Evaluating your company’s insurance
coverage is a complex process. Many
companies have numerous policies, including general liability, directors and officers (D&O) liability, errors and omissions
(E&O) liability, and employment practices
liability, to name a few. Evaluations should be
held at least annually.
“Premiums are not the only issue,” says J.
Ronald Ignatuk, a partner in the law firm of
Shulman Hodges & Bastian LLP. “Companies
change. They may embark on a new enterprise or new line of business that increases
not only the potential that they may be sued
but the amount of damages sought in the lawsuit. Companies need to regularly evaluate
their exposure.”
Smart Business spoke with Ignatuk about
the evaluation process and potential insurance issues.
What factors should risk managers consider
when evaluating the amount of coverage?
The evaluation process depends upon the
nature of the business and the risks presented by offering the goods and/or services to
the market. For instance, if a company manufactures all-terrain vehicles, injuries to
someone using that product could be severe,
and fatalities could result, prompting a substantial product liability lawsuit. For this
company, a large amount of indemnity is recommended. Conversely, if a company manufactures envelopes, potential exposure for
injuries from use of the product is small and
less indemnity is required.
The company’s risk manager should work
with insurance brokers, who are the most
qualified to advise them regarding the
amount of coverage and the potential exposure. The risk manager also can consult with
legal counsel, who can be a valuable source
of information about lawsuits in similar
industries.
With other types of coverage, such and
D&O liability coverage, careful analysis
should be performed regarding potential
exposure of the board and corporate officers.
Likewise, with E&O, careful analysis should
be performed regarding potential exposure
related to the business operations of the
company and potential harm that those operations could cause.
What should the risk manager consider when
increasing the amount of indemnity?
If it is determined that more indemnity coverage is advisable, then the decision must be
made whether to replace the existing policy
or purchase an umbrella policy (or increase
the limits on an existing umbrella policy) that
provides additional indemnity after the first
policy’s limits have been exhausted.
‘Stacking’ two or more policies provides
additional levels of indemnity.
Umbrella coverage is generally inexpensive
compared to the primary underlying policy
because it isn’t implicated unless and until
the limits of the primary policy are exhausted. However, the umbrella coverage may not
contain certain features that may be required.
For example, the umbrella policy may only
provide indemnity and may not cover other
expenses, including defense costs.
When should a company consider switching
insurance companies?
While a different company may offer a
more attractive premium, that is not the only
consideration. The risk manager must also
consider the impact of changing carriers.
One important factor is whether the company has already incurred liability for something it has done, which the new insurance
company may not cover if a claim is made
against the company for that past act. When
applying for a new policy, the company must
disclose on the application all known claims
and known acts and omissions that might
give rise to a claim. Any claim arising from
these disclosed acts and omissions is excluded from coverage. Thus, if the company is
aware of significant potential claims, it may
want to keep the existing coverage.
How important is an accurate application?
If the company omits an important fact on
the application — even if the omission was
inadvertent — and a lawsuit completely unrelated to omitted fact is subsequently filed,
the insurance company can, and some will,
rescind the entire policy, leaving the company without any insurance. The omitted fact
does not need to be related to the lawsuit. As
long as the omitted fact is considered ‘material’ to the insurance company’s decision to
issue the policy or the amount of premium
charged, the insurance company may have
the right to rescind the entire policy, thereby
avoiding any obligation to defend the unrelated lawsuit or pay any judgment. When
changing insurance companies, great care
must be taken to disclose everything on the
application. D&O and E&O policies are more
prone to scrutiny of the application after a
claim is made than a general liability policy.
Do insurance companies always engage in
good faith claims handling?
Insurance companies generally defend lawsuits and pay judgments when there is little
or no dispute regarding coverage. For more
complex matters, they usually hire outside
counsel to render a coverage opinion. When
coverage is questionable, insurance companies may agree to defend and indemnify, and
sometimes they do not. In the latter case, the
company needs to retain competent counsel
experienced in insurance law to press the
insurance company to defend the lawsuit.
J. RONALD IGNATUK is a partner in the law firm of Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or
[email protected].
