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Illusory Insurance – Exclusions that “swallow up the policy”

You buy insurance and you expect to be covered. Sometimes, though you are blindsided by being sold a policy that doesn’t cover anything!

What do we mean by that? We’re referring to the horrible deceptive contract known as “illusory insurance!”

Yes, I’m sure you know that policies contain specific types of exclusions. Policies certainly don’t cover everything. If the claim happens to come under the scope of one of those exclusions, you will have to look elsewhere to be covered, or deal with the issue without the benefit of insurance. That common scenario is not what we’re talking about though.

Policies consist of many pages of fine print. They include the insuring agreement which is the basic promise, that is the description of the kinds of events which ARE covered. But then the policy includes the bulk of the fine print consisting of exclusions, conditions and limitations. No doubt you need to be able to read and understand your policy, or have someone who can do that for you, and negotiate on the finer points. At the end of this scenario, you will have some coverage, though limited in the usual ways.

What did I pay that premium for?

The other scenario, though, the one involving illusory insurance, is much more pernicious. In this situation, you pay a premium and in return you get … nothing! This is not common — but it is not as rare as you might think. In fact if you don’t read and understand your policy (or have someone do that for you), it could exist without your knowledge right now.

Here’s an example which will illustrate how this works. We were just hired by a company involved in the travel and tour business to review and report on all their insurance policies. One of the policies we reviewed was the D&O (Directors & Officers Liability). This kind of policy generally is called on for claims by stockholders over things that affect the value of the company. The officers might make a major error that causes the value of the company to plummet, creating financial harm to the stockholders.

We don’t expect the D&O to cover claims for errors in professional services per se;  those would be covered by other kinds of insurance. What we do need is coverage for harm to the company’s value caused by the professional services error.

In this D&O policy we reviewed we found the following exclusion:

“the Insurer shall not be liable for … any claim: alleging, based upon, arising out of, or attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering of or failure to render professional services.”

This exclusion could not have been made more iron clad. There is absolutely no doubt anymore what this policy covers. It covers nothing!

My broker didn’t tell me that!

This is the embodiment of illusory insurance!

When we pointed a similar situation in the policy language for another of our clients, the client said “wow, that’s terrible, the exclusion swallows up the policy.” A brilliant way to describe what is going on. The 70 or so pages of this contract mean absolutely nothing, because they have been negated by the handful of words in a so-called “Professional Services Exclusion.”

Take control of your insurance purchase – in a very hands-on way. Have an expert on your side.

Frank Licata

[email protected]

Jan 05, 2019

Licata Risk Licata Risk & Insurance Advisors, Inc.
137 South Street, Second Floor
Boston, MA 02111-2848
617-451-2140     [email protected]
LicataRisk Advisors is an independent risk management and insurance consulting firm. We are not brokers and we do not sell insurance. We are not connected to any insurance company or product in any way and do not receive commissions. This is an important difference as you will have an expert on your side who is only committed to you.

Licata Risk is not a law firm and does not practice law. General advice and contract input by the consultants, including those who are attorneys, is to provide insight into the risk and insurance aspects. Your attorney should be the final authority on any legal matter.