Tag Archives: errors & omissions

The Need to Educate on General Liability

In a perfect world, insurance buyers would understand their products just as well their insurance agents. This would save a few headaches for everyone involved, and it would probably streamline the process on all ends. However, the reality is that most business owners don’t understand the extent of the insurance products they purchase. Then again, no one should expect them to.

Insurance products are highly complex vehicles. Few business owners have the time to invest in becoming experts in the field or in the products they purchase. Even the best insurance agents spend years learning about the products they sell, many of which change frequently as the economy changes.

That being said, no business owner should simply buy a product without understanding the most important aspects regarding what it does and does not cover. In truth, a highly skilled insurance agent should never let them, either. Here’s where there can be a gap between how much insurance a business purchases and how much it actually needs, showing why educating business owners on the extent of their insurance really matters.

False Perceptions of General Liability Are Common

Many customers tend to believe their insurance covers more than it actually does. This situation could probably be applied to any insurance product, but general liability policies are often the most frequently misunderstood by buyers.

See also: What to Expect on Management Liability  

To put it simply, far too many businesses are purchasing less insurance coverage than they should. In a sense, many are taking a huge gamble, believing their risk exposure is less than what it actually is or that their preventative measures, such as employee training, can shield them from those risks. While risk prevention definitely helps, it’s ultimately far from the bulletproof shield many companies think it is. Most companies do it to help themselves get a better rate on their insurance, while maintaining the false perception that their general liability coverage protects them against a multitude of risks not actually defined in the policy.

As a company scales in size, so, too, does its likelihood of experiencing losses related to cyber liability, employee fraud, fiduciary liability, directors and officers (D&O) or workplace violence. Yet many companies seem not to realize their exposure.

This would, of course, be less troubling if companies were purchasing policies that actually covered those kind of risks. Overwhelmingly, they’re choosing to avoid those insurance products altogether. According to Chubb’s survey on private company risk, non-purchasers believed their general liability policy covered:

  • Directors and Officers Liability (65%)
  • Employment Practices Liability (60%)
  • Errors & Omissions Liability (52%)
  • Fiduciary Liability (51%)
  • Cyber Liability (39%)

Businesses aren’t failing to purchase enough liability coverage because they’re unnecessary risk takers. Most, it seems, simply have false perceptions about what their general liability will and won’t do.

A small business may think its general liability policy covers a server hack. Yet, lo and behold, when a server gets hacked and the ensuing liability claims start pouring in, that small business may quickly find itself underwater. In fact, the U.S National Cyber Security Alliance found that the 60% of small companies went out of business within six months of a cyber attack. This seems extreme, but the average cost for a small business to clean up after a hack is $690,000, according to the Ponemon Institute. How many small- or medium-sized businesses can easily absorb that kind of cost without insurance coverage? Not many.

Similarly, mid-sized companies may believe their general liability policy covers directors and officers, leaving the company with unnecessary risk exposures should an incident occur. If, for example, a company begins operating internationally and fails to effectively meet one of the federal regulations governing its industry, a general liability policy won’t help protect the company from impending lawsuits. Any directors held personally responsible may find their own personal assets at risk. Given what we learned from the Chubb survey, it’s quite likely that most directors may think they’re fine with the minimal coverage they receive from a general liability policy. A costly mistake, to be sure.

Who’s to Blame?

We’ll leave the finger pointing aside for now and settle on this: The customer is always right, but he’s not always well-informed. As every insurance agent knows, the amount of time it takes to fully understand an insurance product can be extensive. Business owners, in general, lack the time to invest in fully understanding the products they purchase. It should come as no surprise, then, that misunderstandings arise over what general liability policies actually cover and what risks they simply won’t mitigate.

See also: ISO Form Changes Commercial General Liability  

Insurance agents have a responsibility to use their knowledge to help business owners better understand and sift through those misconceptions. More needs to be done to help decision-makers understand what they are and are not getting from their insurance.

Helping businesses better understand the ins and outs of their general liability policy is a win-win all around.

When Terrorism Becomes A Reality

This week's tragedy at the Boston Marathon has touched each of us on a very personal level and puts fear in our hearts that this could happen again. As the dust settles at the site, there will be many unanswered questions, and some of those issues will concern terrorism and insurance for terrorism.

What do we know at this point?

  1. It is being speculated that this is an act of terrorism.
  2. It is uncertain if it is an act of domestic or foreign terrorism.
  3. It is, also, unlikely at this point that this will be a Certified Act of Terrorism.

What are the immediate insurance issues that we see from this event?

  1. Severe injuries and death
  2. Direct damage to buildings and structures
  3. Direct damage to property (including vehicles)
  4. Closure of areas due to direct loss and civil authority
  5. Debris removal and damage
  6. Workers Compensation

For all of us in the insurance industry, we have to be asking ourselves:

  1. Are we offering terrorism coverage to our insureds?
  2. Are we going beyond just the offer of the Terrorism Risk Insurance Act (TRIA) and offer stand-alone terrorism insurance, which is available in the insurance market place?
  3. Are we carefully documenting our conversations with our insureds about the terrorism offer?

The Insurance Community University has two important classes for you to attend:

Update on Terrorism Exposures and Insurance — May 7, 2013

  • Overview of terrorism risk and exposure
  • Review of TRIA (Terrorism Risk Insurance Act)
  • Terrorism Insurance

Insight on Errors & Omissions — April 25th and 26th

We have heard it a thousand times — “documentation;” but in light of the bombing, we have to take a harder look at what we are doing: your files must speak for themselves and contain the notes on discussions, offers, acceptances, rejections, and follow ups. The Errors & Omissions class is approved with various insurance companies, including Fireman's Fund for credit on your agent's Errors & Omissions renewal insurance.

Lessons Learned From Hurricane Sandy

Hurricane Sandy is said to have been the most damaging hurricane recorded in U. S. history. There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor. The loss estimates and concerns are changing daily. The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group, points to the fact that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power. Here is the breakdown provided on November 26, 2012: http://www.governor.ny.gov/press/11262012-damageassessment.

  Sandy in New York ALONE Katrina & Rita in Louisiana
Housing units damaged or destroyed 305,000 214,700
Power Outages (peak) 2,190,000 800,000
Businesses Impacted 265,300 18,700
  • Number of deaths is more than 110 from Hurricane Sandy http://articles.latimes.com/2012/nov/03/nation/la-na-nn-hurricane-sandy-deaths-climb-20121103
  • The official death toll from Katrina was 1,723. http://robertlindsay.wordpress.com/2009/05/30/final-katrina-death-toll-at-4081/
  • 7.5 million power outages throughout Hurricane Sandy's two day assault on land
  • Moody's Analytics estimates the loss in the vicinity of the storm to be $50 billion, of which $30 billion will be directly from damage to property and the remaining $20 billion from economic activity, not all of which is going to come from an insurance policy.
  • 60% of the losses in economic activity, or about $12 billion, will come from the New York City metropolitan area.
  • Because of the storm's intensity and the breadth and scope of the damage, President Obama declared New York and New Jersey federal disaster zones without waiting for any damage estimates.
  • As of 12/3/2012, the Federal government has already issued $180 million in federal contracts related to Sandy.
  • The President has declared several areas as disaster areas, which means that federal funds will now be available to storm victims. (This is not limited to those without flood insurance.) This federal disaster assistance usually takes the form of low-interest loans to help home and business owners rebuild, which you can learn more about on the Disaster Loan page.

The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm. We will attempt to discuss some of the unique and troublesome issues that are arising from the storm.

Article Discussion Points:

  • Definition of “Storm” and its impact on insurance
  • Flood or NOT Flood?-that is the question (or the hope)
  • Personal Auto salvage concerns
  • The Lawyers are out to get you

Definition Of “Storm” And Its Impact On Insurance

A storm reaches tropical storm status by reaching sustained winds of 39 miles per hour. The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization. If a storm causes significant damage and /or loss of life, the name is retired from the list permanently. Thus, there will be no Katrina II or Sandy II.

1. What Does The Definition Of “Storm” Have To Do With Insurance? There May NOT Be Coverage On The DIC.
Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.

In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.

We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the National Weather Service had named the storm, it was not at hurricane strength when it reached landfall. A comprehensive definition of “named storms” would be helpful to clarify coverage. The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.

2. What Is Unique About Hurricane Sandy?

  • Sandy has defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
  • The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
  • The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration's 0 to 6 scale.

3. One Storm or Two Storms:
Bad memories of the World Trade Center came immediately to mind when I read about this potential concern relating to Hurricane Sandy in the Daily Report. You might remember there was a significant concern that a second storm, following the initial impact of Sandy, was going to hit which would have further devastated the area.

Richard Mackowsky, a member of the Cozen O'Connor's global insurance group, said “new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.”

“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,” Mackowsky said. “A second storm could trigger a separate limit of liability if it's a big enough situation,” he said.

But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.

Excerpted from the Daily Report

Saved by the bell on this one — the second storm never hit, but the insurance pundits were armed and ready.

Flood … Not Flood? — That Is The Question

This appears, at first glance, to be Insurance 101 — most of this damage was either directly or indirectly caused by the condition of flooding. That is sure what it looked like to me and that is not a very popular observation. Why? Because most people did not have flood insurance and if they did, the flood insurance policy has limited amounts of insurance and significant restrictions such as no business income coverage.

1. Dilemma Of The Federal Flood Insurance Program — It's A Problem:
Even if it is covered on the flood insurance policy, there is real concern about the overall program. See this article from Reuters for more information.

2. Flood Or Not Flood
Whether talking about homeowner's insurance (including renters and condominium owners) or commercial property insurance, those forms most often include an exclusion for flood. So, here is where it gets a little tricky:

  1. Did the property owner sustain damage from storm surge?
  2. Was the loss due to rising flood waters?
  3. Was the loss due to too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down?

“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”

Excerpted from The Street

In a unique twist, New York has a specific website that contains a regularly updated scorecard on insurance company performance. Here's the link. For example, State Farm has had 48,109 claims; 6,363 closed with payment; 5,229 closed without payment.

3. Problems With The Flood Insurance Solution
FEMA says that less than 15% of homeowners nationally carry flood coverage. Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance (that may change due to higher penalties being imposed upon the banks as of July, 2012).

The National Flood Insurance Program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion. Reauthorization from Congress would be required, and Homeland Security is expected to request appropriation soon. Those current and new policyholders of National Flood Insurance Program coverage will be getting a scheduled rate increase that predates Sandy.

Even if the person or business purchased flood coverage, there are still problems and concerns.

  1. The limits of insurance available through the National Flood Insurance Program are small.
  2. Replacement cost coverage applies only to a dwelling and not to commercial structures.
  3. There may be wind damage to the building that the flood insurer will not pay but is covered in the homeowner's policy.
  4. The insured will get to pay two deductibles for those two separate policies.
  5. What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy?

    1. Will it drop down to pick up the replacement cost difference? No.
    2. Will it drop down to pick up business income, extra expense coverage? It should. Check the policy language.

4. The Future Of Flood Insurance
The future of the entire program is bleak enough. Add to that the impact of Hurricane Sandy on the future purchase of flood insurance. Homeowners in storm-damaged coastal areas who had flood insurance, and many more who did not, still now may be required to carry flood insurance and will face premium increases for flood from an estimated 20 to 25 percent per year beginning January. This is due in part to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.

“Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year,” said Steve Harty, president of National Flood Services, a large claims-processing company.

Excerpted from The New York Times)

Lenders, in addition, will be affected by Hurricane Sandy if they fail to enforce the requirement for their lenders to carry flood insurance. They will face even higher penalties then they have in the past.

5. Ordinance Or Law

  1. Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:

    1. Does the Homeowner's Policy, Commercial Property Policy or Difference in Conditions include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
    2. What about the loss of use for the homeowner as well as the business interruption coverage?
  2. The National Flood Insurance Program policy is out as there is no coverage for the indirect loss.
  3. Many Difference in Conditions policies do not include ordinance or law automatically and many more do not include ordinance or law — increased period of restoration to cover the additional down time due to code or law enforcement.

6. Power Loss
Earlier we quoted the statistic of there being approximately 7.5 million power outages throughout Hurricane Sandy's two day assault on land. Many of these outages lasted days and weeks. There are several issues relating to insurance in terms of the power outages:

  1. Requirement Of An Off Premises Endorsement: In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first have “off premises” or “utility coverage” on the policy. Typically, losses stemming from off premises situations are excluded on property insurance policies.
  2. Causation Of The Power Outage: If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered. For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form. If the loss were caused by flooding, then that cause of loss is excluded and the off premises endorsement would not apply.
  3. Off Premises Deductible: Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
  4. Direct vs. Indirect Loss: An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
  5. Other Perils such as Equipment Breakdown (EB): The cause of off premises loss may be due to a power surge that results from the storming. If the Equipment Breakdown policy has off premises coverage and business income coverage, then recovery can be sought under that policy.
  6. Some Off Premises Policies Have Distance Limitations: It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example, some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured's premise.
  7. Spoilage: It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items and the business income that stems from that loss. This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form. Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of flood.

7. Business Income
Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will not be covered. Here are some of the pressure points of this coverage:

  1. Cause of Loss — back to that one. Flood is excluded on the Commercial Property form so there will be no response for business income.
  2. The Flood insurance policy does not cover business income.
  3. If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance, then the policy should respond from the causation point of view assuming they had direct damage.
  4. The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
  5. The policy has a waiting period for coverage typically 72 hours unless endorsed.
  6. The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
  7. There is no building ordinance for the business income — it would have to be endorsed.
  8. Civil Authority: Many of the businesses did not sustain direct damage but were closed by civil authority.

    1. There is limited coverage on the Business Insurance form
    2. There may be distance limitations
  9. Ingress/Egress: A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.” For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers. However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form. Civil Authority did not close down the area — it was closed due to natural events in this case.

Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response. However, there is talk, in the aftermath of Hurricane Sandy, of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI. While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility. Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component. There is also the TDI or CDI coverage — Trade Disruption which could come into play — however, that coverage has a very limited market. Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage. Liberty International apparently has a program.

8. Automobile Losses From Hurricane Sandy
Autos are the easiest part of this equation: whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage. The salvaging of these autos is where it gets interesting. Canadian officials are now bewailing the fact that thousands of autos — some estimates are as high as 250,000 — are likely making their way to Canada. Those storm-damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell. But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands, and they expect the same thing to happen again. What I wonder is, who is selling those vehicles? The original owner? The salvage company the insurer uses?

The Lawyers Are Out To Get You

Errors And Omissions Litigation
Well, as if all the foregoing isn't depressing enough, we cannot end this article without a little nudge to the insurance agent and broker.

If you are relying upon “conversations” with your client along the lines of “Do you want flood insurance? No. OK, then,” you are going to be sadly mistaken that your client is not going to enjoin you in litigation over your standard of care. Your client is going to claim an increased standard of care, yes including New York residents, and that you had a duty to advise and quote coverage for them or at the very least, tell them in writing of the limitations of coverage in the policies they purchased and that they relied upon you for your expertise. Many agents simply renew, year after year, their direct bill homeowner's and small business clients without any documentation of coverage offers. Even those handling larger accounts somehow rely upon the client's memory and good will not to sue you. So, again, for the millionth time already, please, please document your file, in writing, to the insured, with a rejection signature every year or, for larger accounts, an authorization to bind affirmation from the insured.

As we were all glued to the TV, watching reporters being blown around reporting the devastation, my insurance brain immediately went to “flood exclusions.” I saw the wind ravaging the houses, the uprooted trees blocking the roads, but also saw the rising waters in the streets, along the shores, in the housing areas.

The question will come down to that simple reality — was the damage due to flooding or not? The attorneys are out in force, fighting for first page on the Google search engine so you get to them first. It reminds me of an old Gun Smoke movie — ready, aim, fire. Barrels are being loaded against the insurance companies.

There is no easy way to end this article, although I am sure all of you who reached the very end are hopeful that I will. The storm was one of the biggest ever, and the insurance story will not end soon. There is so much more we could say but best end this with a heads up to watch and see how these claims unravel; and, for those of you who did not insure any of these damaged properties, I say a toast of champagne is in order.

Logistics Management Errors & Omissions

Within the warehousing industry, a business owner might find themselves offering services to their clients that are not usually covered under the warehouse policy or the general liability policy. Coverage for these services can only be found under a professional liability policy.

A general liability policy usually contains some type of professional liability exclusion. Specifically, the insurance carrier will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury or property damage”. Clearly, if there is no bodily injury or property damage but rather an economic loss, this type of loss would not be covered as it does not fall within the coverage definition.

Logistics Management Errors & Omissions Liability Insurance is designed to cover those exposures that fall outside the general liability policy. This policy will pay on behalf of the insured those amounts in excess of the deductible that the insured becomes legally obligated to pay as damages from claims as a result of a wrongful act.

Wrongful act means any actual or alleged act, error or omission in the rendering of or failure to render “Contract Logistics and Supply Chain Management Services.” Services also means those services you are qualified to perform as a Consolidator, Customs Broker, Freight Forwarder or the policy can be endorsed with special wording regarding other services related to supply chain management. Service is further defined in the policy as:

  1. the development and preparation of studies, process analysis, evaluation studies, transportation or routing analysis and re-engineering studies
  2. the design, development, modification, maintenance, licensing, sale, operation or use of logistics or supply chain management algorithims
  3. the design, development, modification, maintenance, coding, integration, licensing, sale or operation of software used in logistics or supply chain management
  4. logistics management
  5. truckload management
  6. shipment management
  7. inventory management
  8. transportation management
  9. records retention and management
  10. vehicle location and tracking
  11. supply chain coordination and management
  12. facilities and warehouse management
  13. data processing and electronic data interchange
  14. computer network access management, administration and support
  15. internet access, connectivity and support
  16. intranet or extranet access, connectivity, management and support
  17. training and supervision, and selection and oversight of vendors, service providers and subcontractors, including carriers, consolidators, brokers, agents and freight forwarders.

The policy does contain some exclusions. These include pollution, operations owned by insured and fines or penalties levied against the insured. There are also some exclusions regarding operations that apply to specific operations such as a freight forwarder.

The policy form is a “claims made” policy. Claims must occur within the period and report no later than 60 days after policy period unless it is agreed upon by the insurance carrier that an extended policy period is agreed upon.

As many warehousing operations are moving into Fourth Party Logistics, the coverage provided under the general liability policy might not be enough to cover all exposures. The Logistics Management Errors and Omissions Liability Policy will provide coverage for most of those gaps that are in the general liability policy.