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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• Policy rescinded - no coverage at all for any individual or the firm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.

For more information, contact Debora Wu, at DWU@LicataRisk.com

News & Reports Archives

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Reports

Fall 2005 INTERNATIONAL RISK MANAGEMENT
 
Spring 2004 EMPLOYMENT LAW MORPHS INTO A MONSTER

Fall 2004 INSURANCE BROKER SUED BY NEW YORK ATTORNEY GENERAL

Summer 2004 UNDERSTANDING THE DYNAMICS OF THE INSURANCE MARKET

Winter 2004 WORLD TRADE CASE UNVEILS INNER WORKINGS OF INSURANCE BROKER

 Fall 2003 A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE

Summer 2003 PRESERVING COVERAGE FOR INNOCENT INSUREDS

Spring 2003 LEAVING TERRORISM COVERAGE ON THE TABLE

Winter 2003 COMPUTER SECURITY IS NOT A BLACK HOLE

Fall 2002 "LET'S BE CAREFUL OUT THERE

Spring/Summer 2002 WHAT WARREN BUFFET KNOWS ABOUT INSURANCE COMPANY FINANCIALS

Spring 2002 OPPORTUNITIES ABOUND IN DEVELOPMENT OF CONTAMINATED PROPERTIES

Winter 2001 "YOU CAN'T PAY US THIS MONTH? WHAT DO YOU MEAN 'NEW DEVELOPMENTS?"

Fall 2001 WORLD TRADE TERRORISM -- REPERCUSSIONS FOR INSURANCE MARKET

Summer 2001 ENERGY AVAILABILITY: CURRENT REALITY OR FOND MEMORY?

Spring 2001 "HOLD THAT BALLOT UP TO THE LIGHT"