is “dependent upon” and have chosen to insure.  The new endorsement allows for secondary dependencies. An example provided by the ISO of a secondary dependency is a situation in which the insured’s supplier (a dependent property identified in the schedule of the current endorsement) is unable to deliver products/services due to interruption in the business of an entity (for example, a manufacturer) upon which the supplier depends but was NOT a supplier that the insured directly depended upon or was identified in the endorsement.

The new option for covering secondary dependencies is focused on contributing and recipient locations as defined in the form.  Business Income losses arising out of physical loss or damage at the secondary location is subject to the same Limit of Insurance that applies to the scheduled dependent location and does not increase the coverage.  The coverage territory is reiterated on the form to avoid any confusion that the coverage goes beyond the stated territory of the policy for example for locations outside of the United States.

Form	Change	Impact
COVERAGE FORMS
Building and Personal Property Form CP 00 10	Debris Removal: The additional limit provided is increased from $10,000 to $25,000. When no Covered Property sustains direct physical loss there is coverage in the amount of $5,000 provided for removal of debris of others’ property.	Coverage is increased and expanded in definition
Building and Personal Property Form CP 00 10	Fire Department Service Charge: The policy clarifies that the $1000.00 limit provided applies to each premises insured.	No change in coverage
Building and Personal Property Form CP 00 10 (various)	Business Personal Property in Described Structures: The coverage provided for Business Personal Property is clarified to cover both in the building or structures covered in the policy.	No change in coverage
Building and Personal Property Form CP 00 10 (various)	Coverage Radius: The language is clarified as relates “where” coverage must occur for coverage to apply. The form extends coverage to 100 feet from the building or 100 feet from the described premises, whichever distance is greater.	The revision broadens coverage with respect to a tenant in a multiple-occupancy building in such situation where the premises are described in terms of the actual area (quarters) occupied by the tenant. Note: many company forms already include this clarification.
Building and Personal Property Form CP 00 10 (various)	Property in Storage Units: A new coverage extension is introduced on the Commercial Property Form for Business Personal Property Temporarily in Portable Storage Units. The coverage is for 90 days with a sub-limit of $10,000. The property must be located within 100 feet of the described premises. A higher limit can be indicated on the Declarations Page.	This can be considered an extension of coverage, however, if an insurer previously treated property in storage as property in the open then then coverage is decreased to the sub-limit.
Building and Personal Property Form CP 00 10	Newly Acquired Business Personal Property: Currently the Commercial Property forms provide $100,000 additional coverage at each building covering newly acquired business personal property. This provision has been removed. There is no change for newly acquired business personal property located at newly acquired locations. If the insured has “newly acquired” property at their location, the coverage should be increased accordingly to reflect that limit.	Coverage is reduced
Building and Personal Property Form CP 00 10 & Cause of Loss Forms	Vegetated Roofs: This is one of the new “green” extensions in Commercial Property. Currently the property form excludes trees, shrubs, plants and lawns and then sub-limits the coverage. The property form is revised to include lawns, trees shrubs and plants which are part of a vegetated roof and thereby treating such property as an insured part of the building so that an existing vegetated roof can be replaced with like kind in the event of a loss. There are some exclusions that are revised to relate directly to a vegetated roof.	Coverage is broadened.
Building and Personal Property Form CP 00 10 & Business Income Form (various)	Electronic Data in Building Equipment: Currently ISO Commercial Property forms limit coverage for electronic data to $2,500 on an annual aggregate basis. The form is revised to remove the $2,500 limitation with respect to loss or damage to electronic data which is integrated in and operates or controls the building’s elevator, lightning, heating, and ventilation, air conditioning or security systems.	Coverage is broadened
Building and Personal Property Form CP 00 10;Business Income FormCP 00 30/00 32; Cause of Loss Forms(various)	Ordinance or Law Exclusion: The form is revised to include the word “compliance”. The new form states the “enforcement of or compliance with any ordinance or law. This is a clarification of language	No change in coverage
Building and Personal Property Form CP 00 10;Business Income FormCP 00 30/00 32; Cause of Loss Forms(various)	Options for Increasing Specified Limits: The coverage forms currently include the ability to increase coverage via an entry on the Declarations Page for certain categories of coverage. This change allows for increased coverage via Declarations for the additional coverages of Electronic Data; Newly Acquired Locations; Interruption of Computer Operations and Limitations for Theft.	These changes are new coverage options
Business Income Form  CP 00 30 and CP 00 32	Extended Business Income, Extended Period of Indemnity: The Business Income forms provide automatic coverage for 30 days’ following the end of the period of restoration for residual loss of income. The form revises the 30 days to 60 days.	Coverage is increased. Note: Many insurance company forms automatically include more than 30 days.
Cause of LossCP10 10, CP10 20, CP 10 30	Earth Movement Exclusion: The term “earthquake” now incorporates tremors and aftershocks. Language is added to the Earth Movement exclusion to reinforce that earth movement is excluded regardless of whether it is caused by an act of nature or is otherwise caused.	No change in coverage
Cause of LossCP10 10, CP10 20, CP 10 30	Water Exclusion: The Water Exclusion CP 1032 and is now incorporated in the base policy forms	No change in coverage
Cause of Loss CP 10 30	Entrusted Property: The revision is included to distinguish between those who have a role in the insured’s business such as partners/employees and others to whom property may be entrusted such as bailees or tenants. Specifically there is an exclusion for loss or damage caused by…dishonest or criminal acts by…anyone to whom the insured entrusts the property.	Coverage is broadened
Cause of Loss CP 10 30	Wear and Tear Exclusion—Special Form: The coverage is expanded to include coverage for water damage in the “specified causes of loss” to include accidental discharge or leakage of water or waterborne material as the direct result of the breaking apart or cracking of certain off-premises systems due to wear and tear.	Coverage is broadened
Cause of Loss CP 10 30	Covered Cause of Loss: The term “risk of” is deleted. This change has been done specifically to clarify the collapse exclusion but has a broader impact. This is modified for clarity purposes	No change in coverage
Form	Change	Impact
ENDORSEMENTS
Business Income Report/Work Sheet: CP 15 15	The worksheet has been modified to 60 days rather than 30 days for the Extended Period of Indemnity as modified in the Business Income Form	No change in coverage
Debris Removal and Outdoor Trees, Shrubs and Plants CP 04 15 and CP 14 30	Debris Removal: The $10,000 additional limit for debris removal is increased to $25,000. Note: Many company forms automatically include this limit automatically. Outdoor Trees, Shrubs and Plants: This specifies that debris removal is included in the limit provided for this coverage	Coverage is broadened
Radio or Television Antennas—Business Income or Extra Expense CP 15 50	The endorsement removes a “reference” to the Cause of Loss Earthquake. If the Earthquake Form were attached to the policy it’s terms and conditions are therein specified	No change in coverage
Utility Services—Overhead Transmission Lines CP 04 17 (Direct) and CP 15 45 (Time Element)	The endorsement clarifies that the term “transmission lines” also includes “distribution lines” which is the vernacular in the power industry for a system that provides electricity to residential and commercial users by reducing voltage through the use of substations, transformers and other devices. The forms now reinforce the intent to cover both transmission and distribution systems which serve in the transmission of power or communication service.	No change in coverage
Ordinance or Law CP 04 05; CP 04 38; CP 15 01; CP 15 02; CP 15 08; CP 15 09; CP15 25; CP 15 31; CP 15 34	Ordinance or Law: The endorsement form is revised in the same manner as the exclusion in the Coverage Forms to include the word “compliance”. The new form states the “enforcement of or compliance with any ordinance or law. This is a clarification of language	No change in coverage
Condominium Commercial Unit-Owners Changes—Standard Property Policy CP 17 98	The endorsement modifies three sections of the Condominium Unit Owners Policy: Coverage Radius; Business Personal Property in Described Structures; and Newly Acquired Property. 1. Coverage Radius is modified to state 100 feet from the building or described premises whichever is greater 2. Clarifying that coverage applies both in a building or structure	No change in coverage
Building Glass Tenants Policy Endorsement CP 14 70	This endorsement was first introduced in 2007 to facilitate writing coverage for building glass under a tenant’s policy that did not cover the building. This endorsement simply allows for the deductible for this coverage to be added on the endorsement rather than on the Declarations Page	No change in coverage
Theft Exclusion Endorsement CP 10 33	The Theft Exclusion Endorsement currently does not contain a schedule. The new edition date will display a schedule of locations so that there is clarity as to which location the exclusion applies	No change in coverage
Flood Coverage Endorsement and Schedule CP 10 65; CP DS 65	Currently the Flood Endorsement states there is no coverage for loss from any Flood that begins before or within 72 hours after the inception date of the endorsement. The prior form did not make any distinction concerning renewal policies. The revised form provides that the 72 hour waiting period will not apply when the prior policy included flood coverage and the policy periods are consecutive without a break in coverage.	Coverage is broadened
Payroll Limitation or Exclusion Option CP 15 10	The payroll endorsement is being modified to provide a means of limiting or excluding the payroll expense of “any category of employees or individual employees” The term “ordinary payroll expense” and its definition are removed from the endorsement. The title, also, will no longer refer to the word “ordinary” and the word “ordinary” will no longer appear in other sections such as the “coinsurance section”. The revised endorsement serves the same purpose as the prior one but can be used to address any category of employee on the insured’s payroll.	No change in intent—clarification of definition
Condominium Commercial Unit-Owners Optional Coverage: Loss Assessment CP 04 18	Currently the endorsement places a $1,000 limitation on an assessment as a result of a deductible on the condominium association policy. This endorsement provides a means for selecting a higher limit.	Coverage is broadened
Utility Services—Wastewater Removal (Time Element)  CP 15 45	The Utility Service Time Element endorsement is being revised to add a new category of utility service: wastewater removal property. By definition, wastewater removal property is a utility system for removing wastewater and sewage from the described premises other than a system designed primarily for draining storm water. The utility property includes sewer mains, pumping stations and similar equipment for moving the effluent to a holding, treatment or disposal facility; and includes such facilities.	Coverage is broadened
Earthquake Sprinkler Leakage Deductible CP 10 40; CP 10 45	In 1999, the EQSL Endorsement CP 10 39 was withdrawn from the series and EQSL could be purchased by activating the EQSL ONLY option on the EQ endorsements CP 10 40 and CP 10 45. The revision in this form adds language providing that the EQ deductible provisions outlined in the EQ endorsement (that is, the percentage deductible) do not apply to the EQSL—Only coverage. Instead the Fire deductible applies.	Coverage is clarified and broadened
Builders Risk—Theft of Building Materials, Fixtures, Machinery, Equipment CP 11 21	This change relates back to the issue of “entrusted property” discussed above. Entrusted Property: The revision is included to distinguish between those who have a role in the insured’s business such as partners/employees and others to whom property may be entrusted such as bailees or tenants. Specifically there is an exclusion for loss or damage caused by…dishonest or criminal acts by…anyone to whom the insured entrusts the property.	There is no change in “intended coverage”
Green Upgrades Endorsement Revision CP 04 02	The schedule on the form is revised to identify which property is subject to upgrade when not all personal property is not to be covered for Green Upgrades.	No change in coverage
Form	Change	Impact
NEW ENDORSEMENTS
Exclusion of Loss Due to By-Products of Production or Processing Operations (Rental Properties)  CP 10 34	New form introduced to be attached to policies issued to owners and tenants of rental premises.Discussion of the change is included above.	There is no change in “intended coverage”
Specified Property Away from Premises CP 04 04	New form introduced to provide coverage for business personal property temporarily away from the described premises in the course of daily business activities, while in the care, custody or control of the insured or an employee of the insured.	Coverage is broadened
Higher Limits CP 04 08	Currently the insurance form has many options to increase coverage via the Declarations Page. This endorsement is an alternative to activating the coverages on the Declarations Page by using this multi-purpose endorsement	No change in coverage but new coverage option
Equipment Breakdown CP 10 46	This is a new optional endorsement which is compatible with the Special Form Cause of Loss CP 00 13. Discussion of the change is included above	New Coverage Option
Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment CP 10 47	Because of the introduction of the new Equipment Breakdown Form, the ISO has also introduced the Suspension or Reinstatement of Coverage for Loss Caused by Breakdown of Certain Equipment to allow the insurance companies to either suspend or reinstate coverage for certain pieces of equipment. Discussion of the change is included above	New Coverage Option
Deductible By Location CP 03 29	Currently there is a Multiple Deductible Form CP 03 20 adopted in most states which is designed to allow for the selection of different deductible by location and peril. This schedule of endorsement shows separate locations and the deductible for each location.	This is a new optional way to show deductibles but does not affect existing deductible options.
Limitations on Coverage for Roof Surfacing CP 10 36	This endorsement provides options for insuring roof surfacing on an ACV basis and for excluding cosmetic damage to roof surfacing. The cosmetic exclusion option applies only to the perils of wind and hail, and could be written without regard to the underlying valuation clause.	New Coverage Option. This would be chosen by an insurer when they deem it necessary typically on an older building
Increase in Rebuilding Expenses Following Disaster CP 04 09	This is a new endorsement to add additional expenses following a disaster. Discussion of the change is included above	New Coverage Option
Dependent Properties in the Supply Chain (Business Interruption) Endorsement to CP 15 01; CP 15 02; CP 15 08; CP 15 09; CP 15 34.	Dependent Property Coverage is written by scheduling the business locations that the insured is “dependent upon” and have chosen to insure. The new endorsement allows for secondary dependencies. Discussion of the change is included above	New Coverage Option
Discharge From Sewer, Drain or Sump CP 10 38	This is a new endorsement to cover discharge from a sewer, drain or sump and pertains to physical damage and/or time element loss as indicated in the schedule. The amounts stated in the schedule are sub-limits and therefore do not increase the underlying limits of the insurance provided. An annual aggregate limitation can be selected via the schedule on the endorsement.	New Coverage Option
Theft of Building Materials and Supplies (Other Than Builders Risk) CP 10 44	Currently there is a limitation under the Special Cause of Loss form for theft coverage for building materials and supplies that are not part of the building or structure to that which is held for sale by the insured. The new endorsement provides coverage for the theft of building materials and supplies that are located on or within 100 feet of the premises when such property is intended to become a permanent part of the building or structure.	New Coverage Option
Protective Safeguards (Fire) CP 04 11	The new endorsement replaces the interline form IL 04 15. This endorsement, therefore, only pertains to Commercial Property insurance and contains the same provisions as the current endorsement.	No Change in Coverage
Food Contamination (Business Interruption and Extra Expense) CP 15 05	This new option covers extra expenses and business income loses arising out of food contamination and pertains to the Business Income And Extra Expense Coverage Form. Coverage is limited to loss of income/extra expense due to the closure of the business. Covered expenses include: cost of cleaning equipment; cost of replacing food; medical testing and vaccination and advertising expense.	New Coverage Option

 

What Do You Mean – I’m Not Getting Paid?

After all your planning, estimating, bidding and hard work, the General Contractor’s Compliance Department says you are not getting paid.

Why? Your insurance doesn’t match their requirements. You call your insurance agent and they say- what?

How does this happen? Typically it is a breakdown between your contract obligations and the insurance that you purchased.

It’s Just a Certificate of Insurance

Insurance is difficult to understand and a high expense factor to your business. Many contractors believe that as long as they have general liability and workers’ compensation coverage that is then put onto a Certificate and sent to the general contractor that they have complied with their contract. That is simply not true. A Certificate is a reflection of the coverage purchased by you. The insurance agent you work with must have specialized knowledge about the insurance needs of contractors. The agent must be able to communicate that to you properly and you must purchase insurance that matches what you are agreeing to in the contract. It doesn’t do any good to demand that specific language appear on the Certificate unless it is supported by the insurance policy. Some insurance agents will put anything on a Certificate to keep their client happy. That works short-term but if a construction defect claim arises, you could lose your business trying to pay the defense costs for the General after the insurance company denies the claim. The Certificate is a summary sheet – the important part is what is attached to the Certificate, such as the Additional Insured endorsement. An endorsement is a change to the insurance policy and without that information, the Certificate is useless.

It Starts With The Contract
Check the bid specification requirements to see if the General Contractor has listed any insurance requirements.   Your submission should show the types of insurance coverage you carry, including the limits of insurance; the additional insured endorsement that you can provide; primary and non-contributory liability insurance; waiver of subrogation on the general liability policy.

After you receive the work order, review the insurance requirements section.  Send a copy of the requirements to your insurance agent and have a discussion.  After you do this a few times, it will get easier, I promise.  Check the insurance documents to verify that they match the contract (NOT just the Certificate).

Liability Insurance Requirements in the Contract

Contractual Liability
This term means that if the GC and/or Owner get sued by an injured party as a result of the job or because the ultimate proper owner claims the property is defective as a result of the work performed, you will pay the attorney fees, court costs and any damages won by the plaintiff get to come out of your pocket.  But you have insurance right?  Well, sort of.  One hundred percent of the time, you are agreeing to pay for every type of situation and you purchase insurance with many exclusions removing coverage.  For example:  a subcontractor brings a fuel tank to the job site.  A worker runs into the tank with their forklift, turning the tank over and allowing fuel to run out.  Even if you are NOT the party that caused this mess, you may very well be called upon to pay the clean up expenses.  This particular claim cost more than $900,000 to clean up and all of the subcontractors shared in the expense on behalf of the GC and Owner.  Your general liability insurance will NOT pay for this claim.  You will.

Additional Insured – General Liability Insurance
Often the construction contract will require a specific endorsement, CG 20 10 11 85.  This November, 1985 edition date is not always available.  You insurance agent will have to place coverage with an insurance company willing to offer this coverage.  That will almost never happen if you are performing residential work, but can happen if you are a commercial work contractor.  Caution:  because this endorsement is not common, it means you have limited access to the insurance marketplace and your insurance premium will go up.

I spoke with an insurance agent earlier this week who was trying to cope with an Additional Insured requirement that stated the following:
“The ownership entities of all projects under contract and their respective assignees, members, partners, shareholders, directors, officers, employees, construction consultants, and agents are additional insured solely in regard to work/services provided by the named insured.”
The insurance company was unwilling to add this language to the subcontractor’s general liability coverage and the GC was holding up a $40,000 payment until they received a Certificate with that wording.  Look at it this way, you are being asked to hand your insurance coverage over to the GC AND whoever is their construction consultants and agents.  This makes no sense.  The first call by the insurance agent to the GC resulted in the agent being told – ‘what’s your problem – we get this wording all the time’ but could not provide a copy of an endorsement where this had actually happened.  The agent then asked for a copy of the construction agreement and upon discovering the requirement was not in the contract, called the GC’s office again and pointed this out; the requirement was removed and the contractor received their payment.
This situation could have been avoided entirely by a review of the insurance requirements by the contractor with their insurance agent both of whom would have known what to do.

Final Points
Hire a knowledgeable insurance agent with expertise in construction.  Have a discussion with the agent about the type of requirements that you are agreeing to in your construction contracts.  Buy insurance that matches those requirements as closely as possible.

Written by: 
Marjorie Segale (AFIS, CISC, RPLM, CIC, CRIS, ACSR, CISR) 

 

Errors & Omissions Claims Management

It Doesn’t Get Easier.

The producer gets a call from a new prospect.  What they want is simple enough:  General Liability coverage with $1,000,000 per occurrence and $2,000,000 Aggregate and Workers’ Compensation on a minimum premium basis.  Since this is a local account, the producer makes an appointment to go out to meet with the prospect.  Turns out the prospect is a small artisan contractor that performs some fabricating in their work shop that is separate from their residence.

The producer discusses the following:
Where is the shop insured?  Answer:  Through my (direct writer) homeowner’s policy and no, I don’t want a quote.

Do you want coverage on your shop equipment and tools that you might use on the job site?  Answer:  Sure, give me a quote and depending on the price, I might take that coverage.

If your shop burns down, could you lose income and have to pay extra expenses to keep going?  Answer:  Well, I don’t see that happening so don’t give me a quote.  I just want the liability, workers’ compensation that my contracts require and I might take the tool coverage.

The producer goes back to the office, prepares a quote, provides it in writing and it is accepted.  The producer has the insured fill out the application, sign and date it.  A policy is requested, received and sent to the customer along with a coverage summary.  The policy is cancelled three months later for non-payment of premium.  The customer contacts the producer and requests a reinstatement.  The insurance company was unwilling to do so and a second carrier was contacted, a quote provided and the whole process is performed again in exactly the same manner.  This time the payments are made on time.  Six months later, the shop burns to the ground.

Result:  The direct writer denied the claim for the shop due to business use and an exclusion in the homeowner’s policy.  The customer claimed that he had requested that coverage, but nothing in writing.  The customer then filed an E & O claim against the commercial coverage agency, claiming that he thought his coverage included business income and extra expense coverage, even though nothing in the proposal or coverage summary indicated that coverage had been purchased nor anything to indicate the coverage request on either of the two applications the insured completed.

Did the agent do anything wrong?  No.  Could the agent have taken the step of advising the customer of the lack of coverage for the building and or business income coverage?  Yes.  However, in no way had the producer indicated any special knowledge or established any special circumstances that would indicate a higher degree of care other than the ordinary duty of an insurance agent required to place what had been requested.

This case is still in litigation, thus the final result is not yet known.  However, as you might imagine, this case has taken time from other agency business and has thus impacted the overall earnings of the agency.  This really is one of those cases that the reason for E & O coverage exists.

No matter how hard you try – sometimes it is just not enough.  It can get discouraging, but don’t give up.  You really can reduce your exposure and still keep a viable business moving forward.

 

Errors and Omissions Coverage for Insurance Agents and Brokers

Errors & Omissions coverage for insurance agents and brokers up until recently, has been readily available with flexible terms and conditions.  This coverage is beginning to trend the other way.  Why?  Part of this trend is natural market forces at work.  The deeper part of this trend is due to increased frequency of losses.

Causes of the losses:
• The economy in general; individuals and businesses that cannot afford uncovered losses attempt to place the economic results onto their insurance agent or broker
• Insurance companies are becoming less resistive to looking at their own agent as a source of recovery for bad faith litigation expenses
• Agencies are becoming more focused on transaction and data management, using less staff to perform more of those functions and less emphasis on consultative, knowledge based performance by their producers and support staff.  In addition to this, is the increased use of data transfer by receiving information from clients over the web; transferring that information by data links and receiving new policies and renewals by data upload.

Agency Risk Exposures
The current economic downturn has dramatically affected a significant number of an agency’s customer base.  Most agencies have lost revenue in the past few years as many of their customers have either closed their doors or experienced reduced sales and/or payroll.  In turn, the typical agency has been forced to reduce their own expenses and staff layoffs have happened all over the country.  Often those layoffs have affected some of the more experienced (and thus higher priced) personnel, resulting in less knowledgeable staff now being fully responsible for the account.  So where does that leave the agency?  Let’s take a look at the different areas of exposures.

• Documentation

E & O Insurance Coverage

This is the key area that must be addressed within the agency.  Do NOT assume that this is happening.  As Ronald Reagan so famously said, “trust but verify”.  In order to defend yourself against an E & O claim, you must be able to show proof of the following:

1. The coverages requested by the customer.  This means that you must have a signed bind order or coverage proposal in file.  No excuses.

2. The application for coverage must match the customer’s coverage request and signed by the customer.

3. The coverages must be reviewed within the agency before sending to the client.  This means a little more than just checking off the forms and endorsements.  For certain, it means that you must have a complete copy of the policy in the system.  Many carriers are now uploading renewals into the agency management system, but do not include the forms and endorsements.  You must have a procedure in place to obtain these forms and endorsements for review.

4. Change orders must be confirmed to the customer in writing or a written request received from the customer.

5. Customer claims must be documented and transmitted promptly to the insurer.  If it is a liability claim, have a procedure of notification to the appropriate primary policy and tender of notice only to the excess carrier(s).

Keep in mind the following truism when setting up an internal agency audit process:  The file must speak for itself.  If it is not in the client’s file, it doesn’t exist.  You cannot win a case without supporting evidence and just saying that you discussed the issue with the client on a particular date will not prevent a lawsuit, nor will it have weight with the court.

If your agency or producers have created a customer relationship that is more than just placing the coverage requested by the customer or have held yourself out to have a special program or special knowledge, then you must go beyond just documenting what the client asked for.  You must review their exposures and offer coverage solutions or other risk handling mechanisms.

• Customer Review
Train your producers and agency managers on the type of customers that are desired as well as the type of customers that must be avoided.  All of us at one point or another have had a suspicion that all is not right about a particular customer.  For example:  a customer that all of a sudden asks for a particular insurance coverage when in the past has wanted only the bare insurance basics or the customer that is constantly late in their payments.  You really don’t have to write every customer that approaches your company.  It pays to be a little selective.  Have a procedure in place to deal with these issues and it should not be based upon the size of the customer or the amount of commission received.

• Security of Information
With the advent of technology comes growing risk of privacy suits due to the loss of private information.  Agency owners need to review with their IT person or department exactly how much encryption is being used and how secure are the transmissions.  Many applications are being completed online and there is no means to obtain the customer’s signature.  Fix that problem as soon as possible.  Digital signatures are, for the most part, legally acceptable, but without that signature, many carriers will not rescind coverage in the event of misrepresentation and will turn to the agency to compensate them for the bad faith claim.  Check your website for encryption of information as well as the customer portal for accessing their policy information.

• Certificates of Liability Insurance
This continues to be a litigious area for agencies and a growing area of claims are those arising from the recipient of the Certificate and not from just the agency customer.

Ways to manage this risk:
Have a master Certificate created by a knowledgeable insurance person in the agency.  The person responsible for actual issuance must then use only the master Certificate.
Never, ever put anything on the Certificate that is not supported by policy language.
Use the most current version of the ACORD Certificate.
Do NOT change the notice of cancellation on the Certificate. The newer editions by ACORD no longer have a place for that improper action, but we have seen Certificates where the incorrect cancellation information is being placed in the blank “operations” box.

• Remarketing of Coverage
Agencies today are remarketing everything as it renews.  Without a thorough understanding of their current coverage, it is impossible to be aware of reduction of coverage in a different policy through a new carrier.  Should a claim arise that would have been covered in the prior policy but is not covered in the new carrier’s form, the agency will have a hard time defending themselves if they have failed to point out (in writing with a customer acknowledgement signature) that reduction of coverage to the customer.

Professional Insurance agents work hard to understand their clients’ risks and exposures to provide a comprehensive insurance program to transfer those risks.  Some insurance agents identify means and methods of loss control and risk reduction.  Those same principles must be applied to their own business.

Written by:
Marjorie Segale (AFIS, CISC, RPLM, CIC, CRIS, ACSR, CISR)

 

Clients & Leases

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Working with clients and their leases are never fun.

The first hurdle for the insurance agent is: Do you ask for the lease or do you not? It would be easy to say – sure you should. Not so fast. If you have never read a lease in your life, how would you even know what you are reading? You are also not a lawyer, so how can you be asked to review a legal document? If you ask for the lease, but the insured only sends you the two pages called “insurance requirements” and now you only see a small sliver of the whole picture created by the lease.

Taking these questions separately, consider the following:

• If you have never read a lease before, ask for help from a more experienced insurance person.

• You should never, ever read a lease and give any legal advice. That would be practicing law without a license. You are reviewing the lease from a risk transfer, risk acceptance and insurance response perspective. You should have a disclaimer to the effect that your review is an insurance review and that this review should not be considered legal guidance and for that, the insured should look to their attorney.

• As for reading a legal document, you do so every working day – that would be the insurance policies you provide for your clients.

• If you ask for the lease and you only get a couple of pages, make sure that fact is documented permanently in your files as well as confirming back to your client in writing.
• A final comment here – if you are only placing insurance based upon specific orders from your client, a lease review is going above and beyond the order taking role you are playing. That could put you in an enhanced role of having a “special relationship” with that client. Meaning that your E & O exposure in some states just rose. If you are already in a consultative role with the client, you already have that type of relationship and NOT reviewing the lease (or at least asking for it) could place you at higher risk for an E & O claim should something go awry as a result of a lease condition.

The next hurdle: Your client has already signed the lease before you got a chance to review it. Now, your client is stuck with the results – rarely will a landlord or a tenant be willing to renegotiate lease terms once they have been agreed to and signed. If your client has a number of leases, one thing that is true, no two will be exactly alike. Do your best to request that you are part of the lease negotiations, but in the end, it will be the client’s decision.

Let’s move on to the next hurdle: What if you are the agent for both the building owner and the tenant? Since the lease will create risk that is transferred at the same time as risk that is assumed, how do you properly act as an advising insurance agent for both? Well, there are a couple of options. First, you can play it straight with both – ‘just the facts, ma’am” and offer no opinion as to the good or the bad results, just solutions, if there are any. If there are not, make a written disclosure, whichever is adversely affected. Some insurance agencies will split up this review and recommendations by having another insurance agent in the office review the lease for one or the other of the two clients.

One of the less tangible items regarding leases is the value of that lease to both parties. A landlord may make several concessions because they want a stable, long-term tenant that will care for the property and pay their rent on time. A tenant may find the location extremely valuable and will not want to run the risk of the lease cancelling or upsetting the landlord. A discussion about their motivations and long-term objectives is a necessary component in working with your client. An example of this was brought home to me clearly during a recent discussion with a client (tenant). The client wanted to avoid all problems with the landlord at, literally, all costs due the value of the location. This client has 143 locations around the U. S. and, while all of the leases are different in various ways, a common thread among all of them was a hold harmless and indemnity agreement along with a requirement that the landlord be added as an Additional Insured to the General Liability policy. At one of the retail locations, an elderly customer had fallen outside the actual retail premises on the common sidewalk at the strip mall. Since the Additional Insured – Managers, Lessors of Premises endorsement only applies to injury within the premises leased to the insured tenant, the protection under the Additional Insured endorsement did not apply. Although the insurance company initially denied, they ultimately picked up the defense for the landlord with a reservation of rights under the contractual liability section of the liability policy, this created great concern by the tenant. A discussion took place with the insured and their attorney regarding the language of the endorsement, including the changes affecting that endorsement that took place with the 2007 revisions.

That newer edition of the Additional Insured endorsement contains language that restricts the landlord’s access to the insurance policy only if the Named Insured (or a party over whom the NI has direction or control) contributes in some way to the injury. Many insurance companies have adopted this newer edition and the insured needed to understand that their desire to broaden the coverage response for the landlord, rather than restricting it, would limit their insurance marketplace options. The result of the discussion was that the insured’s attorney would specifically review the indemnity provisions, looking to those to be the backstop to the Additional Insured endorsement and the agent would be watchful for the proper AI endorsement on the future policies. A good division of labor for all.

Good luck and happy reading. ~M

 

Wait a Minute – What Did They Say Again?

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The insured (tenant) entered into a lease agreement with the building owner.

The tenant provided the insurance requirements to the agent by copying that page of the lease and sending it to the agent. Under the terms of the lease, the tenant is required to purchase insurance to cover the building “at the cost to repair or replace the building”. So, the agent did exactly that – provided a policy that covered the building for replacement cost. The building sustained major damage from a fire.

As the adjustors reviewed the claim and discussed the repair of the building, it became immediately apparent that a significant number of changes were required to comply with current building codes. That is when the first hint appeared of the arguments that were about to erupt that resulted, ultimately, in litigation. The landlord claimed that the language of the lease was very clear – repair and replace the building and if that means that new codes must be complied with, then do it.

The insurance company said no coverage for ordinance or law compliance. Well, according the mediator – they were both right. He felt that the lease was very clear and that the insurance policy excluded ordinance or law. The tenant had to cough up the money to bring the building up to code. Well, you know where this is headed – right to the agent’s doorstep in the form of a lawsuit. This case did not go to trial, but was settled in favor of the insured on the courthouse steps after 3 ½ years of legal wrangling between the insured’s lawyers and the insurance agent’s E & O lawyers. The agent paid their $50,000 deductible.

Just one of the lessons from this claim: Take lease language very seriously and don’t “interpret”. The first misstep by the agent was reading “insurance lingo” into the lease wording. There really is a difference between the cost to repair or replace and replacement cost insurance language. On another level – it is helpful to have a thorough understand of insurance policy language and how it relates to lease language.

 

Trusts

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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

 

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

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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.

 

Completing and Signing applications for Homeowners Insurance can only get you into trouble

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The tip of this week is a simple one.  

Do not complete an insured’s Homeowners application without discussing it in detail with them and having them sign the application. I know that most often these applications are completed in our agency management systems based on a phone conversation we have with an insured or their representative and then uploaded to the company. Some carriers do not even require that they be signed, so then it is “your word against mine” when a claim is denied and the insured said they never saw or signed the application.

The application is where all the trouble starts. We are applying for coverage based on what the application includes. And questions that are posed are if the home is occupied, vacant and when the insured intends to occupy. The insured has no idea, unless we tell them, that they have to occupy the home in thirty days or sixty days depending on the company requirements. And if they don’t…..then there is NO coverage with some carriers and others will penalize the insured. Did we tell them that? Or, did we just complete the application, not have them review it and rush it off to the escrow company. And then we just renewed and renewed and renewed.

This has become more and more of a reality with homeowners buying homes on spec; buying a home that was a short sale or foreclosed and having to put in time and money in renovating them, and in both cases, not occupying in the required time. So, the tip of the week is to make sure you communicate with the insured what the requirement are in terms of occupancy and having them read and sign the application. When the claim comes through, there’s no coverage, and the finger points in your direction, you’ll be happy you followed this simple tip.

~Laurie