A Road Map to Policy Analysis

Transcription

1 A Road Map to Policy Analysis Unlike those who specialize in doing in-depth analysis of insurance policies, the typical insurance professional is more focused on the selling or servicing aspect of the industry. Little training is done to help seasoned professionals be more adept at policy analysis and comparison. This session is designed to guide experienced professionals step-by-step through the process of reading policy and form language, applying a basic coverage analysis to look for possible gaps in coverage, and understanding advanced coverage issues. Copyright 2016 International Risk Management Institute, Inc. 1

2 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 2

3 A Road Map to Policy Analysis Course Objectives Understand important contract features in general, as well as those specific to insurance policies and how they may or may not affect coverage Know the general sections of a policy, their purpose, how they can be modified, and the importance of each Understand how the sections of a policy interact and be able to explain how they work together to determine coverage 2 3

4 Course Objectives Explain the importance of each area of special interest and be able to explain how they work together Understand and explain how a program of insurance should be coordinated and why it is important 3 4

5 Understanding the Native Language 4 Elements of A Contract Offer and acceptance Consideration Competency Legal purpose 5 5

6 Unique Characteristics of Insurance Contracts Principle of indemnity Insurable interest Unilateral contract Conditional contract Personal contract Doctrine of adhesion Aleatory contract Subrogation Doctrine of reasonable expectation Doctrine of good faith 6 6

7 Landmarks in the Insurance Contract and Their Importance 7 Standard vs. Nonstandard Policies ISO: most widely recognized provider of standard forms AAIS: similar but less complete product offerings NCCI: workers compensation policy forms State bureaus (WCIRB) Drafted with the needs of the average insured in mind Can be used across all industries with some modification by endorsements to meet specific needs 8 7

8 Standard vs. Nonstandard Policies Advantages of standard policy forms Ability to set rates using pooled loss data is enhanced Increases ability to make generalizations about coverages Reduces the need to compare numerous insurers policies word for word to determine which provides the most favorable coverage Application of caselaw to consistent policy terms helps define the scope of coverage Simplifies the claims-settling process 9 Standard vs. Nonstandard Policies Standard forms and language updated based on: Loss exposures that change Changing underwriting philosophies Case law interpreting coverage Nonstandard policies and endorsements Used where no standard form exists Used for risks that need specialized coverage Used where no standard market exists Companies develop their own policy forms Agents must read and understand the coverage differences 10 8

9 Policy Format Declarations (WC information page) Insuring agreement Covered property Covered perils (property forms) Exclusions Definitions Conditions Endorsements 11 Policy Format Declarations (WC information page) Information about the insured o Name and address o Type of organization (corporation, partnership, etc.) o Policy period o Policy limits o Deductibles o Premium o Endorsements attached 12 9

10 Policy Format Declarations (WC information page) Important for information to be correct o Declarations can be binding o Make sure policy conforms to the specifications in the application Changes in locations, additional locations, limits, etc. must be modified by endorsement Verify named insured, location addresses, and other important information that can result in uncovered claims 13 Policy Format Declarations (WC information page) Take time to verify all information on the application and/or Dec page with the insured o Extra time shows the insured you are concerned about proper coverage o Shows that you value their business o Increases sales satisfaction and retention o Reduces the likelihood of E&O losses resulting from uncovered claims 14 10

11 Policy Format Declarations (WC information page) Grants the coverage provided by the policy Very broad in scope o Liability: promises to pay for all liability arising from BI or PD occurring during the policy period and related defense o Property: promise to pay for all direct damage to insured property Places few restrictions 15 Policy Format Definitions the policy dictionary Words that have special meaning within the contract must be defined No definition means that words take on their traditional meaning Can be used to clarify coverage, restrict coverage, or grant coverage Defined terms identified with quotation marks, bold faced or italicized fonts 16 11

12 Policy Format Conditions Enumerates the insured s rights and responsibilities Enumerates the insurer s rights and responsibilities Other items addressed: o Subrogation o Insured s duties after loss o How losses are apportioned when more than one policy applies Violation of a condition can lead to coverage denial 17 Policy Format Endorsements Used to tailor terms to the needs of the individual insured s business Used to: o Grant additional coverage o Restrict or eliminate coverage o Change coverage by changing or adding definitions o Modify the rights of the insurer or insured by changing or adding conditions o Schedule covered persons, projects, or property 18 12

13 Exclusions and Limitations Perils not covered Basic form and broad form causes of loss o No coverage unless specifically named o Still contain exclusions for clarification purposes Special causes of loss o Covered unless specifically excluded 19 Exclusions and Limitations Perils not covered Common exclusions o Flood, rising water, tidal surge, water or waterborne debris that backs up through sewers or drains o Earth movement, earthquake, sinkhole, landslide o Wear and tear, deterioration o Pressure or weight of water or ice o Vandalism or malicious mischief while vacant for more than a certain number of days o Ordinance or law o Governmental action o Nuclear o Pollution, smoke or soot from agricultural smudging o Others that will be discussed during coverage-specific classes 20 13

14 Exclusions and Limitations Liability exclusions Common exclusions in personal lines o Motor vehicle liability (homeowners) o Hovercraft liability (homeowners) o Vehicles owned and not insured by the policy (auto) o Vehicles furnished or available for use (auto) o Intentional acts 21 Exclusions and Limitations Liability exclusions Common exclusions in commercial liability o Contractual liability o Pollution o Damage to property of others o Impaired property o Product recall o Liquor liability o War o Nuclear 22 14

15 Exclusions and Limitations How exceptions affect coverage Most policies contain some exclusions that have exceptions Exceptions to exclusions help shape coverage Exceptions give coverage back under certain conditions 23 Exclusions and Limitations How exceptions affect coverage Examples: Contractual liability is excluded in the CGL; however, there is an exception to that exclusion for insured contracts. Note that is a defined term in the policy since it is in quotation marks

16 Exclusions and Limitation How exceptions affect coverage Examples: Watercraft liability is excluded in both personal and commercial liability. Both include exceptions to that exclusion. Typically, the CGL policy gives back coverage for non-owned watercraft less than 26 feet. Personal liability policies give back coverage depending upon size, type and horsepower of engine, and whether it is owned, rented or used by the insured. 25 Exclusions and Limitations How exceptions affect coverage Examples: Property damage exclusions contain coverage grants for certain types of property. The homeowners policy allows the insured to request coverage up to a small sub-limit for damage to property of others. The CGL policy has some very specific exceptions to the exclusion for damage to property of others

17 Exclusions and Limitations How exceptions affect coverage Examples: Liquor liability is excluded in the CGL. This exclusion contains an exception that gives coverage back to those that are not in the business of manufacturing, distributing, selling, serving or furnishing of alcoholic beverages. This is commonly called host liquor liability. 27 Exclusions and Limitations How exceptions affect coverage Examples: Damage to property exclusion contains some very precise, sometimes complicated and confusing language that gives back coverage under certain conditions as illustrated in the exhibit below: 28 17

18 29 Exclusions and Limitations How exceptions affect coverage Other exclusions o Absolute exclusions apply regardless of circumstances o Anti-concurrent causation exclusions excludes all coverage if an excluded cause of loss causes a covered cause of loss to be triggered Example: Flood loss causes a short that results in a fire that damages a building; damage caused by the flood is excluded thereby eliminating coverage for the fire damage as well 30 18

19 Definitions All contracts have words or terms that have special meaning within the scope of the contract Those words or terms must be defined within the contract Result: interpreted differently than intended 31 Definitions Definition of terms may very by policy form Not all policies contain the same definitions Definitions section ( policy dictionary ) located differently Personal lines front of policy Commercial lines back of policy Knowing what terms are defined is important marked by quotation marks, bold-faced or italicized print) Examples: 32 19

20 33 Definitions Help shape coverage Example o Contractual liability is excluded in the CGL and BAC o Exclusion contains an exception for insured contracts o As a result, while contractual liability is excluded, there is a coverage grant for those contracts that fit the definition 34 20

21 35 Definitions Help shape coverage Example o CGL policy covers personal and advertising injury o Note this is a defined term o The definition tells us what types of personal and advertising injury losses the policy covers o Still subject to additional exclusions and exceptions 36 21

22 37 Conditions Enumerate the insured s and the insurer s rights and responsibilities Vary from policy to policy A number of conditions are common to all policies 38 22

23 Conditions Duties in the event of occurrence, claim, or suit: Prompt notice Cooperate in investigation or defense Could be grounds for denial of claim Subrogation: Insurer s right to recover from a responsible third party Can be waived in most policies but conditions for waiver vary 39 Conditions Package policies can contain conditions specific to property, liability, and other coverage sections Also contain general conditions that apply to all sections Homeowners policy example: 40 23

24 Conditions Section I (property) Insurable interest and limit of liability Duties after Loss Loss settlement Loss to a pair or set Appraisal Other insurance and service agreement Suit against us Our option Loss payment Abandonment of property Mortgage clause No benefit to bailee Nuclear hazard clause Recovered property Volcanic eruption period Policy period Concealment or fraud Loss payable clause 41 Conditions Section II (liability) Limit of Liability Severability of Insurance Duties after Occurrence Duties of an Injured Person Coverage F Medical Payments to Others Payment of Claim Coverage F Medical Payments to Others Suit Against Us Bankruptcy of an Insured Other Insurance Policy Period Concealment or Fraud 42 24

25 Conditions Section I and II Liberalization Clause Waiver or Change of Policy Provisions Cancellation Nonrenewal Assignment Subrogation Death 43 Endorsements Policies designed to cover wide variety of insureds and common exposures Endorsements need to be used to include coverage to meet a specific insured s needs 44 25

26 Endorsements Add coverage that the policy does not automatically include Adding physical damage and/or liability for watercraft to a homeowners policy 45 Endorsements Broadening coverage Including employees as insureds when they drive personal vehicles on company business in the BAC Broadening pollution liability in the BAC to include pollution resulting from cargo 46 26

27 Endorsements Restricting coverage Adding absolute pollution exclusions to the CGL and commercial umbrellas Limiting employee dishonesty in a crime policy to scheduled individuals or scheduled positions 47 Endorsements Change or add definitions Adding medical payments to the BAC adds exclusions and definitions that only apply to that coverage Adding an endorsement to the CGL to change the definition of employee to no longer include leased workers 48 27

28 Endorsements Agency benefits Important to understand the use of endorsements and how they affect coverage Proper recommendation of endorsements to enhance coverage adds value that can attract or retain customers Spotting use or lack of use of endorsements in an existing program can increase sales All staff should have knowledge of endorsements, how they affect coverage, and spotting improper endorsements added to a policy in error to minimize exposure to E&O losses 49 Importance of Punctuation Commas Most frequently used internal punctuation More questions arise about the use of commas than any other punctuation mark Trend has been toward lighter punctuation resulting in fewer commas Treatment by the courts may not acknowledge or approve of this trend 50 28

29 Importance of Punctuation Commas Real example from the 2004 hurricane season in Florida o Purpose: to remove coverage for wind-driven rain without structural damage HURRICANE COVERAGE: Coverage under this policy includes loss or damage caused by the peril of windstorm during a hurricane. It includes damage to a building s interior or property inside a building, caused directly by rain, snow, sleet, hail, sand or dust if direct force of the windstorm first damages the building causing an opening through which the above enters and causes damage. 51 Importance of Punctuation Commas Real example from the 2004 hurricane season in Florida o Legal challenge resulted in claim denials being rescinded as a result of the lack of a comma after sand or dust o Literally read, the policy covers damage to the building s interior or property inside the building caused by all of the perils listed with the exception of sand or dust unless there is direct damage to the building first 52 29

30 Importance of Punctuation Commas Real example from the 2004 hurricane season in Florida o Adding a comma after sand or dust changes the meaning o Now the entire list of perils is limited HURRICANE COVERGE: Coverage under this policy includes loss or damage caused by the peril of windstorm during a hurricane. It includes damage to a building s interior or property inside a building, caused directly by rain, snow, sleet, hail, sand or dust, if direct force of the windstorm first damages the building causing an opening through which the above enters and causes damage

31 Landmarks of Special Interest 54 Insurance Valuation Can be a point of contention Insured s opinion on value Company s valuation results Agent is caught in the middle Must be prepared to discuss o Market value o Assessed value o Replacement value Major source of E&O problems Can be a great sales benefit if effectively communicated 55 31

32 Insurance to Value and Related Terms Insurable value Depends on the applicable valuation provision in the policy o States how the value is to be determined o Applied when settling claims Replacement cost cost to repair or replace with no deduction for depreciation Actual cash value cost to replace less depreciation; may vary by state to a degree Functional replacement cost repair or replace with less costly common construction materials and methods (generally used for older structures) 56 Insurance to Value and Related Terms Overinsurance Less prevalent than underinsurance Waste of premium dollars May occur due to the difficulty in establishing an exact insurable value for a future loss 57 32

33 Insurance to Value and Related Terms Overinsurance Mortgage lenders sometimes require a limit of insurance that is equal to or exceeds the outstanding balance Prohibited by law in a number of states for several reasons: o Mortgage is based on the purchase price which includes land o Small down payments lead to larger mortgage values o Fluctuation of construction costs can lead to an amount owed that exceeds the reconstruction value of the home 58 Insurance to Value and Related Terms Underinsurance Can be intentional or unintentional Many homeowners assume the limit should be consistent with market value o Market values fluctuate up and down resulting from Speculation Mortgage rates Employment rates Other factors 59 33

34 Insurance to Value and Related Terms Underinsurance o Replacement cost reflects construction and material costs During the recent economic crisis, construction costs were increasing while market values were decreasing Lack of mortgage company s interest beyond making sure the amount of coverage satisfies the outstanding balance o Mortgage companies generally do not look at replacement values beyond the initial closing Underinsurance costs less than insurance to value o Homeowners can be tempted to skimp in order to save 60 Insurance to Value and Related Terms Underinsurance Total losses are relatively infrequent Partial losses are covered on a replacement cost value subject to the ITV clause Insureds may be willing to risk insuring for less than 100% o Agents and insureds may target 80% rather than 100% for cost savings o Inadequate values can occur over time unless the amount of insurance is increased 61 34

35 Insurance to Value and Related Terms Underinsurance Wildfires, tornados, hurricanes, floods, can destroy many homes in a single area o Demand surge substantially increases the cost of replacing structures Building owners may be reluctant to insure for amounts that seem excessive 62 Insurance to Value and Related Terms Penalties for underinsuring Policies require insurance to value o Personal lines and BOP policies have ITV clauses o Penalties are imposed if the amount of insurance is less than 80% o Penalty is ACV instead of RCV o Example of ITV clause in the HO policy: 63 35

36 64 Insurance to Value and Related Terms Penalties for underinsuring Policies require insurance to value o Commercial property policies contain a coinsurance clause o Basic rating contemplates 80% coinsurance o Can be increased to 90% or 100% o Insured receives additional rate discounts for higher percentages o Example of the coinsurance clause: 65 36

37 66 Insurance to Value and Related Terms Benefits of insurance to value Benefits to the insurer o Higher, more accurate premiums o More funds to pay losses o Reduce loss ratios o Reduce rates per unit of insurance o Maintenance of adequate limits to support a major loss o Potential for suits alleging failure to suggest, require, or provide insurance to value 67 37

38 Insurance to Value and Related Terms Benefits of insurance to value Benefits to the insured o Full recovery including total losses Creates more complex problems for the insured o Peace of mind o Benefit from lower pricing 68 Insurance to Value and Related Terms How insurers encourage insurance to value Agents should educate the insured on the importance of ITV Insurers provide tools to help estimate replacement cost values Values should be monitored and updated Use of ACV or functional replacement cost when RCV is impractical Use of underwriting guidelines requiring ITV 69 38

39 Insurance to Value and Related Terms Factors that affect insurable value Construction type and location Building age Economic inflation or deflation Impact of building codes, ordinances or laws o Vary from municipality to municipality o Could have major impacts on older buildings o Jurisdictional authority rule o Percentage rule 70 Insurance to Value and Related Terms Factors that affect insurable value Catastrophic losses o Affect many properties in the same geographical area o Increased cost of materials and labor because of the high demand (known as demand surge) 71 39

40 Who Is An Insured Automatic insureds in the CGL Partnerships and joint ventures o Joint venture two businesses joining together on one project o Spouses included while in the course of business o Joint venture or partnership must be designated as a named insured o If dissolved, deleted from coverage 72 Who Is An Insured Automatic insureds in the CGL Executive officers o Separate status from employees o Limitation that applies to employees does not apply to exec officers for the fellow employee exclusion Employees as insureds o Included for two basic reasons Perceived corporate responsibility in protecting employees from loss arising from activities on behalf of their employer Help secure cooperation in defending claims made against the employer 73 40

41 Who Is An Insured Automatic insureds in the CGL Volunteer workers o Added due to widespread use of endorsements to add coverage o Can be excluded Leased workers o Rise in labor leasing firms and the popularity of use o Co-employer relationship similar to employment 74 Who Is An Insured Automatic insureds in the CGL Real estate managers o In the past, often lived on premises o Not a defined term; can be broadly interpreted o Gives primary coverage to the real estate manager o Other insurance clause could give rise to coverage issues 75 41

42 Who Is An Insured Automatic insureds in the CGL Professional services exclusion o Classification and premium determination do not contemplate this exposure o Best treated under E&O type policies Other automatic insureds o Legal representative o Newly acquired or formed organizations subject to certain conditions for 90 days 76 Named Insured Policy terms used Named insured First named insured Other insured persons or organizations 77 42

43 Named Insured Named insured vs. first named insured and other insureds Named insured not a defined term An insured with additional rights and duties 78 Named Insured Named insured vs. first named insured and other insureds Appears in four sections of the policy: o Premium audit condition (first named insured is given specific rights and duties with respect to payment and reimbursement of policy premiums) o Separation of insureds o Newly acquired organizations o Cancellation and nonrenewal notice to the first named insured 79 43

44 Named Insured Named insured vs. first named insured and other insureds Named insured referred to as you o Throughout this policy the words you and your refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy. 80 Named Insured Named insured vs. first named insured and other insureds Multiple named insureds o First entity named is the first named insured o Additional rights and responsibilities as seen above o Care should be taken to make sure to list in proper order 81 44

45 Named Insured Named insured vs. first named insured and other insureds Other parties having insured status but not named insured: o Partners in a named insured partnership o Members of a named insured joint venture o Executive officers, directors, stockholders o Employees and volunteer workers of a named insured corporation (with certain exceptions) o Organizations acquired or formed by the named insured (for a limited time) o The named insured s legal representative if the named insured dies o The named insured s real estate manager o Any entity added to the policy as an insured by endorsement 82 Named Insured Named insured vs. first named insured and other insureds Other differences o More stringent obligations for claims reporting for the named insured o Certain exclusions only apply to the named insured o Officers, directors, and employees of the named insured qualify as insureds but not the officers, directors, or employees of additional insureds 83 45

46 Additional Insured Commercial liability policies may need to be endorsed to include a third party as an additional insured May be a contractual requirement AI endorsements alter several sections of the policy Numerous endorsements Overview: more detail in coverage-specific classes 84 Additional Insured What is additional insured status? Indemnity or hold harmless agreements widely used o Leases o Rental contracts o Construction contracts o Other business agreements 85 46

47 Coordinating An Insurance Program 86 Purpose and Importance Necessary and important to the agent and the insured Insurance is not first and foremost in the typical household or business May understand the importance and need Don t take time to do in-depth analysis of exposures 87 47

48 Purpose and Importance Agents can fall into the order-taker role Using a detailed analysis approach makes the agent more valuable Valuable agents rarely lose business solely on price Insured is educated about the true exposures faced never recognized without their agent Being involved builds a strong relationship that helps attract and retain customers 88 Purpose and Importance Impact on agent E&O exposure Helps with documentation of o Exposures o Recommendations o Insured choices Educated consumers have greater satisfaction at time of claim o Claim denials can be positive experiences when customers understand what their policies do and do not cover 89 48

49 Proper Analysis Using Risk Management Approach Common sense approach Identifies losses that could be suffered other than those attributable to business operations Attempts to effectively handle risk at the lowest possible cost Works for both personal and commercial customers 90 Identifying and Addressing Coverage Gaps Typical insured needs more than one policy Tips to assist in properly coordinating various exposures and policies The named insured including spouse, along with any trusts or similar interests, should be specifically and consistently co-named in all of the personal insurance policies. The same holds true on the commercial side, making sure all entities that need coverage are properly named. Consistency is necessary for all insurance policies covering these parties. This approach helps to eliminate coverage gaps. If a limited liability corporation owns property for which the insured has a financial interest, the insured should work with a skilled attorney experienced in business organizations on this matter

50 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Selecting the proper umbrella policy is important since these policies may cover important gaps in the underlying coverage. It is highly recommended that the same insurer provide the underlying coverage and the excess coverage again to reduce any gaps and to avoid bickering between two separate insurers in the event of a major liability loss. 92 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Insureds should retain proposals for insurance that outline exposures and recommended coverage. These proposals should be kept for at least 3 years. Some state laws or E&O carrier recommendations may require longer periods. If changes are made to these proposals or reviews, the insured should receive the updates

51 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Insureds should indefinitely keep old copies of insurance policies, particularly those with liability coverages. The insured should scan these documents and retain them electronically with backups stored at a different location. 94 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Insurance agents should provide an annual review of coverage afforded or areas that may be uninsured or underinsured, particularly for wealthier clients or more complex businesses with myriad loss exposures. As changes are discussed and implemented, the agent should provide the insured a revised review

52 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Agents should regularly provide loss control and contractual risk transfer recommendations to their clients. This process should also be part of the annual review of coverage for new exposures. Various other risk management techniques, as necessary, should be explained to the insured as well. 96 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Insurance agents should explain the suability factor to their clients. The suability of a person is determined by the size of his or her savings account and stock portfolio, the size of his or her real estate holdings, the profile in the community, current family income, and potential income in the future. Agents and brokers should recommend a personal umbrella policy for their clients with moderate suability factors ($1 million limits) and high suability factors ($2 million to $5 million limits)

53 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Agents should advise their insureds to be wary of purchasing some of their coverage (e.g., personal auto policy) from the Internet and the rest through a traditional agent. The insured may unknowingly procure auto liability limits (or boat or motorcycle liability limits) well below the minimum limits required by their umbrella policy. Gaps of $100,000 or beyond are not uncommon in these scenarios. 98 Identifying and Addressing Coverage Gaps Tips to assist in properly coordinating various exposures and policies Forward thinking agents need to evolve into risk managers due to growing complexity of loss exposures Value-added activities pay big dividends in the form of client satisfaction and retention 99 53

54 Addressing Overlaps and Conflicts Use of one company to write multiple policies for the same insured Avoids conflicts in coverage that can occur o Example: auto and CGL coordination o Example: umbrella/excess and underlying coverage Use of ISO forms and proprietary forms can create coverage gaps o Analysis is important with proprietary forms 100 Addressing Overlaps and Conflicts Use of one company to write multiple policies for the same insured Umbrella, inland marine, other coverages have no standard forms o Analysis is extremely important in these situations to avoid gaps and overlaps Immediately begin looking for ways to eliminate overlap or gaps If no coverage is available to fill the gap, make the insured aware right away

55 Recommendations Once process is complete and ready for meeting with customer, recommendations should be written Detailed proposal to the customer that includes the risk analysis; exposures uncovered Recommendations should include options so the customer can make a decision on how to treat exposures 102 Recommendations Customer should be aware of insurance and other other exposure treatment options Insurance is a great risk-transfer method but not always the best Deductible options in case the customer is more risk-tolerant Document choices and decisions made by the customer

56 Recommendations Document choices and decisions made by the customer Document, document, document Choices are memorialized on a copy of the proposal/recommendations Insured should initial coverage selections and rejections and sign at the bottom Keep a copy in the file (folder or electronic) Send a follow up letter with a copy for their records thanking them for their business