8 Legal Developments You Need to Know About

In a new RIMS Professional Report, attorneys Mark Plumer and Xandra Bernardo (of Pillsbury Winthrop Shaw Pittman LLP) and Patrick Walker, a risk professional at mining company Rio Tinto Group, shed light on the top risk management legal developments of 2017.

According to the authors, risk managers “must be familiar with the legal principles that underlie claims that are asserted. A successful resolution will turn on the policy wording, the company’s business relationship with the affected insurers and the strength of the  coverage argument under the law.”

In The Top 8 Legal Developments You Need to Know About in 2017, the authors lay out the notable rulings on insurance law relating to rights of coverage, rescission, cyber coverage and more. Here is a quick look at their findings:

  1. Rights to Coverage: There were important developments to rights of coverage under historic occurrence-based policies. These relate to “long-tail” liabilities such as environmental exposures.

“The best practice now is to assign the right to make claims on historic policies for such exposures, where such transfer of rights is intended. Legal counsel should assure that the law in the affected jurisdictions allows for the transfer of insurance rights.”

  1. Rescission: It’s an insured’s worst nightmare: you have a claim that you believe should be covered, and the insurance company finds a way to rescind coverage. It’s a growing trend. “In particular, insurers are requiring more disclosures during the application process and may seek rescission if full and accurate disclosures are not provided.”

The authors focus on H.J. Heinz Co. v. Starr Surplus Lines Ins., a trial decision that was reached in New York’s Third Circuit. The court ruled that Heinz was not entitled to its purchased coverage because of historic loss information that was mistakenly withheld by the company’s risk manager.

“The Heinz case highlights the importance of answering questions thoroughly and truthfully in connection with applying for insurance. Applying for insurance is an increasingly challenging process, particularly with respect to specialty policies that require answers to many questions and call for considerable data. Risk managers must assume that insurers will be emboldened by Heinz and other, similar cases.”

  1. Consent to Settle: In case you needed to be reminded: risk management and corporate counsel need to work together!

“Some courts may simply void coverage where there is a voluntary payments provision and advance consent from an insurer for a settlement was not requested regardless of whether the insurer was prejudiced. It is rare that insurers will stand in the way of a settlement. Thus, asking for consent often is no more than a technical requirement. Insurers should not be allowed to escape coverage your company has paid for based on a technicality.”

  1. Notice: Your coverage can be voided if you don’t give prompt notice of a claim. There were two important developments on this front in 2017 that the authors describe in detail in the report.

“The best way to avoid an insurer ‘late’ notice argument is to provide notice at the earliest reasonable date, even if this requires later supplementation and clarification. Of course, this is often easier said than done. You should learn the law affecting notice in your home jurisdiction and consider treating occurrence-based policy and claims-made policy notification procedures differently…”

  1. Cyber Claims: This is obviously a hot area in risk management and in insurance. It seems like we constantly hear about new entrants into the insurance market on this front, with new firms specializing in cyber also popping up almost every day. Risk managers need to exercise caution in this field: cyber insurance is still relatively new and untested, and the claims history for this subfield is short.

The policies are also potentially confusing. For example, “many cyber policies specifically provide coverage for credit card association assessments for an additional premium. These policies are quite complicated and may contain dozens of cross-referenced definitions.”

  1. Construction Claims: The authors dive into key decisions coming out of New Jersey and Iowa on this familiar risk management topic. They caution risk managers to “make certain your CGL policy has a subcontractor exception in the ‘your work’ exclusion. Policies containing a ‘your work’ exclusion that do not also include a subcontractor exception to that exclusion place your company at greater risk.”
  2. Additional Insured: Access to additional insured endorsements is getting narrower, according to the authors. A decision from New York continues this trend: the June 2017 decision from New York’s high court in Burlington Ins. Co. v. NYC Transit Auth.

The report cautions that the Burlington decision “may come as a surprise to many policyholders who expect courts to interpret additional insured endorsements broadly, particularly ISO’s standard form endorsements. Risk managers concerned about this potential reduction in coverage can follow the advice of the Burlington court: ‘Of course, if the parties desire a different allocation of risk, they are free to negotiate language that serves their interests.’”

  1. Scope of Coverage: It’s important to understand your home jurisdiction’s philosophy on long-tail general liability claims. There are two types of jurisdictions, according to the authors: “all sums” and “pro rata.” In 2017, there were several decisions that complicated this well-understood legal dynamic.

“If your company faces a long-tail claim, be proactive and understand the scope of coverage law applicable to your historic policies. If the jurisdiction applies the ‘all sums’ principle, make sure your counsel is aware of it. If not, confirm whether your historic policies contain non-cumulation clauses or if the applicable jurisdiction has considered the ‘unavailability’ exception to pro rata allocation.”

For more information on “all sums” versus “pro rata,” as well as detail for all of the top legal developments, please visit www.rims.org and download the paper. All RIMS papers are members-only for the first 60 days of their release.

Tips for Managing a Hurricane Claim

Despite early predictions of a mild 2017 Atlantic hurricane season, the latest forecasts reflect the likelihood of more named storms than originally anticipated. If that is not ample motivation for risk managers to double-check their hurricane preparation, then the reality that it only takes one major storm to generate a widespread disaster should be sufficient to warrant a review of their claims preparation.
This process will not only help spot potential gaps in your insurance, but also any issues in your planning that may affect the amount and delay the timing of a claim recovery. Based on recent experience, here are some tips for hurricane claims preparation and management.

Conduct a thorough review of your property insurance. Start by checking your deductible. After a loss, the first question risk managers often get from leadership is: “What’s our retention?” You also need to see if your policy has a blanket or percentage deductible. If the latter, is it a percentage of total insured value (TIV)? Do separate deductibles apply to physical damage and business interruption? Double-check your business interruption deductible. A 2% deductible on a business interruption loss equals seven days of self-retention (365 days x 2%).

In reviewing your policy, check the definitions of covered perils. Look for specific references to “storm surge,” “named windstorm” and “flood.” You’ll also want to make sure your policy covers costs to protect and preserve insured property that sustains physical damage and addresses business interruption losses when a facility is closed to preserve or protect property.

Check fee coverage for claims preparation. In a catastrophe, you may need to retain an outside claims consultant to manage your claim; this coverage—standard in some policies and optional for a nominal surcharge in others—comes in handy for complex claims.

Risk managers also shouldn’t overlook the extended period of indemnity, which gives policyholders additional time after a damaged property is restored to regain market share. And don’t miss assessing how your business interruption coverage addresses payroll; most policyholders want coverage that treats payments to hourly workers as a fixed expense (ordinary payroll), especially during catastrophe events.

During your policy review, be sure not to miss the opportunity to pre-select your adjuster. Designate an adjuster in your insurance policy and meet with them and your insurer’s claims director or examiner before any loss. Besides informing them about your company’s operations and claim strategy, a meeting helps structure the claims process.

List your claims team in your emergency response plan. Creating a team in advance—including claim advocate, restoration company, forensic accountant, engineers and building consultants—will mean they can be mobilized immediately following a major loss event.

After a loss event, communicate with key internal stakeholders. Keep your c-suite, operations, procurement and legal teams fully informed of your loss situation and claim process. And be sure all employees have ample instruction. They will need guidance for setting up loss accounts, invoicing, tracking internal labor, inventory, fixed asset ledgers and on any purchases to help mitigate the loss. They also need to understand the sensitive nature of any discussions with insurance company representatives.

Act quickly to assess the loss. Immediately evaluate the extent of property damage and obtain recommendations on temporary repairs and remediation needed to preserve and protect property. Show the adjuster the full scope of the loss so an appropriate reserve is established.

Designate a key member of your claims team to coordinate, manage and communicate activities of emergency resources, remediation, restoration vendors, environmental specialists and other providers involved in your claim. This encompasses all site inspections and remediation, timelines, target dates, ownership of issues and accountability, and facilitates expedited reviews of damaged inventory.

Work closely with your insurer throughout the loss adjustment process, as well, to negotiate partial payments based on expected short-term expenditures.

Get outside help for complex losses. By bringing expertise and special resources, such as drones and other technology, to determine extent and scope of loss, prepare accurate damage and business interruption assessments, claim experts can make a significant difference in your recovery.

Large-scale catastrophes can involve delays in insurance adjustment and elongated downtime, which can have enduring and widespread negative consequences for an enterprise. With careful planning, risk managers can help their organizations achieve faster and more complete recoveries.

For more information on hurricane preparedness and natural catastrophe planning, visit: http://www.aon.com/disaster-response/

Should You Respond to a Reservation of Rights Letter?

An organization buys insurance to transfer certain types of risks (depending on the policies purchased). If a covered event occurs that results in a loss, you submit a claim and get paid. Simple, right? That’s how it would seem, but many experienced risk managers know it doesn’t always go that smoothly.

A recent RIMS Executive Report discusses one of the most common instances when things don’t go according to plan, and the insurer sends along some unpleasant surprises. In “A Risk Manager’s Guide to Reservation of Rights,” we learn how an insurer protest against paying a claim is commonly initiated and communicated: the dreaded reservation of rights letter.

In case you’ve never had the pleasure of receiving one, a reservation of rights letter is “a notice that the insurer has reserved its rights to either limit or deny coverage for the claim, based on the terms and conditions of the policy or information uncovered in an investigation of the claim itself.” In other words, these legal notices can become hurdles for an organization trying to realize the value of the insurance it has purchased.

Many risk managers do nothing when they receive this letter—they assume that the insurer will act in good faith and everything will work out. The authors of the RIMS Executive Report, however, strongly encourage a more active response. At the very least, the risk manager should compare the wording of the letter to the insurance policy language in question, as well as draft a response to the letter. The authors state: “Generally, there is no requirement that a policyholder respond to an insurer’s reservation of rights letter, disagreeing with the reservation or the bases thereof. However, it is highly recommended that the policyholder do so.”

A response letter might look something like this:
In some cases, a well thought-out response can save an organization a large amount of money. A good example is the common insurer-proposed reservation to recover defense costs spent on defending a policyholder if the insurer determines at a later date that it did not, in fact, have a responsibility to defend. In order to reject this reservation and the big legal bills that could come with it down the road, many jurisdictions in the United States require that the insured respond to the reservation of rights letter and specifically disagree with this detail.

According to the authors: “Receipt of a reservation of rights notice should prompt a review by risk managers…leading to an informed decision and deliberate action: whether to accept the insurer’s interpretation of the coverage and defense obligations, or respond with a reservation of its own rights. If not, unexpected and unintended consequences may result.”

The report also includes more in-depth information on obligatory communications, the use of tolling agreements and conflicts of interest that arise in these situations. In a reservation of rights situation, there can be some tricky territory to navigate. For example, insureds are almost always contractually obligated to cooperate with the insurer’s investigation and defense of claims. Failure to communicate or cooperate with these efforts can be a breach of contract and result in loss of coverage. It is important for the insured (i.e., the risk manager) to “understand its obligations in the claims management and settlement process, and the continuing obliga­tions when a reservation of rights notification is issued.”

The balancing act is that “Insureds need to continue cooperating…regardless of any coverage disputes, to preserve the continuity of claim management as well as meet the policy obligation.”

As the coordinator between functional areas and the in-house risk expert, risk professionals have an important role in all of these stages.

Recovering from Hurricane Matthew

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Many organizations in the southeastern United States recovering from Hurricane Matthew are still dealing with downed power lines, swollen rivers and blocked roads. As soon as they are able to, business owners should start assessing damage to their property and begin their insurance recovery process. They will need to assess not only physical damage to their property but also any income losses that may have occurred as a result of flooded and blocked roads and bridges, interrupted shipping and air transport, evacuations, and closures by civil authority.

They need to gather the information they’ll need for their insurer, and also be familiar with their policy and policy language. “In the runup to a storm, we always hear insurance executives on the news assuring the public that they will take care of things—that policyholders can rest assured,” Marshall Gilinsky, a shareholder in the insurance recovery group at Anderson Kill P.C., said in a statement. “But it’s vital for businesses not to assume everything’s going to be taken care of automatically. Storm-related claims can run into a snarl of unclear policy provisions, sublimits and exclusions, and occasionally obstreperous insurance company adjusters. A false sense of security leads easily to lost insurance proceeds.”

Businesses impacted by the storm that have flood insurance, he said, “should look for coverage not only for physical damage to their premises due to any flooding, but also business interruption and contingent business interruption coverage.” For best results, they should be sure they are up-to-date on how their insurer defines and invokes sublimits for “flood,” “storm surge” and “named storms” and how their insurer deals with claims that include damages from both wind and flood, Gilinsky said.

According to Galinsky, the following coverages (and coverage limits) will apply in a storm’s aftermath:

Business interruption or BI covers businesses for losses stemming from unavoidable interruptions in their daily operations.  BI coverage may be triggered by circumstances including a forced shut-down, a downturn in business due to damage to premises, or a substantial impairment in access to a business’s plant or premises.

Businesses that are not themselves forced to close may be able to tap contingent business interruption coverage, triggered when policyholders do not themselves suffer physical damage but still lose revenue after a property loss sidelines a major supplier or customer base.  Contingent BI is a standard provision in many property insurance policies, though many small businesses are not aware of it.

Also in play will be coverage for evacuation by order of civil authority, triggered when authorities close off access to a damaged area – and ingress egress coverage, which insures lost profits due to difficulties in accessing the insured premises due to the storm. Again, damage to the insured’s own property is not required to trigger coverage — though typically, the losses must result from property damage of a type covered by the insurance policy.

“Too many businesses do not think about insurance unless their premises are damaged—or if they do, they fail to calculate the full range of loss,” Gilinsky said. “Small businesses in particular may not even be aware of their civil authority, ingress egress and business interruption coverage, let alone their contingent business interruption coverage.”

He also noted that many commercial property insurance policies provide different sublimits for losses caused by “flood,” “storm surge” and “named storms.” How the policy defines these key terms can be critical in determining the amount recoverable for the policyholder’s loss.

The Property Casualty Insurers Association of America offered the following tips to help businesses through their recovery process.

Business Recovery Information

  • In the aftermath of natural disasters, businesses should take immediate steps to minimize damage, speed up the claims process and accelerate business recovery. Assess the damage and report all damage to your insurance company agent as soon as possible.
  • Take pictures of your building and contents to document the damage.
  • Check for safety hazards, such as downed trees, branches, downed power wires and leaking gas.
  • Keep all receipts for anything purchased for that purpose so they can be submitted to your insurance company.
  • Be prepared to list the “replacement cost” of each item and its actual cash value. Replacement cost is what it would cost today to replace an item with another one just like it. Actual cash value is what the item is really worth after deducting for depreciation and wear.
  • Restore your utilities, phone service, gas lines and other important links as soon as possible.
  • Business interruption coverage is complex and will vary by insurers. It is important to read your policy and understand what is and is not covered.
  • As you seek contractors to make repairs, deal only with reliable, licensed professionals. Get written bids from the contractor, but don’t sign any contracts or give a deposit until you have seen your insurance adjuster.
  • If you or your employees get involved in clean-up efforts, use safety items like proper eyewear, gloves, hardhats, dust masks and respirators.
  • Keep detailed records of business activity and extra expenses during the interruption period, and prepare records to show the income from the business both before and after the loss.