Insurance Pitfalls

The Property and Casualty insurance industry is a minefield for insureds looking to transfer their risks of loss. Policyholders are often not forewarned of policy exclusions and limitations, or worse, inexperienced producers unintentionally mislead them about their potential impact.

The Margin Clause, perhaps the most insidious "underwriting tool" used by insurers in the recent insurance market crunch, effectively eliminates the benefit of blanket property coverage. Under blanket property insurance, the buildings and contents values (and sometimes even business interruption values) for multiple locations are combined into a single "blanket" amount of coverage that is available to any one specific location in the event of a loss. A Margin Clause imposes a cap on loss recoveries for each covered location equal to a percentage of the values declared for that location (usually ranging anywhere from 110% to 150% of the declared value). Sometimes the Margin Clause applies only to Real Property, but not always. Policies with such clauses are frequently sold as blanket policies, but are still subject to a Margin Clause. This is exceptionally misleading to the uninformed policyholder. Beware that blanket property coverage may no longer be truly blanket.

For Directors & Officers Liability coverage, the Prior and Pending Litigation exclusion is often misunderstood or confused with the exclusion of coverage for Prior Acts. Most producers and policyholders readily understand the importance of having coverage for prior acts when switching from one D&O insurer to another. D&O policies without a retroactive date will provide coverage for acts committed before the policy's retroactive date. Without such coverage, however, an Extended Reporting Period (Tail Coverage) will be essential to avoid gaps in coverage when changing insurers.

After ensuring that coverage is provided for Prior Acts, many producers and policyholders let down their guard when it comes to the Prior and Pending Litigation exclusion. Some producers have gone so far as to improperly advise their clients that, as long as Prior Acts coverage is provided, there is no need to be concerned with the Prior & Pending Litigation exclusion.

Prior and Pending Litigation exclusions typically exclude coverage for any claim arising out of, based upon or attributable to any litigation pending as of or prior to the Prior and Pending Litigation date, often the inception date of the policy. Also excluded is litigation alleging or derived from the same or essentially the same facts as alleged in such pending or prior litigation. Depending upon the scope of the exclusion, even if such prior or pending litigation did not involve any of the directors and officers, if a subsequent claim is brought against them that is related to that prior litigation, the insurer may likely depend on the Prior and Pending Litigation exclusion to deny coverage. These exclusions are sometimes contained in the exclusion section of the policy, but can also be added by endorsement.

This exclusion should be limited to litigation that was prior to or pending as of the inception date of their current D&O insurer's first policy and, if possible, restricted to the type of litigation that would be covered by a D&O policy. Avoiding the exclusion entirely when changing insurers is nearly impossible, but the limitation should be understood when making a change to a new insurer.

Changes to ISO's General Liability policy and various endorsements are worth briefly noting here, as well. Being added as an Additional Insured on someone else's General Liability policy may seem fairly routine. There are, however, more than thirty ISO Additional Insured endorsements in addition to many non-standard endorsements and policy forms, all providing a varying scope of protection for the Additional Insured. Adding to this confusion is ISO's recent changes to their Additional Insured endorsements intended to curtail the protection previously granted to many Additional Insureds by court interpretations of the old "arising out of " language.

Certificates of insurance alone, reflecting your inclusion as an Additional Insured under someone's CGL policy, are likely insufficient. Specific requirements in contracts coupled with attachment of the specific Additional Insured endorsement to the certificate are likely the only means to help ensure the intended protection.

-- Charles H. Cox

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