Insurance Basics

Insurance Basics Bruce Moothart bruce.moothart@huschblackwell.com David Schatz david.schatz@huschblackwell.com

Introduction and Summary • Types of insurance and application • Common issues with insurance • Roles of the insurance broker and lawyer

Types of Insurance • Is there insurance for everything? • Virtually all conduct can be covered, but there can be gaps • Example: Co-employees: Standard insurance forms generally includes employees while operating within the course and scope of their employment, unless the injured individual is also an employee injured during the course and scope of employment

Types of Insurance • The Big Four • Commercial general liability (CGL) • Workers Compensation (WC)/Employers Liability (EL) • Property • Business auto

Types of Insurance • Commercial general liability (CGL) • Provides coverage for bodily injury or property damage caused by an accident • Also provides coverage for personal injury for advertising injury • Does not cover contractual claims

Types of Insurance • Workers’ Compensation/Employers Liability (WL/EL) • Required if five or more employees/one or more employees if in construction industry • Possible to self insure • Penalties if you do not carry it • EL is stop gap insurance

Types of Insurance • Property • Real property • Personal property • Business interruption • You may need a specialty policy for certain types of property

Types of Insurance • Business Auto Liability (BAL) • Provides coverage for categories of vehicles or scheduled vehicles • Works in conjunction with your CGL

Types of Insurance • Other types of liability insurance • Directors and Officers Insurance (D&O ) • Three types of potential coverage • Includes intentional acts • Available for the entity

Types of Insurance • Other types of liability insurance • Data Protection Liability Insurance (Cyber Insurance) • Fiduciary Liability (FL) • Errors and Omissions Insurance (E&O)

Types of Insurance • Other types of liability insurance • Internet Liability Insurance (ILI) • Employer Practices Liability Insurance (EPL) • Builder’s Risk • Environmental and Pollution Liability Insurance • Surety Bonds (not insurance for the purchaser)

Types of Insurance • Transactional insurance • Representations and Warranties (R&W) • Protects parties from inaccuracies in representations and warranties • Litigation Buyout Insurance • Insurer assumes risk of a lawsuit or group of claims • Involves known loss

Types of Insurance • Transactional insurance • Life insurance (key person insurance)

Types of Insurance • Excess and Umbrella policies • Excess Policies • Provide additional limits of coverage • By reference contain the same terms of coverage as the underlying policy and follow form. See American Home Ass. Co. v. Republic Ins. Co., 984 F.2d 76 (2nd Cir. 1993).

Types of Insurance • Excess and Umbrella policies • Umbrella policies • Are broader than the underlying policies and may provide coverage not present in the underlying policy. See Commercial Union Ins. V. Walbrook Ins. Co., 7 F.3d 1047 (1st Cir. 1993)

Types of Insurance • Excess and Umbrella policies • Do not drop-down for insolvencies • The determination is made by a review of the policy language. The majority of courts have held that excess carriers do not have to “drop down” in the event the underlying carrier becomes insolvent. Fred Weber, Inc. v. Granite State Ins. Co., 829 S.W.2d 589 (Mo. Ct. App. 1992)

Types of Insurance • Self Insured Retention (SIR) versus Deductible • SIR: A dollar amount specified in the insurance policy that must be paid before the insurance policy will respond to a loss • Usually employed by insureds who have frequent but small losses • TPA may be required • Deductible: A portion of a covered loss that is not paid by the insurer

Types of Insurance • Self Insured Retention versus Deductible • Difference between an SIR and deductible is that a deductible is a portion of a covered loss for which the insured must reimburse the insurer, whereas an SIR is a portion of a risk that that the insured retains for itself • Choice of defense counsel: Typically an insured has the obligation to defend the suit with an SIR • Insolvency/Dropping Down: The insured’s payment of a deductible is a condition subsequent. Therefore, where the insured is in bankruptcy, the insurer must pay the entire amount, and then seek reimbursement from the insured. Payment of an SIR, on the other hand, is a condition precedent. The insurer is not required to “drop down” and pay the SIR

Types of Insurance • Claims made versus Occurrence based policies • CGL policies are generally “occurrence-based” policies that cover injuries that take place during the policy period • “Claims made” policies cover liability for bodily injury or property damage for claims asserted during the policy period (e.g. D&O Policies)

Common Issues • Why do so many issues arise with insurance coverage? • Contracts are not negotiated • Form language that must address an unlimited number of circumstances • State law varies on contractual outcome and extra-contractual claims

Common Issues • Notice • Specific notice provisions vary from policy to policy, but the basic purpose is to allow enable insurers to adequately investigate and respond to claims • Majority rule is late notice does not relieve the insurer of its obligations unless the insurer is prejudiced as a result of the delay (Tuterri’s, Inc. v. Hartford Steam Boiler Inspection & Ins. Co., 984 S.W.2d 266, 269 (Mo. Ct. App. 1995)) • Practical Impact: Insured may not be able to obtain reimbursement for defense costs expended through the time the insurer received notice of the claim

Common Issues • Notice • It is generally held that independent insurance brokers are considered agents of the insureds whose coverages they place (United Fire & Ca. Ins. Co. v. Garvey, 419 F.3d 743, (8th Cir. (Mo.) 2005)) • Brokers may be held liable when they fail to timely communicate notice of a claim to insurers (See Stevenson Ins. Assocs., Inc. v. Cohen, 228 So.2d 118, 210 (Fla. Dist. Ct. App. 1969)) • Best practice is to obtain written copy of notice provided by broker to insurance carrier

Common Issues • Obligation to defend versus indemnity • Duty to defend is broad: Insurers have a duty to defend claims where the facts “potentially” state a claim within coverage of the policy (Steve Spicer Motors, Inc. v. Federal Mutual Ins. Co., 758 S.W.2d 191, 193 (Mo.App. S.D. 1988)) • Generally includes the duty to defend both covered and non-covered claims, but states vary on the issue (See Carpenter, Weir & Myers v. St. Paul Fire and Marine Ins. Co., 1998 WL 976309, *12 (D.Kan. October 30, 1998)) • Insurer more likely to indemnify if defending

Common Issues • Reimbursement of Defense Costs by Insurer for a Non-Covered Claim • Majority rule is that an insurer is entitled to recoup its defense fees if it reserved its right to do so and a subsequent determination is made that the insurer had no duty to defend • The minority rule (and more recent case law) suggests that absent a specific provision in the policy requiring reimbursement, the insurer is not entitled to recover it defense costs from the insured (See Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 718 (8th Cir. 2009)(applying Minnesota law))

Common Issues • The Tri-partite relationship • In the typical insurance defense scenario, the insurer retains a lawyer to represent an insured, which sets up a three-way relationship between the insurer, insured, and the lawyer

Common Issues • The Tri-Partite relationship • http://www.youtube.com/user/TheDHXTRA

Common Issues • The Tri-partite relationship • Lawyer’s primary obligation of duty or loyalty is to the insured, but owes some obligation to the insurer, and may be sued by the insurer for malpractice. Nevada Yellow Cab Corp. v. Eighth Judicial District Court ex rel. County of Clark, 152 P.3d 737 (Nev. 2007). • In other states defense counsel’s only client is the insured. In re A.J. Robins Co., Inc., 880 F.2d 709 (4th Cir. 1989) • Affects reporting

Common Issues • Duty of Insurer • The insurer must sacrifice its interests in favor of the insured • The insurer must provide a timely and complete response

Common Issues • Duty of Insured • All policies contain cooperation clauses that require the insured to assist in the defense of the case

Common Issues • Limitations on CGL coverage • Does not apply to your work or product • Not a guarantee of your work • You may need Products/Completed Operations coverage • Only applies to accidents, not intentional conduct • Only applies to bodily injury, property damage or personal injury

Common Issues • Limitations on CGL coverage • Does not apply to employment claims • Does not cover recalls • Only covers named, other or additional insureds • Does not apply to environmental claims

Common Issues • Reservation of Rights Letter • A declaration by the insurer that it will defend the action, but reserves the right to contest the available coverage for all or part of the claim • Creates a conflict of interest • Commonly issued

Common Issues • Reservation of Rights Letter • Insurer may lose the ability to control the defense (Ballmer v. Ballmer, 923 S.W.2d 365, 370 (Mo.App. W.D. 1996)) • Treated the same as a refusal to defend (Auto Owner’s Ins. Co. v. Ennulat, 231 S.W.3d 297, 305 (Mo.App. E.D. 2007)) • Frees insured to act in its own interest

Common Issues • Additional Conflicts of Interest • Claims in excess of policy limits • Uncovered punitive damages • Facts discovered that bear on coverage

Common Issues • Why insurers are concerned about conflicts • If the conduct is done in bad faith, it exposes the insurer to damages beyond policy limits and punitive damages • Cannot challenge judgment • Juries do not like insurance carriers • The adjuster may not make the best witness • http://www.youtube.com/watch?v=rOuAU3nn-UM

Common Issues • Settlement without insured’s consent • Most often a med mal issue: Rogers v. Robson, Masters, Ryan, Brumund and Belom, 407 N.E.2d 47 (Ill. 1980)(physican feared loss of reputation if malpractice claim against him was settled) • Most policies give the insurer the right to settle

Common Issues • Insurance requirements versus indemnity obligations • Different obligations • Duty to indemnify can exist without available insurance • Interplay between policy and agreement can affect obligations and priority of coverage

Common Issues • Additional insured status • Should review endorsements • Certificates of insurance do not create coverage • Trend is that insurer will not agree to provide notice of cancellation

Common Issues • Other available insurance • Should not impact your insurer’s obligations to you

Roles of the Broker and Lawyer • Broker is generally agent of the insured • Best knowledge of available options • May act as an advocate for the insured • Lawyer can provide insight on scope of coverage • No relationship with insurers

Tips • Submit claims immediately and to all potential insurers • Be proactive in providing support for your claim • Be on the lookout for coverage issues and conflicts of interest • Maintain copies of current and prior policies

Tips • Insist that the insurer pay undisputed portions of a claim • Request endorsements in addition to certificates of insurance • Pay attention to insurance requirements and indemnity provisions • If you are bringing suit, consider what claims may be covered

Tips • Know your acronyms: • CGL, D&O, FL, EPL, E&O • EUO (Examination under oath) • DOL (Date of loss) • POL (Proof of loss) • SOL (What happens when your policy lapses the day before a loss)

Questions?

Insurance Basics