Other C overages. and O ptions

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1 Other C overages 10 and O ptions

2 Ohio Property and Casualty Insurance Personal and Commercial Umbrella Liability Although Homeowners, Auto, and Commercial policies cover liability, there is still a demand for the Umbrella policy, which provides excess limits of liability and world wide coverage for a very reasonable premium charge. Umbrellas are written to provide excess liability coverage over and above a client s other liability policies. The primary policies (Personal and Commercial) will pay out their respective limits before the Umbrella, which then pays only in the event that the primary coverage is exhausted. In essence the primary policies act as the deductible before the umbrella responds. Most underwriters require that the underlying (primary) policies be written with high limits, such as $300,000 or more. If the primary policy pays a claim up to that amount, the Umbrella policy takes over, usually providing at least another $1 million or more of coverage for BI (bodily injury) and PD (property damage). Commercial umbrellas could go as high as 50 million or more. Umbrellas are also designed to cover gaps in coverage that may be present in the underlying policies. A client is driving a car in England and has an accident. Since the accident occurred outside of the coverage territory, the Personal Auto policy will not respond. The Umbrella however, provides worldwide coverage and will cover this claim, but only after the insured pays a selfinsured retention requirement, which is like a deductible and can range from as low as $250 to as high as $1,000 or more. Personal Umbrellas will not cover any business exposure and a Commercial Umbrella would exclude any personal liability exposure. 164 Specialty Liability Insurance Professional Liability: Although professionals, such as doctors, lawyers, real-estate agents, and insurance agents, need a CGL or a BOP policy to protect them for such things as Premises Liability, those policies do not cover their professional activities. Professional Liability, sold as a separate policy, protects the insured against legal liability resulting from negligence, errors and omissions, and the rendering or failure to render proper professional services. It does not cover fraud, dishonesty, or criminal acts. Malpractice: A type of Professional Liability Insurance sold to doctors, dentists, hospitals, and nurses and anyone involved in the care of patients. This insurance only covers bodily injury liability. Errors and Omissions: A type of Professional Liability Insurance sold to professionals such as, but not limited to, lawyers, agents, and accountants. It generally does not cover bodily injury liability, since its purpose is to cover claims for financial damages. However, Professional Liability policies sold to architects and engineers do cover both BI and PD, due to the nature of the professions (e.g., an error in the design of a building or product could lead to claims for both). Directors and Officers Liability: A type of E&O called Directors and Officers Liability (D&O) is available to protect the directors (board members) and officers of corporations if they are sued by the stockholders. This policy does not cover fraud, embezzlement, or other illegal activities. It does cover liability resulting from actions by the director or officer (such as mismanagement of corporate assets), inactions, and errors and omissions. A D&O policy covers any amount for which the director or officer is found to be liable, and it additionally reimburses the corporation for any required payments due to the wrongful acts of its officers or directors.

3 Other Coverages and Options 10 Professional Liability is usually issued on a claims made form, as discussed in the Commercial General Liability policy in chapter seven. In addition, most Professional Liability policies require the consent of the insured to settle a claim, since settling out of court may damage the professional standing of the insured. Other Types of Specialty Liability Insurance Coverage Fiduciary Liability: Pertains to a person holding the funds or property of another in a position of trust, who is obligated to act in a prudent and ethical manner; for example, attorneys, bank trustees, custodians, and executors. Failure to do so could result in a lawsuit filed by a person harmed by the fiduciary s improper management of client funds. Liquor Liability: Purchased by tavern or nightclub owners who could be sued under the so-called dram shop laws, which state that a person serving someone who is intoxicated or contributing to the intoxication of another person may be liable for injury or damage caused by the intoxicated person. Employment Practices Liability: Purchased by employers who may be sued for unfair or discriminatory hiring and firing practices, a hostile work environment, or sexual harassment. Employee Benefits: Covers liability of an employer for an error or omission in the administration of an employee benefit program, such as failure to advise employees of benefit programs or errors in the administration of benefit programs. Identity Fraud Expense Coverage: Identity Fraud Expense Coverage has been developed to assist in the cost of repairing the credit errors caused by the identity fraud. The funds provided by this endorsement will afford limited expense reimbursement, which include but are not limited to the following types of expenses: Costs for notarizing fraud affidavits or similar documents Costs for certified mail Lost wages Loan application fees Reasonable attorney fees Long distance telephone calls Surplus Lines Surplus Lines insurers specialize in coverage that is not available from authorized insurers (those who have a Certificate of Authority from the state). Generally, these unauthorized Surplus Lines carriers are free from state regulation in the areas of policy forms and rates. Since the policy is issued by an unauthorized insurer, it must be countersigned by a licensed resident agent in order to be considered a legal contract in the state. Since the insurer is not authorized to operate in the state, they are required to charge the insured sales tax on the policy just as any other commodity sold in the state. The current sales tax rate on these policies is 5%. The surplus lines broker representing the carrier is required to collect this tax and remit it to the state. Surplus Lines business may be transacted only through a licensed Surplus Lines broker. A Surplus Lines broker must obtain a contract to represent a Surplus Lines insurer. The contract states that all business in the state written by the Surplus Lines insurer must be placed through its Surplus Lines broker. 165

4 Ohio Property and Casualty Insurance A client, who is a licensed P&C agent, needs coverage on a new airplane. Since the insurer appointing the agent won t insure airplanes, the agent must shop various Surplus Lines brokers. The client selects coverage written by the Surplus Lines broker representing Lloyd s of London. Lloyd s writes the policy and pays a commission to its broker who, in turn, pays part of the commission to the agent. This is done frequently. The client will sign an affidavit acknowledging that the insurance is being placed with a non admitted carrier and that there is no protection under current state law for the insolvency of the insurer. A copy of this affidavit is given to the carrier, the broker, the agent and the client. Surplus Lines brokers are required to have a license to operate in the state of Ohio. This license renews every January 31st for a $100 fee. Since the broker is responsible for collecting the required sales taxes on the policies issued and remitting them to the state, a $25,000 bond is required to be filed with the state to guarantee the remittance of these sales taxes. Surety Bonds 166 Surety Bonds are not insurance, although they are transacted within the Property and Casualty Insurance industry. Insurance policies are based on the uncertainty that a loss will occur. Bonds on the other hand, guarantee that something will or will not occur. If a client has a claim against his Property or Liability policy, the company pays the claim on his behalf (if coverage exists). The company is not allowed to recoup any of these amounts from the insured, since the payment is why the client bought the policy and since that is how the contract was written. The client gave up a little bit of premium in return for the promise that the company would pay out a potentially large amount in a claim. Rates can be raised, canceled, or non-renewed, but the company cannot recover the claim money paid out. Bonds are not insurance and no claims are expected. Therefore, if a bond has to pay out on a client s behalf, the company has the right of recovery from the client for every penny paid out. In a sense, surety is similar to banking, in that bankers expect their loans to be fully repaid. Additionally, surety insurers usually require that the principal personally sign an Indemnity Agreement, which states that in the event of default, the surety may place a lien against the personal assets of the principal in order to recover the loss paid out. There are many types of Surety Bonds, including Contract, Bid, Performance, Completion, Supply, Judicial, and License & Permit. Each one of these bonds guarantees that something will be completed properly such as a contract; a performance; a posted bid; supplies rendered and judicial bonds guaranteeing that lawsuit damages are paid. License and Permit bonds allow the contractor to work in the jurisdiction provided the contractor guarantees through the bond to do work according to the local building codes. Fidelity Bonds, including Employee theft, Public official, Financial institution and Fiduciary guarantee the proper handling of funds by employees of a business, public officials, banks and anyone acting in a fiduciary capacity. Bonds can be written so coverage only applies if a claim is made during the actual bond period, or they can provide coverage once the loss is discovered if the event took place during the bond period. A major difference between an insurance policy and a Surety Bond is that the bond is a three-party contract, while an insurance policy is a two-party contract. On every Surety Bond, the three parties include: 1. Surety or Guarantor: The insurance company that provides the bond in consideration for the premium paid. The surety joins with the principal to guarantee the fulfillment of the obligation, and agrees to pay damages to the obligee if the principal defaults. 2. Principal: The party who agrees to perform the obligation and purchases the bond at the request of the obligee, or as required under the terms of a contract with the obligee.

5 Other Coverages and Options Obligee: The party for whose benefit the bond is written. If the principal defaults on the obligation, damages are payable by the surety to the obligee. If you know the definitions of the three parties in a bond, it is easy to figure out who each party is. Client Cathy has a contractor build a new home for her. Cathy (the obligee) enters into an agreement that requires the contractor (the principal) to purchase a Contract Bond from a surety to guarantee that the contractor won t default during the contract period. If the contractor does default, the insurance company (the surety) will pay Cathy damages and then recover the money from the contractor who defaulted. Ocean Marine Another unique miscellaneous commercial coverage is Ocean Marine, which is one of the oldest types of insurance. Ocean Marine, which is virtually unregulated with respect to rates and policy forms, may be written to cover hull damage, cargo, freight, and protection and indemnity (P&I). Hull Coverage: Insures against damage to, or loss of, the ship itself. Cargo Coverage: Usually protects the cargo (at sea and on land) from its point of origin to its ultimate destination. Freight Coverage: An indirect coverage of the cost of moving the cargo (i.e., the cost of shipping, in addition to the value of the cargo itself). Protection and Indemnity (P&I): Provides Marine Legal Liability coverage for losses arising from the insured s operation of the vessel. P&I usually insures the shipowner against injury to crew members, harbor workers, loss of cargo, and damage to other fixed objects or vessels resulting from the negligent operation of the insured vessel. It is similar to BI and PD coverage on a Liability policy, except that it also covers the insured s own crewmembers, as required by the federal Jones Act, since state Workers Compensation laws do not apply on the open seas. Hull and Cargo coverage may be written on either an All Risk or a Named Peril basis, both of which include coverage for the peril of jettison. Jettison is defined as voluntarily throwing the cargo overboard in order to save the ship from sinking. The peril of war is also generally covered on an Ocean Marine policy, as is the peril of barratry, which is fraudulent behavior on the part of the captain or crew causing loss to the ship or cargo. In Ocean Marine, the word average means loss or damage. A loss can be determined to be either general average or particular average. A general average loss will be shared by all the parties in proportion to their interests. If cargo must be jettisoned to save the ship, this benefits all parties, so all would share in the loss. A particular average loss is borne only by the party having an actual interest in the lost property. Four implied warranties exist in Ocean Marine coverage. If any of these four warranties are breeched, coverage can be declined or the policy can be voided: 1. Vessel seaworthiness 3. Route to be traveled is specific 2. Voyage for legal purpose 4. Cargo is packed properly Due to the risk involved, most Ocean Marine coverage is written by Surplus Lines carriers (such as Lloyd s of London), as is the next miscellaneous category, Aviation Insurance. 167

6 Ohio Property and Casualty Insurance Aviation Insurance Although there are no standardized policies, Aviation Insurance is similar to Ocean Marine Insurance because it provides coverage for both liability and hull damage. Liability coverage usually applies to claims arising out of the ownership, maintenance, or use of the insured aircraft (similar to Auto Liability). Commonly, exclusions remove coverage if the aircraft is used for purposes not described in the declarations, is operated by a pilot not named in the declarations, if the airworthiness certificate is no longer valid, or if the aircraft is used for instructional purposes. Aviation coverages are usually written as package policies, which combine liability to others, medical to passengers, and physical damage for the aircraft itself (known as hull damage). Hull coverage may be written as Named Perils or as All Risk. Different coverage may apply while the plane is on the ground or when the plane is in the air. Due to the possibility of large losses, major aviation risks are often insured by Surplus Lines carriers or aviation pools, which consist of a group of insurers who join together to share risks and premiums. The same four warranties mentioned in Ocean Marine Insurance must be present here: 1. The plane is airworthy. 2. The route to be traveled is specific. 3. The trip is for legal purposes. 4. The cargo is packed properly. Claims or losses are settled as averages general and particular, similar to Ocean Marine Insurance. 168 Flood Insurance Historically, insurance companies have been very reluctant to offer Flood Insurance to clients, since the only people who buy it are those who live in flood-prone areas. This constitutes adverse selection, and would cause the insurer to lose money at any affordable premium level. To solve this problem, Congress created the National Flood Insurance Program (NFIP). Flood Insurance may be written directly with the NFIP, or with one of several private insurers who participate in the Write Your Own Program. In this program, the federal government still underwrites the risk of loss. If the premiums collected by a private carrier for the peril of flood are not adequate to cover losses, the insurer is reimbursed by the NFIP. However, if the private insurer makes a profit from writing Flood Insurance, the gains are turned over to the U.S. Treasury. In either case, the coverage is identical and is sold by licensed P&C agents. NFIP policies cover all direct losses by or from a flood. A flood is defined as a temporary or complete inundation of normally dry land by an overflow of inland or tidal waters, unusual and rapid accumulation or runoff of surface waters or mudflows on the surface of normally dry land areas. The collapse of land along the shore of a body of water is also covered, if it is caused by erosion that is, in turn, caused directly by the floodwaters. There is a 30-day waiting period before coverage starts. Exclusions on NFIP policies include money, securities, lawns, trees, shrubs, aircraft, autos, fences, retaining walls, bridges, wharves, piers, docks, underground contents, or equipment, storage structures, and sewer backup. Indirect losses are excluded as well. Flood Insurance is only available in designated flood zones. The NFIP does not provide Flood Insurance in a community that is unwilling to adopt flood-control measures. If a community agrees to adopt flood control measures and improved land-use regulations, it may then apply for participation in NFIP. First, the community makes an application to be a designated flood zone. Upon receipt of the application, structures become eligible for the NFIP s Emergency Program,

7 Other Coverages and Options 10 which provides coverage for an interim period during which the Federal Emergency Management Agency (FEMA) studies the area. The FEMA recommends flood control measures to protect the area from future flooding. Once the community has adopted the recommended flood control measures, the area becomes a designated flood zone and structures are now eligible for coverage under the Regular Flood Program. NFIP s Emergency Program While the community is completing the flood control recommendations and waiting to be declared a designated flood zone, clients needing Flood Insurance may obtain coverage through the Emergency Program, which covers single-family homes up to a maximum of $35,000 coverage. Apartment houses and other residential properties, including commercial properties, may be covered up to $100,000. Coverage for the contents of single-family homes is also available up to $10,000, while $100,000 coverage is available for contents in commercial structures. The standard deductible is $2,000, which is separately applied to each building loss and each contents loss on a per occurrence basis. All losses under the Emergency Program are settled at Actual Cash Value (ACV). NFIP s Regular Program When the community has adopted the flood control recommendations, detailed Flood Insurance rate maps are published, at which time the community becomes a designated flood zone and eligible for the NFIP s Regular Program. Under the Regular Program, single-family homes may be insured for a maximum of $250,000 and building s contents can be insured for up to $100,000. Commercial structures and contents may be covered up to a maximum of $500,000. The standard deductible is $1,000, which is applied separately to each building loss and each contents loss on a per occurrence basis. Single-family homes are covered on a replacement cost basis if the structure is insured for at least 80% of its replacement value, or the maximum policy limits available. All other buildings, as well as contents, are insured on an ACV (depreciated value) basis. Any partial loss is indemnified on a replacement cost basis, up to the limit. The cost to completely replace a single family dwelling is $400, % of $400,000 is $320,000. The insured cannot purchase that amount of coverage. Therefore, any partial loss is paid on a replacement cost basis if the insured buys the maximum of $250,000. Other Policies Since Homeowners policies provide only limited coverage for watercraft ($1,500 maximum on the value of the boat and liability coverage generally for boats with limited horsepower), there is an obvious need for Watercraft Insurance, which is sold as a separate policy or may be added by endorsement to a Homeowners contract. Auto policies are for vehicles designed for use on the public roads. Recreational vehicles can be used off road so there is a need for a specialized policy or an endorsement to the auto policy for these types of risks. Boatowners Policies: Available for runabout-type boats, their motors, equipment, and trailers. These policies are actually very similar to Auto Insurance, since they also cover Watercraft Liability in the event the insured negligently injures someone or damages property (BI and PD). The boat itself is also covered for physical damage, which is called Hull Damage, in the event that the boat sinks, is stolen, or is involved in a collision. Coverage is provided on an ACV basis. These policies are designed for watercraft less than 26 feet in length. Personal watercraft such as jet skis can be insured on a boatowners policy. 169

8 Ohio Property and Casualty Insurance Recreational vehicles: This policy can cover All Terrain Vehicles (ATV); Mopeds; Scooters; Dune Buggies: Golf Carts; Segways; and 3 wheeled vehicles (trikes) which are motorized land conveyances that are not designed primarily to be operated on the public roads. Many carriers will permit these to be insured on the personal auto policy while others prefer this specialized type of policy. Structured similarly to an auto policy providing liability, medical payments, uninsured motorists and physical damage coverage (comp and collision) these policies can extend coverage for specialized customizations, equipment and personal effects that a standard auto policy may not. Vacation liability expenses and trip interruption coverage can also be added. Differences in Conditions (DIC) DIC Insurance is usually written in connection with Property coverages to supplement the protection or to provide a specific type of coverage that may be excluded on the Property policy form purchased by the insured. Since DIC Insurance is intended to supplement more traditional coverages, it usually excludes losses from any peril that are already covered by the basic policy, such as fire or wind. DIC does not cover what is covered elsewhere. It just covers everything else. DIC is designed to fill in any gaps in coverage that may exist in a basic, traditional Property policy. Earthquakes are not covered on most Property Insurance forms. Although it may be possible to add earthquake coverage to a Property policy by endorsement, it is usually cheaper to purchase DIC coverage instead. Earthquake and Flood Insurance policies are examples of DIC policies. On most DIC policies, there are no co-insurance requirements since most claims for these types of perils result in total losses, and claims are paid at ACV, up to the policy limit. 170