Insurance 101:Understanding and interpreting your

policies

RIMS 2012

Philadelphia, PA

April 17, 2012

Insurance 101Michael G. Mangino Insurance Advisor BP Corp North America

Christopher M. BrophyManaging DirectorFTI Consulting

Lawrence A. HobelPartnerCovington & Burling LLP

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Agenda

I. Overview and General Principles

II. First Party Coverage

III. Third Party Coverage

IV. Resolving Insurance Coverage Disputes

V. Game – Risks and Rewards

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• Who has the Risk of Loss- First Party (risk to insured)- Third Party (liability to others)

• What is at Risk of Loss - Injuries to Persons or Tangible Property- Employees- Intangible Property- Business Loss

• Who is at Risk of Liability for Loss- Insured- Management of Insured- Affiliated Entities - Contractual Parties (Additional Insureds)

I. Overview and General Principles

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• To what extent will Insured participate in risk- “Old Fashioned Way” (Fixed Amount, Subject to an Audit)- Use of Deductibles or Self-Insured Retentions (SIRs)- Retrospective Premium Plans- Captive Insurers and Reinsurers

• Contractual or other requirements for insurance- Contractual provisions and Additional Insured Requirements- Who should obtain the insurance- Worker Comp/Auto- International Risks and Local Policies

• Structures to Be Considered- Risk Specific Coverage- Package Policies (Multiple lines in one policy)

I. Overview and General Principles

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• Plain language is applied where it is ambiguous– To figure out what the plain language means, you need to read the provisions as a

layperson would (not in a hyper-technical way) and in the context of the policy as a whole

• Where language is ambiguous – i.e., where the language is susceptible to two or more reasonable meanings – the courts generally undertake to ascertain the “reasonable expectations of the insured”– Determine whether specific language is standard or manuscripted– Courts allow the use of extrinsic evidence to ascertain the insured’s reasonable

expectations– If the meaning is still not determined, the language is generally construed against

the insurer

• Exclusions– Are construed strictly against the insurer– Even if unambiguous, must be clear and conspicuous to be enforceable

I. Overview and General Principles

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• When Claim/Loss Occurs• Notice to Insurers

- Precautionary and requirement of notice of potential loss- Notice of Claim/Loss- Tender of Defense

• Insurer Response– Accept without Reservation, Denial or Reservation of Rights

• A Policy defense (e.g., failure to give notice or to cooperate)• A Coverage defense (e.g., alternative theories of negligent and intentional tort are

plead, and only negligent acts are covered)– Reservation of Rights

• Insurer seeks to avoid waiving of rights to contest coverage even though insurer may undertake performance under policy

• If Dispute Later– Obligation of Insurer to reserve on specific issue– Policyholder Performance Conduct/Waiver/Estoppel

I. Overview and General Principles

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• Perils Insured• Property Loss Issues

- Replacement Cost v. Actual Cash Value- Like Kind and quality- Code Upgrades

• Business Interruption- Period of Indemnity- Extended Period of Indemnity- Measuring the Loss• Likely experience if loss did not occur• Lost sales less discontinuing costs• Idle Periods• Make-up

• Extra Expense

II. First Party Coverage

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• Focused Coverage for Certain Losses– May include third party protection

• Data Breach – Loss • Crime – Dishonesty

• Building the Tower– Premiums and self-insurance– Binders and consistency in policy language– What happens if coverage dispute

• Appraisal provisions• Arbitration provisions

• Number of Occurrences and Loss• Misrepresentation and Application Process

II. First Party Coverage

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• Primary– Lower limits of Liability– Limits can be per occurrence or annual– Typically provides defense obligation above policy limits

• Excess-Umbrella – Difference between Excess and Umbrella coverage– Typically defense costs within policy limits (“Ultimate

Net Loss”)– May or may not “follow form”– May contain additional exclusions

III. Third Party Coverage

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• Claims Made Coverage- Claim made during the policy period- Be certain to review the definition of “claim”- May also include the threat of a claim- May require that the claim be reported during policy

period- Can usually purchase “extended reporting period”- May have a retro date- Examples: D&O, E&O, Crime-Fidelity

III. Third Party CoverageWhat Triggers Coverage?

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• Occurrence Coverage- “An event, or continuous or repeated exposure to conditions which

results in personal injury or property damage during the policy period.”

- May have Funnel language

- Can Trigger more than one Policy

- Long Tail Claims• Exposure: when claimant exposed to product• Manifestation: when injury reasonably capable of medical diagnosis• Injury in Fact: when actual injury even if not manifest• Continuous trigger: from exposure to manifestation (and possibly beyond)

- Allocation – pro rata, all sums, who pays as to coverage gaps- Each injured person a separate occurrence, each property as separate

occurrence or Claims Aggregate

III. Third Party CoverageWhat Triggers Coverage?

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• ”Right and duty to defend any suit seeking damages … even if the allegations of the suit are groundless . . .”

• Defense based upon potential for indemnity- Generally insurer cannot look behind allegations of the underlying action- Defense continues until no potential for coverage

• If an insurer reserves its rights based on a coverage defense, the insured generally is entitled to independent counsel (“Cumis” counsel)

• If the insurer reserves its rights, it may have rights to seek reimbursement of defense expenses allocable solely to non-covered claims

III. Third Party CoverageDuty to Defend

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• Indemnity Language – GL coverage

- We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage [or personal injury or advertising injury] to which this insurance applies.

• Damages- Equitable Relief- Punitive Damages- Administrative Requirements vs. Court Judgments

• Consent to Settlement Clause

III. Third Party CoverageDuty to Indemnify

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• Owned, rented or occupied property• The Insured’s product

- But may be covered if incorporated into a building or other product

• Exclusions- Faulty workmanship- Worker Comp- Pollution Exclusions- Intend/Expect

• Cooperation and Settlement• Misrepresentation and Disclosure• Successor Access

III. Third Party CoverageOther GL Issues

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• Owner Controlled Insurance Programs

• Owner purchases insurance to protect itself and contractors- Typically involves managing Risks for Construction and

O&M Projects - Focuses on contractually required Worker Comp and GL

Insurance- Reduces potential for coverage disputes and cross suits

between contractors: OCIP is a no-fault site

III. Third Party CoverageOCIPs

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• Pros and Cons- Typically can obtain higher limits than Contractors- Reduced potential for coverage disputes and cross suits between

contractors. However, aggregate stop loss provisions may trigger such disputes

- Contractor and Owner interests are more aligned- Owner pays up-front costs. Owner should control claims defense and

management- Contractor loss experience can impact rates and contractor’s cost of

business- Sometimes difficult to demonstrate cost savings

III. Third Party CoverageOCIPs

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D&O Insurance

- Suits against Directors and Officers

- Securities actions against the company

Professional Liability Insurance (E&O)

- Suits alleging errors and omissions in professional work

III. Third Party CoverageD&O and Professional Liability

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Side A- Insure directors and officers when they are not indemnified

Side B- Insure corporations when they indemnify their directors

and officers

Side C- Insure corporations for certain types of direct liability

III. Third Party CoverageBasics of D&O Insurance

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• Wrongful Profit

• Deliberate Criminal or Fraudulent Act

• In fact vs. final adjudication - settlements

• Insured vs. Insured

• Severability clause

• Prior Claims

• Regulatory Exclusions

III. Third Party CoverageD&O Exclusions

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• Covers claims of negligence, misrepresentation, violation of good faith and fair dealing, wrong advice

• For a “Wrongful Act”

• In the rendering or failing to render “Professional Services”

• Coverage for Loss Resulting from a Claim made (and reported?) during policy period

III. Third Party CoverageBasics of E&O Coverage

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IV. Resolving Insurance Coverage Disputes

Litigation Provisions- Mediation Requirement- Choice of Law- Choice of Forum

Arbitration Provisions- Choice of Law (Bermuda, NY, English)- Choice of Forum (Canada, London, Singapore, Bermuda, New York)- Selection of ADR Organization and Rules- Managing Conflicts among Clauses