. Common Mistakes and Exposures

. Disclaimer Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This book is intended as a general guideline and might not apply to a specific situation. Information which is copyrighted by any proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers. The author and any organization for which this seminar is conducted shall have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this book. 2

. Reduce Mistakes – Reduce Agency Risk and Loss of Client  90% of E & O claims are caused by a mistake (error) not an omission  More than 50% of all E & O claims derive from failure to recommend coverages, failure to identify exposures or reduction of coverage due to re-marketing at renewal  Today – any account is open to competition 3

. Client Cycle Identify Exposures Design Coverage Submit for Quote ProposalCloseRenew 4

. Transaction Cycle Application Company quote Proposals PolicyCorrections Binders Certificates Evidence Policy Changes 5

. Account Review Basic Information: Who, What, Where Locations / Operations Gross Sales/Payroll Current Insurance Missing Coverages 6

. No Assumptions Coverage datesName Insured correct First Named insured All other entities included or written separately Inactive entities included Locations 7

. Claim Example  Benefit Plan (401K) changed  Client created new plan  Fiduciary policy written to cover a specific plan name only New plan was not included  Several employees sued employer No coverage E & O claim resulted against agent 8

. Claim Example  Client uses a commercial warehouse to store inventory  Never advises agent – agent never asked  Fire at warehouse – Warehouseman’s coverage did not pay (no legal liability)  Client sued agent for E & O – failure to advise Claim was settled by E & O carrier 9

. Claim Example  Client establishes a new company  Agent fails to ask about new companies or ownership at renewal  New building is acquired by the new company and added to the policy Nobody asked specifically about the owner of the building  The location and property description is added to the policy – sustains a $500k fire loss Claim denied 10

. Claim Example  Building A woodworker is a long term tenant in a building where he has operated his business for in excess of twenty years. The building owner did not carry fire coverage on their building. The woodworker client requested that their agent added the building to their commercial package program. The account handler asked for the information regarding the building in terms of value and whether their was any lender. At no time did the account handler ask if the woodworker “owned” the building. The building was added to the policy. 11

. Claim Example The building burned down Claim denied as the building was not owned by the insured and was not required by the lease to insure the building 12

. Claim Example  Insured has 16 vehicles insured on a Business Auto Policy  Remarketed the account at renewal Post-renewal, employee calls agent advising that his bank needs evidence of physical damage coverage  That call triggered a question as to the ownership of the vehicles 13

. Claim Example  The agent determined that all 16 vehicles were owned by employees and lease back to the insured by written contract  Solution—Employee Leased Auto

. Who Is Insured Other insureds on the property policy Banks / lenders Loss Payable Coverage applies if insured can collect Lenders Loss Payable Coverage applies even if the insured cannot collect Landlord as Loss Payee Triple Net 15

. Claim Example  The insured was a plastic manufacturer  The insured purchased $1,200,000 worth of equipment for which they secured a bank loan with the equipment securing the loan  The bank sent a standard notice to the insured and insurance agent asking that they be added to the policy as a loss payee 16

. Claim Example  Within the language of the request they specifically required the attachment of the Lenders Loss Payable form which is “standard” in a collateralized bank loan.  The agent attached a Loss Payable clause instead of the Lenders Loss Payable option. 17

. Claim Example  The insured was late on their payments to the bank  The bank went to the insured’s location only to find that they had vacated the premises and all of the equipment gone— presumably taken (stolen) by the insured  The bank filed claim under the insured’s policy for their interest as a “lender loss payable” 18

. Where Coverage Is Provided  Mailing Address v. Premises Insured— Suite #, Floor #  Property coverage  Time Element coverage  Liability coverage when Limitation to Designated Premises endorsement is included  Mailing address match with first named insured 19

. First Interstate Bank Building May 4,

. Where Coverage Is Provided  Where was the property located  Are all owned, leased, rented locations covered  Are all locations within the coverage territory of the policy— Foreign Cover  Are warehouses identified and covered 21

. Mare Island Warehouse Fire Vallejo, California October 12,

.  The three-alarm fire at Wines Central sent plumes of smoke more than 700 feet high that could be seen for miles. The blaze could not be controlled by firefighters because the Mare Island building structure that once housed Navy torpedoes -- had steel doors and 3-foot-thick concrete walls and a concrete roof that could not be penetrated. 23

.  Wines Central converted the 1942 military fortress three years ago into a 240,000-square-foot specialty warehouse that stored more than 500,000 cases of rare vintages believed to be worth up to $100 million, officials said. Clients included wineries, private collectors and some other businesses. 24

.  The scene confronting vintner visitors to Mare Island last week, writes Trent, "was unbelievable. Wine and mold everywhere, the smoke smell almost made me gag and the destruction took your breath away. There are piles and piles of wine from pallets falling over due to water damage, our library area was just a bunch of ash. 25

. Small Mistake  Failure to put the warehouse location on the policy  Failure to add Brand and Label, Control Salvage, Preclude Salvage 26

. "Insured Location" Provisions Have Winemakers Over a Barrel 27 Begin with fledgling winemaker Allan Christensen, whose first-ever vintage Napa Valley Viognier, which was to have been released under the Amazon Ranch label, is no more. Though the couple paid a premium to insure all of their wine, their policy specified the location where the wine was to be stored -- the Christensen's home, not a warehouse in Vallejo, Christensen explained. News and Comment on California Insurance Law, the Politics of Insurance, and Other Risky Business 12/21/05

. "Insured Location" Provisions Have Winemakers Over a Barrel The 'site-specific' policy would have covered the couple's wine at a different location, had the couple merely notified the insurance company of the change. Some insurance companies are starting to take the hard-line stance that they will only reimburse clients for the quantity of wine that was, according to the fine print, designated for the warehouse. 28

. Where Coverage Is Provided  Limitation of Coverage to Designated Premises  This is an unacceptable endorsement but sometimes the only way the underwriter will take the risk  The endorsement language limits coverage to the described premises – broader description helps, but does NOT overcome the inherent concerns with this endorsement 29

. What is Covered Property is insured  Property is not insured Foundations—no on prop Foundations—yes on EQ Foundations—yes for BO  Property insured on the wrong policy Computer vs. computerized equipment  Property insured on more than one policy Computer vs.computerized equipment 30

. Building Valuation  COPE information – review limit  Covered Property definition – values too high or too low  Underground foundations, underground piping, excavation, backfilling, pavements, patios, sidewalks, installed refrigeration equipment, outdoor furniture, etc. all excluded  Policy not endorsed to include  Limit is adequate – coverage is not 31

. Stock Valuation Manufacturer’s Selling Price Finished, Unsold stockKey to Business Income Selling Price Sold But Not DeliveredAdequate Limit? RCV – requested but NOT shown on Dec 32

. Tenant’s Improvements  Trade Fixture vs. Improvements Removable or not If not - improvement not trade fixture Which party should insure – owner / tenant? Check lease agreement 33

Tenants Improvements & Building Ordinance Owner Tenant

. Business Income Valuation  Financial statement  Include worksheet for underwriter to suspend coinsurance  Do NOT use for calculation of limit  Discuss down time with insured and extra expenses to relocate Period of restoration Additional extended period of indemnity Additional Increased Period of Restoration 35

. Coinsurance / Blanket Coinsurance Waive it for Property and Time Element coverages Blanket Not all insurers state correctly on the policy Which coverage Building(s) BPP Business Income / Extra Expense 36

. Margin Clause Check the policy Some forms are including this instead of OR in addition to coinsurance Some forms call this an additional coverage when, in fact, it is a limitation on the blanket coverage Some forms only apply it when shown in the Declarations page 37

. CP A.This endorsement applies to loss settlement on property that is subject to a Blanket Limit of Insurance. A Blanket Limit of Insurance is a single Limit of Insurance that applies to any of the following as shown elsewhere in this policy: 1.Two or more buildings; 2.Building and contents; 3.Contents of more than one building; or 4.Contents at more than one premises. 38

. CP B.Margin Clause With respect to property that is subject to a Blanket Limit of Insurance, we will determine a maximum loss payable for each building and for the contents of each building or the contents at each premises. The maximum loss payable is determined by applying the applicable Margin Clause percentage indicated in the Schedule to the value of the property as shown in the latest statement of values reported to us. If the statement of values does not state individually the value of each building and the value of contents at each building or premises, we will determine individual values as a part of the total reported values prior to application of the Margin Clause percentage. 39

. Building Ordinance Coverage A ALWAYS include for covered buildings Coverage B Include with Coverage C on Blanket basis Coverage C Very difficult to calculate Laws in force at time of loss – not retroactive laws ALWAYS include Increased Period of Restoration 40

. Building Ordinance Check building definition and Excluded Property Include in other coverage forms DIC Equipment Breakdown 41

. How Causes of Loss 42 Falling Objects Earthquake Utility Interruption Steam Explosion Fire Spoilage

. How?? Policy has coverages, sub- limits for some coverages, and exclusions Increase limits Separate policies Rarely are there “separate” policies or increased limits beyond what is granted by the company 43

. How Covered Loss must occur at the insured’s premises Off PremisesOn ALL policies? 44

. Spoilage Check policy language for coverage reductions Property policy Equipment Breakdown DIC Add spoilage to the DIC 45

. Claim Example  A cheese manufacturer was insured by Aetna for several years  In 1998 Aetna was acquired by Travelers  The insured suffered a contamination loss in

. Claim Example  The renewal used the Aetna form and the and 2001 renewal switched the coverage to Traveler’s form.  Traveler’s form contained an additional perils exclusion 2.d.7. We will not pay for loss or damage caused by or resulting from the following: for personal property… Evaporation, Loss of Weight, Contamination  Claim submitted under the Traveler’s form was denied and resulted in a $450,000 loss not paid 47

. When 48

. When Insured Going Out of Business CGL Cancel policy Continue policy Discontinued products / operations 49

. Occurrence Forms  Coverage triggered due to injury / damage during policy  Liability is assigned to the policy in force at the time of a covered loss, though an event or condition that eventually produces the loss may have existed at an earlier time when a different policy was in force. 50

. How Long? When will the “occurrence” take place? When will the claim come in? How long is the statute? 51

. When Professional Liability – D & O, EPLI, E & O, etc. – Claims Made and Reported Basic Reporting Period Extended Reporting Period 52

. Claims Made Forms  The trigger of coverage in this type of form is the date of the “claim”  The claim must be made during the policy period or any extended reporting period provided by the policy 53

. Claims Made Forms  The policy will define what a “claim” is and will often include language regarding an “incident” and the rights and obligations of the insured to report an “incident” to reserve the policy for any ensuing claim 54

. Claims Made and Reported Forms  This is a more stringent version of the Claims Made form  Many professional liability forms are written with these requirements  TWO triggers  Claim made to “insured”  Claim reported to carrier  BOTH must happen – same policy period to trigger coverage 55

. Claims Made/Claims Made & Reported  A misconception of many agents is that there is automatically a short extended reporting period for 30 to 60 days built into the policy  NOT true

. Claim Example  D & O policy 1/1/08 to 1/1/09  On December 27 th process server serves summons and complaint  The only person there is the receptionist  On 12/29 Company VP comes in and sees the summons, hands to receptionist saying send this to our broker 57

. Claim Example  Broker comes into the office after holidays on 1/3 and finds the claim and immediately sends it to the insurance company  Claim denied  Solution  Place with Claims Made coverage  Basic Reporting Period – 60 days 58

. Next – Contract Concerns  Limits, deductibles/retentions  Endorsements as requested  Endorsements added by company  Restrictions and limiting endorsements and coverage language Be aware and educated Learn how to communicate these issues to the insurance buyer 59

File Management and Processing Issues

. Proposals  Critical document  Describes coverage  Cover letter with binder should state binder replaces proposal  Use carrier quotes / proposals when possible  Audit your files for compliance with procedure manual master proposal 61

. Proposals  Default proposals in AMS often are non- specific and too expansive for actual insurance company being issued  Review of renewing insurance company proposals and comparison to prior year’s policy and endorsements  Proper coverage  Identified correctly 62

. Claim Example  Middle aged woman is hired at her new position  Her benefits begin on the first day of the month following 30 days of employment  She completes the paperwork immediately and send it in 63

. Claim Example  She sets up a physical at her new HMO a week after the effective date of her policy  She does not have a benefit card yet but HR says go ahead  She goes in, has the physical and they discover she has cancer 64

. Claim Example  The health insurance carrier never received the enrollment from HR they will accept subject to underwriting which means with cancer now as a pre-existing she has no coverage 65

. Claim Example  What do you think the EBL will pay She is billed $450/visit as a private pay patient The HMO, if it had covered it, would have negotiated that bill down to $ and no remaining would have been billed. Because she did NOT have the HMO the full $ is due  Would EBL pay the $ or $450.00? 66

. Fiduciary  Look at Fiduciary policy you are selling  Two insuring agreements Wrongful Act, Error or Omission (EBL)  $ Legal Liability  $  Employer is absolutely legally liable for the financial harm to that employee (ERISA) 67

. ERISA Don’t just think of ERISA when someone has a 401K or other form of pension plan ERISA includes all benefit plans with few exceptions Offer Fiduciary Liability for EVERY client 68

. Employee Dishonesty  Verify if using temporary employees or leased employees  If so, check definition and modify as needed  Policies vary and very important if changing carriers

. Proposals  Excess Liability vs. Umbrella  Always verify the type of coverage form being requested and received  Do NOT use the phrase “following form” excess unless it really is. Most excess policies written today are NOT following form  A true follow form is 2 pages long—no separate insuring agreement, etc 70

. Proposal Example  The proposal from the prior correctly showed that an umbrella had been issued.  At renewal, the account was re-marketed and the incoming carrier was unwilling to issue an umbrella and instead provided an excess liability policy  The proposal was re-created using the prior year’s template and this change was not noted to the insured and still reflected an “umbrella” was being provided. 71

. Applications  Most asked question—who is supposed to sign the application Accord Supplemental Application Warranty Application  Second most asked question—who is supposed to complete the application (BI worksheet, Reports of Value) 72

. Applications  Lack of detail for coverage requests or endorsements  Lack of underwriting information  Factual representation of client’s exposures  Property  Omission of coverage requests 73

. Applications  Statement of values Must get signature from authorized representative Request agreed value from insurer  BI Worksheet  Liability Total Pollution Exclusion vs. Exclusion with exceptions 74

. Warranty Applications  Agency completing and signing or agency completing and client signing Either method is incorrect  Client completing and signing is the proper approach If the CLIENT completed last year’s application in its entirety, provide a copy to the insured and ask them to complete the new application with correct information 75

. Applications  Comparison of coverage offers among quoting insurers  Show all admitted as well as non-admitted  Retain information of insurance company rejections Reasons stated Notate that information to the client in writing 76

. Coverage Review Example  Application requested Business Income With Extra Expense  The proposal showed BI With EE to the client  Policy was checked  Coverage was provided for BI Without EE  No correction made 77

. Binders  Incorrect company name I.e. Travelers when the issuing carrier is Travelers Indemnity Co of Illinois Always using Chubb as the company Binders must be specific to the insurance company that has agreed to provide the contract 78

. Binders  When placed with Surplus Lines broker No authority placed with broker Must have written authority provided by Surplus Lines broker 79

. Policies  Coverage requests after policy issue Document insureds request to the carrier and confirm to the insured  Review of coverage issues  Identify insurance solutions  Follow through with endorsement request 80

. Summary  Getting it right is difficult  Identify risks / exposures  Design insurance program  Market – obtain company quotes  Proposal accurate  Corrections made  Policy issued and corrected  Lot of work to be proud of 81

. Insurance Community Center.com  New website  Provides tools and resources to help  Easy to use  Sign up today – for free! 82