COVID-19 and the recent political unrest have come with implications that are either direct or consequential to the insurance market. Many businesses looking to renew long-standing commercial insurance policies are finding either increased premiums or a refusal of certain excess carriers to extend the same policy limits. This has caused many businesses to either shop their insurance program to new carriers altogether or at least to add carriers to their excess insurance tower. Some policyholders have even chosen to reduce the policy limits available to them, potentially putting their business at risk of catastrophic loss.
I addressed risk relating to Directors and Officers coverage in my prior posts: Directors and Officers Coverage Renewal: Pitfalls to Avoid and Directors and Officers Coverage Renewal: Pitfalls to Avoid (Part II ). Below I add to my original comments and outline additional issues that businesses should consider when renewing their insurance.
Gaps in Coverage
The biggest risk stemming from changing insurance carriers is the creation of gaps in coverage. Coverage gaps can be created simply because different policies have different language. All commercial policies are not the same. Directors and Officers policies, Employment Practices policies, and Cyber Insurance policies for example, do not have a standard form. Each insurance company has its own policy form providing unique coverage language. It is important to work closely with your broker and insurance coverage counsel to assess your highest risk, and whether a change in policy language will significantly decrease the coverage you have available for potential claims.
Additionally, make sure that your prior acts date and retroactive date are not changed. These dates in policies are the times that triggering acts must occur to invoke coverage. If you are replacing a policy, the new carrier should carry these dates over. By failing to do so, later claims can be precluded by the old policy no longer being valid, and the new policy precluding old occurrences.
Deductibles or Self-Insured Limits
It is important to make sure that your deductible or self-insured limit — the amount you have to pay first before the obligation of the insurer kicks in — is appropriate. Including a higher deductible can significantly reduce the cost of coverage because it limits the claims that an insurer must respond to. However, make sure the number is not so high that your business would be adversely affected, particularly if you have regular claim experiences. Additionally, you may want to consider different deductibles for different coverages. For example, you may want to have a very low deductible, or even no deductible, for claims against directors and officers.
Read Your Endorsements
Endorsements can expand coverage, but they can also drastically reduce it. Make sure you carefully read all of your endorsements and understand their effect on coverage. Often endorsements completely re-write coverages or add exclusions not in the original policy language. Endorsements are also a way to expand coverage or to have a new carrier adopt beneficial language from prior insurance policies. Work with your broker to review and understand these provisions.
Make sure the policy clearly defines who has the duty to defend, and who has the right to select defense counsel. You should have your normal counsel listed in the policy. In Minnesota, it is extremely advantageous to a policyholder for the policy to create a duty on the carrier to defend. In this situation, if the insurer breaches the duty, the policyholder has the right to recover its attorneys’ fees establishing the duty. The right does not exist if the policy only requires the insurer to reimburse defense costs. It is also possible to have a hybrid policy where the duty is first on the policyholder, but the policyholder can tender it to the insurer within a certain period of time. Again, make sure you understand these provisions and the obligations they create.
Most policies have exclusions for intentional or criminal acts. It is common for a policyholder to dispute the allegations. Make sure your policies limit these exclusions so that they only apply if there is a final adjudication of inappropriate conduct. Remember, over ninety-five percent of cases settle, and it is unlikely that there will be a final adjudication of improper acts. This is particularly important where the insurer has a duty to defend. You should also insist on a provision that the insurer cannot bring a separate action to adjudicate the allegations if they are no proven in the underlying case.
Shopping for insurance based on the lowest premium is not always a good business decision. All policies are not created equal. When businesses are faced with increased premiums or decreased policy limits, a detailed analysis of the difference in the proposed insurance language is extremely important. It is also important to remember that the purpose of insurance is to spread risk and to be sure that your business is protected if a significant claim arises. Cutting costs where it ultimately leads to a reduction in your insurance coverage eliminates the very reason for buying insurance in the first place.