By CORT T. MALONE, an attorney practicing in the New York office of Anderson Kill & Olick PC with a concentration on insurance recovery and corporate/commercial litigation
It's no secret that the federal government's huge loan to American International Group Inc. has led many corporate policyholders to take stock of their insurance portfolios and consider changing carriers on one or more lines of coverage.
A recent survey of risk managers by Advisen found that two-thirds of AIG customers intend to get quotes from competitors. Though AIG may ultimately retain most of its customers, the market is unquestionably in flux. Policyholders are demanding--and finding--more alternatives at renewal time. Under today's conditions, it is a matter of simple prudence to seek more than one bid and to seek flexibility in insurance contracts.
The decision to switch--or stand pat--should not be made purely on the basis of price and financial strength. Attractively priced insurance from solvent carriers will not meet the policyholder's needs if the carrier does not pay claims. What else should be considered?
Here are five Issues that must be considered if an insurance portfolio is to work as planned in this new environment:.
The Right Amount of Coverage
Before soliciting new offers, risk managers should review past litigation expenses and any new business operations or risks that have arisen since the last insurance purchase or renewal to determine whether current insurance limits provide sufficient coverage.
Companies often find that recent developments have increased potential liability, leaving a potentially ruinous coverage gap if their insurance limits remain the same. By testing the market, risk managers may find that they can obtain greater limits for the same--or lower--premiums.
Excess and Umbrella Coverage
An alternative to increasing primary layer limits is to purchase excess or umbrella coverage above the limits of the primary policy. Excess/umbrella coverage provides greater limits for potentially catastrophic exposures--often at a relatively low premium--because coverage does not kick in until exposure reaches a high level.
When deciding between increasing primary limits versus obtaining excess coverage, carefully review the policy terms. Primary and umbrella insurance often have significant differences, such as whether defense costs are covered.
Claims Handling History: Positive or Negative?
Policyholders should regard past claims-handling experiences with their current insurance company as a key factor in deciding whether to switch. Were submitted claims paid promptly or otherwise treated fairly? Insurance is worthless if carriers don't pay claims. Some insurance companies seek to avoid or lessen their obligations through certain policy terms.
Mandatory Policy Clauses:
A Limit to Options?
One policy term to avoid is a mandatory arbitration provision, which could force you to arbitrate claims for which coverage seems to be clearly provided under the policies at issue. This limitation can prove very costly to a company hit with a coverage denial in the face of potentially large exposures that should be covered under its policies.
Other policies may specify that the law of a particular jurisdiction must apply should litigation occur--typically, one in which the law is unfavorable to policyholders.
"Known" Conditions: Not Just a Health Concern
The term "pre-existing condition," widely associated with health insurance, may be applicable to a manufacturer or other corporate entity that has certain types of potential liabilities, such as pollution risks or suits brought by shareholders.
A common policy exclusion bars coverage for "pre-existing conditions" known to a "responsible insured" but not disclosed or identified in new policy applications. This type of exclusion can make it very difficult to secure coverage for risks endemic to the company's business.
If you lack a complete inventory of your company's "known" potential liabilities, your company may fall victim to these exclusions. Therefore, undertake a yearly evaluation to ensure awareness of any and all potential risks, including new liabilities, and report the findings to insurers.
The only way for risk managers to be protected from these coverage denials is to stay one step ahead by being cognizant of their own liabilities, informing their insurance companies about them and keeping detailed records of those communications.
The New Application Process: The Pitfalls
A change in insurance companies always requires filling out entirely new application materials, which entails a risk of forgetting to include critical information. Though policyholders might think that an error as simple as leaving off a location on a schedule of proposed insured properties should only prevent coverage for that location, an insurance company could seek to rescind an entire policy based on one innocent mistake in the application.
One safeguard is to request that a new policy include a clause broadening coverage to include inadvertently omitted sites.
Switching insurance providers, or otherwise altering an insurance portfolio, requires a 360 degree view of an organization's risk profile, insurance needs and existing coverage--as well as a keen eye for policy language in any new offers under consideration.
Policyholders that understand their own insurance needs will be much more likely to come to the correct decision regarding where to procure its future insurance coverage.
January 20, 2009
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