Why the Insurance Market is like Quicksand
LicataRisk: A Commercial insurance buy is a negotiation
At our Risk Advisory Breakfast (held several times a year) we have a regular segment called Why the Insurance Market is Like Quicksand.
Why describe it that way? Quicksand is a hazard that is not clearly marked. You are happily marching along a trail when, suddenly — WHAM!*— you’re mired in muck to the extent that, try as hard as you can, you can’t extricate yourself from it.
Your insurance broker advises you to “read your policy.” That’s fine, but consider:
- It’s a done deal by the time you receive it;
- You’ve been bound by it sight unseen since the inception date;
- If you don’t like it when you do read it, there’s nothing you can do about it!
It all just points out the hazardous nature of the insurance delivery system.
Some quicksand analogies from the world of commercial insurance:
THE CREEPING POLLUTION EXCLUSION
A fire at your property release soot, ashes and fumes into the neighborhood, prompting abutting business owners and their employees to file bodily injury claims. You submit the claims, but your insurer says sorry, no coverage, due to the “Total Pollution Exclusion” in your general liability policy. “Pollution exclusion – surely someone is kidding !” But, no joke, many insurers have eliminated the “hostile fire” exception from the exclusion. At the same time the exception for releases from heating systems was also removed. Carbon monoxide disaster? No coverage for that either. You didn’t receive any notice of this evolution in the terms of your policy! There are solutions to this gap, but first you need to be aware it exists.
THE TERROR OF INSURANCE UNDERWRITING
Given the current volatile environment, you are concerned about damage to your property by terrorism. Your broker presents a proposal with a modest premium for coverage under TRIA (the Terrorism Risk & Insurance Act); you agree to pay the premium, check “accept,” and sign the TRIA form. Well, that’s taken care of – at least we have the terrorism coverage. Not so fast! You HAVE purchased coverage for “certified” acts of terrorism, that is, acts declared by the federal government to meet the threshold to be certified. What the insurer is still excluding, notwithstanding payment of the extra premium, is “non-certified” terrorism. That latter class involves a broad range of terrorist and pseudo-terrorist activities including such events at the Boston Marathon bombing, which never was certified. That means, despite purchasing “terrorism coverage,” you are STILL not covered for the devastation and loss of income from the event. Does it have to be that way? Hell no – we insist on total absence of any terrorism exclusion in return for payment of the TRIA premium.
CONSTANTLY CHANGING THE RULES OF THE GAME
You’re a real estate owner and you hire a contractor to do a minor repair. You obtain a certificate of insurance from the contractor designating you as an “additional insured.” You never did get around to signing a construction agreement for this small repair, but at least you nailed down the insurance protection, right? Oops, there’s an accident with serious injuries, and you submit the claim to the contractor’s insurer for defense of the case and protection against any judgments. But, you’re advised that the additional insured status is void despite the certificate. Insurance language concerning ‘additional insureds” is continually being revised and tightened by the insurers, and one of the changes is: additional insured status is only triggered if there is an underlying contract between the parties requiring the additional insured status – the policy adopts the outside agreement by reference.
This is one of MANY “additional insured” gaps that the industry has created by their incessant changing of policy language, to the negative, over the last ten years or so.
TRYING TO BUCK LEGAL PRECEDENT
In a possible new trend we recently spotted, insurance companies have brazenly taken to trying to overturn centuries of case law on insurance contract interpretation. Here are two examples we uncovered in the last 12 months:
# 1. Case Law: in demonstrating the applicability of policy exclusions, the burden of proof is on the insurer. Not so fast says insurer CNA in their Signature Property Policy:
“In any action…where the Company alleges that by reason of the above [exclusions] any loss or damage is not covered by this insurance, the burden of proving such loss or damage is covered shall be upon the Insured.”
This means they have flipped the normal contract interpretation process on its head to make it easier for them to deny claims.
#2. Case Law: Because the policy was written by the insurer, ambiguity is ruled in favor of the insured. On the contrary says insurer ACE in one of their Cyber-risk policies:
“The terms and conditions of this Policy shall be interpreted and construed in an evenhanded fashion as between the parties. If the language of this Policy is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant terms and conditions, without regard to authorship of the language, without any presumption or arbitrary interpretation or construction in favor of either the Insureds or the Insurer and without reference to the reasonable expectations of either the Insureds or the Insurer.”
This means they have eviscerated the protections courts have provided for 200 years for insureds in recognition of the uneven balance between the big lawyer-laden insurance company and its smaller customer.
Sound like quicksand?
Treat your commercial insurance purchase as a negotiation. You have to receive 100% of the proposed policy language as a part of your proposal. Then you have to understand it and have the ability to discuss it. But here’s what one court said about insurance policies (summing up commonly stated judicial thought on the subject):
“It should not be necessary for the insured to provide himself with a microscope …to inspect the fine print…in his insurance policy. Neither should it be necessary for an insured to provide himself with an insurance policy to protect himself against the provision to be found within such small print of his insurance policy.” 1
You’re going to need an expert independent from the insurance company and the broker.
- Southern District of New York, May, 2009, Janart 55 West 8th LLC v. Greenwich Insurance Co
© 2014 Licata Risk & Insurance Advisors, Inc.
May 07, 2015