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PRESERVING COVERAGE
FOR INNOCENT INSUREDS
Insurers Try
to Hold All Responsible for Actions of One
Group identity may
be the social issue du jour, but insurers have a purely business reason
for treating their insureds as groups members rather than individuals...
A basic principle for
risk managers has always been preservation of coverage for the innocent
insureds (including the insured firm itself) in the face of intentional
or dishonest acts which may void coverage for the perpetrator. The principle
("severability") is that each insured is an individual, and
none of us deserves to have our coverage impaired due to acts over which
we had no control and with which we had no connection. Until recently,
the insurance industry generally agreed. But now coverage terms themselves,
and the way insurers fight to interpret them in court, are most definitely
undergoing revision.
Blame Enron, WorldCom
and the Catholic church for this new attitude. Having been stung by what
it has viewed as "institutionalized" corruption, the insurers
now attempt to hold all responsible -- the implication being "you
knew or you should have known what was going on." The idea is that
without the insurance security blanket, all in the firm will be diligent
in uncovering and eliminating the corruption. This may work in some cases
where the bad behavior is in fact pervasive, but at the same time it will
expose many innocent people and firms to
uncovered loss.
CASE STUDIES
1. Insurer
attempts to "rescind" Directors and Officers (D&O) coverage
because of untrue statements made on application. One person filled out
and signed the application. That person knew about but did not disclose
a past event that could lead to a claim, but the fact that it was omitted
was not known by any other directors or officers in the firm. The possible
outcomes from this (depending on policy language and/or court decision)
include:
•
No coverage for the individual completing the application, but coverage
for the firm and all other individual insureds
• No coverage for the guilty individual OR the
firm
• Policy rescinded - no coverage at all for any
individual or the firm
The trend is clearly
toward the last in both current construction of policy language, and in
the number of cases where insurers will fight their
insureds in court.
This environment argues
for the involvement of all interested parties in completion of the application.
That is, although one person will sign the application, all directors
and officers should "sign on" to the information being presented.
At least, each individual, for his or her own protection, should insist
on reviewing applications for coverage under which that person will be
an insured.
2.
Insurer revises its private school General Liability policy so that there
will be no coverage for anyone, innocent insured or entity, in the event
that an "Officer" commits sexual abuse. These punitive terms
may motivate individuals to try to root out institutionalized corruption
if it exists, but the price for that is very steep for uninvolved and
unaware innocent parties. Sexual abuse can be committed by a rogue individual
in an environment where there is no history of such activity. Good management
means trying to prevent such happenings, and taking strong action when
presented with an event. Prevention by itself is no guarantee of success;
insurance is all about loss control to minimize loss potential, and THEN
insuring to protect against the odd loss scenario which may prevent itself
in spite of the effort.
What can be
done when faced with policy language like this:
•
Shop/negotiate for more favorable terms and conditions
• Establish a screening process including background
checks for all people in sensitive positions. In addition to possibly
preventing an event, this will provide a defense in the event there is
a lawsuit against the firm or the innocent individual (for which there
is no coverage)
• Consider whether or not the firm will indemnify
key individuals in cases where innocently uninsured; draft indemnification
agreements
Erosion of the severability concept is showing up in numerous other types
of coverage and kinds of situations. This is a reaction by the insurance
industry to current events only. Because of its inherent unfairness, it
will not be maintainable; competition will ultimately force the insurers
back to a more reasonable position. It's incumbent on us to keep testing
the market on this point.
Given
the inevitability of losses, you'll be judged not by whether you were
the victim of an event, but by how well you planned for it.
(C) 2003 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution).
Contact us for risk management strategy and implementation.
Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.
The above is intended to be general information, and should not be construed as specific recommendations.
Other Articles:
LEAVING TERRORISM COVERAGE ON THE TABLE -Spring 2003
COMPUTER SECURITY IS NOT A BLACK HOLE -Winter 2003
"LET'S BE CAREFUL OUT THERE" -Fall 2002
WHAT
WARREN BUFFET KNOWS ABOUT
INSURANCE COMPANY FINANCIALS-Spring/Summer 2002
OPPORTUNITIES
ABOUND IN DEVELOPMENT
OF CONTAMINATED PROPERTIES -Spring 2002
"YOU
CAN'T PAY US THIS MONTH?
WHAT DO YOU MEAN 'NEW DEVELOPMENTS?" Winter 2001
WORLD
TRADE TERRORISM --
REPERCUSSIONS FOR INSURANCE MARKET-Fall 2001
ENERGY
AVAILABILITY: CURRENT REALITY OR FOND MEMORY?
-Summer 2001
"HOLD THAT BALLOT UP TO THE LIGHT" -Spring 2001
