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DO YOU KNOW THE TERMS
OF YOUR INSURANCE POLICY?
World Trade
Case Unveils Inner Workings of Insurance Broker
In property/casualty insurance, due diligence is crucial.It is ironic
indeed that an industry that depends so heavily on the written contract
is so
careless about documenting the terms of that contract.
The World Trade Center insurance case that is now playing itself out in
court is providing an inside look at what really goes on. Two headlines
hint at the intrigue:
"Jottings May Cut Insurers' Payouts On Twin Towers"
Wall Street Journal, February 4, 2004
"Broker Didn't Inform Insurers of Form Switch"
Business Insurance, March 1, 2004
Willis, the insurance broker for the WTC owner, had been vacillating between
two different insurance policy "forms," and at the time of the
tragedy on September 11, 2001 it is unclear if anybody, broker, owner
or insurer was really sure what the actual terms of the contract were.
The only thing that is clear is that the
mortgagee, GMAC, had no idea since they were out of the loop. This uncertainty
was in spite of the fact that, although the loss was on September 11,
the policy effective date was July 9. The difference between the two forms
is worth $3.5 billion.
Insurance is like poker, but in the extreme.
Your company's fate
can depend on whether you negotiated your insurance terms before the fact;
after the fact (i.e. the loss) your hands will be tied. Any rules of the
game of poker are fine - dealer's choice - before the cards are dealt.
After the deal, ….. !
Before a loss insurance
negotiation is feasible. The coverage you ask for will be priced at a
certain level, and after somegive and take there will be an agreement.
The insurer deals in large numbers. There will be losses, but the underwriter
doesn't know from where specifically. Thus your risk is as good as any
other.
THE WINDOW CLOSES
When you have an insurance loss the atmospherics will change. This is now "after the fact." It's as though the cards have been dealt. Negotiations with the insurer were doable; now they're impossible. The parties are nervously eyeing each other across the card table.
The language of the insurance policy, accurate or not in representing the agreement, will now be memorialized.
Contract law generally
allows only "outward expressions" of intent into evidence. The
parol evidence rule normally excludes all other evidence (oral agreements
or side letters, etc.) which are offered to contradict the terms of the
written agreement. Everyone's hands must stay on top of the poker table.
It's too late to
say "what I meant was... .
"The point is the event has happened and the rules are set. An insurer will fight harder on this score than anyone else you deal with. Why? Mathematics:
Generally speaking
an "average" premium for insurance can be around 1/10 of 1%
of the insurer's maximum possible payout, i.e. the policy limit. This
applies to both property and liability insurance. This means that the
insurer could suffer a loss equal to 1000 times what you would have paid
for the insurance. This leverage makes the insurer more passionate about
the "sanctity of the contract."
Negotiation before the loss, or litigation after -- this is the
choice the insurance proposition offers us. Consider the following accidents
waiting to happen if we default:
1. Policies are replete with conditions, limitations and exclusions;
2. Proposals are 4-5 pages, but policies are 40-50;
3. Policies are not issued until 3-4 months after the effective date,
and are hardly ever issued in conformance to the agreement;
4. Policies are never read after they're received;
5. Renewals with the same insurer will not necessarily have the same terms
as the contracts they replace.
Boatloads of insurance litigation shouldn’t surprise us.
Do we have any chance after loss of discussing true intent vs. policy
terms? Yes. If the loss is small enough or you litigate long enough.
WHAT TO DO
Here’s what we need to do before a loss:
a.. Understand your
needs and negotiate for them
b.. Document your negotiations
c.. Read your policy and have it amended to conform to the actual agreement
d.. Hire professional risk management help to do these things for you
Write the rules in advance, or try to change them later. Which position would you rather be in?
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) 2002 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:
A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE-Fall 2003
PRESERVING COVERAGE FOR INNOCENT INSUREDS-Summer 2003
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
