Policy-Writing for Private Enterprise Risk Captives

Transcription

1 Policy-Writing for Private Enterprise Risk Captives Andrew Rennick, Esquire Associate Gordon, Fournaris & Mammarella, P.A Lovering Avenue Wilmington, DE (telephone) DCIA Spring Forum 2014 May 12-13, 2014 Tuesday, May 13, :30 a.m. to 9:30 a.m. Hotel DuPont Wilmington, DE Sandra L. Fenters Managing Director & Principal Capterra Risk Solutions Grant Street, Suite 1320 Pittsburgh, PA (office)

2 A critical part of the planning process in the formation of Private Enterprise Risk Captives (also known as 831b captives or micro-captives) is how to structure the actual policies of insurance. This session will provide a nuts and bolts overview of how this should be done. Speakers: Andrew Rennick, Esquire Associate Gordon, Fournaris, & Mammarella, P.A. Sandra L. Fenters Managing Director & Principal Capterra Risk Solutions

3 Policy-Writing for Private Enterprise Risk Captives Presentation Overview: o Advantages & Benefits to Control o Administrative / Practical Concerns o Goals of Policy Drafting o Policy Forms o Cutting Off Liability for the Insurer o Policy Limits o Valuation of Claims o Exclusions

4 Advantages & Benefits to Control

5 Advantages & Benefits to Control Control over policy drafting and administration is one of the key advantages of a captive Opportunity to tailor coverage to insured s unique exposures Address specific gaps in insured s commercial insurance program Flexibility in interpreting policy provisions Ability to endorse after the fact to confirm intentions

6 Administrative / Practical Concerns

7 Administrative / Practical Concerns Captive plays a dual role insurer of related party risks and reinsurer of pooled, unrelated party risks Customized and / or diverse policies create uncertainty for the insurer Also less efficient for the captive manager to administer claims, since every policy can have different definitions / claim triggers / methods of valuation / exclusions

8 Administrative / Practical Concerns Presence of unrelated exposures can lead to tensions between captives in the pool Captives may not want their manager to interpret policies liberally Because pooling arrangements can put as much as 75% of a claim into the pool, an insured has an incentive to aggressively contest a denied claim.

9 Administrative / Practical Concerns There are also external pressures from the desire to have the captive be treated as an insurance company for tax purposes. Case law emphasizes the need for reasonable pricing that is actuarially determined This necessarily requires some level of coordination between policy terms and premium pricing analysis Vague policy language could arguably expand coverage beyond what the actuary contemplated, perhaps even into business risks, as opposed to insurable risks

10 Goals of Policy Drafting

11 Goals of Policy Drafting Establish and meet the expectations of the insured with respect to scope of coverage, the responsibilities of the insurer and insured. Coordinate with feasibility study and business plan Prevent claim disputes

12 Policy Forms, Limits, and Exclusions

13 Policy Forms, Limits, and Exclusions Master Policy vs. Individual policies Master policy can be unwieldy Difficult to make master policy internally coherent

14 Policy Forms, Limits, and Exclusions Claims made or occurrence based? The term Claims made is ubiquitous not always applicable What event creates liability for the insurer: - The event itself? - A claim against the insured from an injured thirdparty? - Loss (e.g. expense) actually incurred by the insured?

15 Policy Forms, Limits, and Exclusions Policy Limits Do you permit or prohibit stacking (e.g. an occurrence triggers liability under multiple captive policies)?

16 Policy Forms, Limits, and Exclusions Policy Exclusions: Making sure that the exclusions are applicable to the types of coverage Balance between providing DIC coverage and permitting policy to cover moral hazards, uninsurable risks

17 Adjudication of Claims

18 Adjudication of Claims Exhaustion of Liability for the Insurer Must the bad act or property damage occur during the policy period or can it occur prior?

19 Adjudication of Claims Dealing with spill-over claims - what happens if liability is triggered during the policy period but losses continue into future periods? ~ Only reimburse for expenses incurred during the period? ~ Reimburse for expenses incurred during the period and allow insured to renew? o how does the pricing account for the known claim?

20 Adjudication of Claims - Reimburse for expenses until the claim is done or policy limits reached? ~ How does this affect the ability to close the pool? ~ Use a period of restoration to cut off liability after a certain time?

21 Adjudication of Claims Valuation of Claims How are business interruption losses calculated? Projecting income that would have been earned but for the event Meaningful comparison of pre-loss and post-loss experience Valuing the loss of a contract or a key employee

22 CONTACT INFORMATION Andrew Rennick, Esquire Associate Gordon, Fournaris & Mammarella, P.A Lovering Avenue Wilmington, DE (telephone) Sandra L. Fenters Managing Director & Principal Capterra Risk Solutions Grant Street, Suite 1320 Pittsburgh, PA (office)