IRMI Update—Issue #113

An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
May 17, 2005


In This Issue


Message from the Editor

Colleague,

Do privately held companies face a directors and officers (D&O) liability exposure? Thinking that shareholders are the sole source of claims, many risk and insurance professionals believe that only publicly held companies face D&O liability exposures. However, this belief overlooks the fact that about 50 percent of D&O suits brought against publicly or privately held for-profit companies are by parties other than shareholders.

According to the Towers Perrin Tillinghast "2004 D&O Liability Survey", the leading non-shareholder plaintiffs, in order of frequency, are employees (30%), competitors (7%), customers and clients (6%), others (4%), and government (2%). In each of the past 3 years, nearly 10% of the privately held companies who responded to the survey have experienced one or more D&O claims (as opposed to about 30% of the publicly held companies).

This does not mean that all privately held companies should buy D&O insurance. However, the exposure should not be dismissed out of hand simply because a company is privately held. Some consideration should be given to the exposure from non-shareholders.

Package policies combining coverage for D&O, fiduciary liability, employment practices liability (EPL), and other executive liability coverages are available from a number of insurers. Since many companies of any size now purchase EPL insurance, the cost of adding D&O to this policy is often inconsequential and is worth considering.

What do you think? When should privately held companies consider buying D&O insurance? Have you seen any claims against privately held companies that were covered by D&O insurance (or would have been covered had it been purchased)? [See reader comments].

On another note, I hit a nerve with my last IRMI Update editorial about certificates of insurance. While many readers pointed out a host of problems with expecting insurers to provide certificate holders with notice of cancellation, I still believe this problem is solvable with some creativity and technology. By reading the responses we've included below and on our website, you'll get a good perspective of all sides of this touchy subject.

Thank you for subscribing to IRMI Update.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI


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Your View—Sending Cancellation Notices to Cert Holders

In IRMI Update 112, Jack Gibson said he believes it is long past time for insurers to commit to certificate holders that they will provide cancellation notices. He asked readers for their opinions, and we received many, many responses. Below are some of them.

  • Surely you jest! What companies do you deal with that you think are either willing or able to send notice to certificate holders in a timely manner? We routinely cross out "endeavor to" knowing full well that it will fall on us, the brokers, to send notice should it be necessary. No way would I rely on a carrier to do this!

    —Cathy James, Vice President,
    Porter & Curtis, LLC, Media, PA

  • I completely agree. In fact the method of delivery could be mandated to be via e-mail, which is easily confirmed delivered and would be literally zero cost especially if automated, or via fax which would be pennies and again very automated. This would also prevent a significant number of cancels for no-pay because the holders would be after the insureds to keep the coverage in place (same as a mortgagee or loss payee, which by the way they seem to be able to notify).

    —Jamie Ferris, Executive Vice President,
    P.W. Wood, Ithaca, NY

  • While I understand the certificate holders' frustrations at a seemingly simple task of sending cancellation notices, it is not the insurers who would be doing this task as you mention in your perspective, but once again, the agents. The agents already have enough on their plates, now doing the largest part of the rating and underwriting in their offices. Most carriers do not even want to see copies of certificates, let alone commit to sending cancellation notices. If we could get the carriers to put this information in their data base and send out the certificates with cancellations, I would totally agree. If it is something else for the agents to keep track of and another E&O exposure, I vote no. We do try to send out revised certificates from our office when a policy cancels midterm. However, we have so many cancellations and reinstatements, it is definitely a challenge to keep up with the certificates.

    —Sandra Taylor, Commercial Producer,
    ISU/The May Agency, Bloomington, IN

  • It can and should be done, but our industry doesn't like change, especially when change places responsibility back on the business. No wonder we have regulators all over our books right now. We owe the public more.

    —Ed Hart, Account Executive, Thilman Filippini, Chicago, IL

  • I am in agreement with you concerning certificate holder notification, however most carriers now do not even want to know who certificates are issued to. Who is responsible then to that certificate holder for policy cancellation? This is a real problem for the industry! This is another example of the carriers' rush to efficiency (in somebody's mind) but neglecting a "fiduciary" responsibility. If a carrier does not want to accept responsibility for certificates of insurance then they should not allow them to be issued at all. Wouldn't it be great if a few carriers took this position? Then you would have a group of carriers who for competition reasons would step up and say, "We take full responsibility for all certificate handling." Then the whole industry would do the right thing and get back to proper management of certificates of insurance.

    —Eric Donahoe, COO,
    The Bottrell Insurance Agency, Inc., Jackson, MS

  • Your assumption that insurers issue certificates of insurance is incorrect in most cases.

    As the primary client interface, the broker or agent is typically responsible for issuing of the vast majority of certificates of insurance. Off the top of my head, I can think of a couple of factors that contribute to this situation: (1) the additional time that would be needed for clients to transmit full and accurate information to their insurer or multiple insurers (rather than their broker) and the subsequent delay for each insurer to issue their certificate is not acceptable (i.e., clients want their certificates NOW and they do not want to be bothered with communicating to multiple insurers); and (2) many insurers lack software programs and/or are not staffed to issue them (hence their delegation to the broker/agent).

    To avoid a potential E&O, brokers/agents make every effort to accurately transmit relevant certificate data from themselves to insurers. However, the potential for mistakes, omissions, or delays in the communication of certificate information to insurer by broker/agent cause both parties to resist requests that the certificate holders be provided with "guaranteed notice" in the event of cancellation. As a result, the "endeavor to" wording is offered and is truly more realistic. Also, in the case of "cancellation for nonpayment," the cancellation may only be temporary while the insured and broker verify payment information or expedite payment to the insurer's accounting department.

    That said, both the insurer and the broker/agent have an interest in letting the certificate holder know about a cancellation of coverage because they do not want the certificate holder to rely on coverage that does not exist.

    If insurers did issue all certificates, then they would have greater control of the process and perhaps they would agree to stronger wording up front. However, clients would have to accept the necessity to communicate directly with one or more insurers rather than their broker/agent. It is not an issue that has a solution that will satisfy all parties involved.

    —Kevin Still, A/E,
    Marsh USA, New York City, NY

  • Your view that companies should be able to give cancellation notice to Certificate holders is valid. However, your assertion that in today's age of automation this should be simple to do is in error. Many companies, my own included, do not have the ability to program certificate holders into their systems as entities to send cancellation notices to. Also, you fail to realize how many certificate holders a business such as a large contractor can generate in a single policy term. It is not feasible to try to keep track of all of them as many are short-term jobs and nowhere on the certificate does it ask for the duration of the time the certificate is required.

    While your view represents the "ideal," it is just not viable for all companies at this point in time.

    —Brenda Glover-Myers, Senior Underwriter, Utica National

  • Agree 100%. Anything that will be granted EVERY time and costs time and money to do should be automatic.

    —Tom Drawert, Exec Vice President,
    HCDT Insurance Agency, San Antonio, TX

  • While I agree that something has to be done concerning the time wasted on certificates of insurance, I am not so sure that getting the carriers to "commit" to sending notice is appropriate. Many carriers do not require that their agents submit copies of the certificates that have been issued. In fact, I have witnessed a carrier returning to the agent certificates of insurance that the agent submitted, with a cover note stating "Please do not send us certificates of insurance, as we do not require copies." What happens when something goes wrong? I'm thinking of the contractor on a job site who allows his insurance to lapse for nonpayment, and a claim occurs arising out of the contractor's work. If the carrier "committed" or "promised" on the certificate to notify the certificate holder, and could not do so because they do not have a copy of the certificate, where does the responsibility lie? Should the carriers go back to requiring copies of certificates? In addition, even back when the all carriers required copies of issued certificates, we all know that there are agents who would not submit them. I understand and appreciate the carriers' position. It's difficult to make a promise to act when you don't have all the facts.

    —Sally Ann Krauss, Account Executive,
    Acordia, Pittsburgh, PA

  • The letter of cancellation, governed by state law, is enough. Certificates have become an end to themselves, and often serve no other valued purpose other than an excuse not to pay invoices that are rightfully due. MOIs would serve the coverage verification purpose, with a lot less cost, if only the industry would accept them as the standard. Do the manuscripted AI endorsements on the certificate trump the agreed and conformed contract language? I think not. Validating that the subcontractor is a financially solvent, reliable, trustworthy citizen, who does quality work, is part of the due diligence process in the supplier/subcontractor qualification program.

    —John Bowler, Contracts Administrator,
    Ametek Solidstate Controls, Columbus, OH

  • As regards certificates of insurance and carriers notifying certificate holders of cancellations, I believe the primary reason for the "endeavor to" language is because the policy itself does not require notification of nonrenewal or cancellation to certificate holders or even additional insureds. The only notice requirements are for first named insureds and mortgagees or loss payees in property coverages. If they change the wording on the certificate, they are assuming a liability not covered in the policy.

    Also, some carriers are very casual about their tracking of certificates, and the chance of missing someone in a required mailing would be very high. In addition, I know that some agents permit insureds to fill in and file their own certificates under certain circumstances. The likelihood of missing one of those in a mailing regarding cancellation is also very high.

    I think that if carriers decided to take on this liability, there would be a HUGE exposure for E&O, both for them and for the agents. I have no problem with the "endeavor to" language, because I understand that it's there only as a courtesy to the certificate holder, and not as an assumption on the part of either the carrier or the agent of an obligation that does not appear in the policy. I believe that the certificate holder must assume SOME obligation to keep track of those certifying insurance coverage.

    One other thought: the fact of cancellation midterm is uncommon to begin with. Most insureds don't get canceled midterm unless they are in poor financial condition, or else because they are either sold or go out of business. I think the whole subject is overblown. I specialize in construction, and I tire of owners and some large nationwide general contractors trying to make their specifications and certificates into policies of insurance.

    —Kirk Johnson, CIC, AAI, Senior Consultant, Construction Division, SilverStone Group, Omaha, NE

  • The insurance industry should make it standard policy to provide certificate holders with evidence of cancellation or nonrenewal and, given today's technology capabilities, this is a value-added no-brainer.

    —Joyce Pascoe, President, PRM Consulting, LLC, Mukilteo, WA

  • Your comment on certificates is very good, however, Pistol Pete [Polstein] wrote an excellent article on the subject several months ago. In his comments, Pete stated correctly that "Insurance certificates are one of the more dangerous documents that float between insureds, insurers, and a host of third parties."

    As a client manager, I have seen over the years a requirement for these certificates to reach down to the most ridiculous level. e.g., a supplier of a postage meter looks for the certificate to show them as a named insured, require 30-day written notice of any material change, cancellation, or nonrenewal, and the removal of the word "endeavor." From an insurer's point, this creates a paper problem if they have to adhere to such silly requirements.

    Another example, I was recently asked for my client's (a tenant) coverage to insure the landlord against not only ordinary negligence but even "gross" negligence, and add the landlords' mortgage holder, any contractor or subcontractor as additional named insured, although they would be engaged by the landlord to perform repairs on behalf of the landlord. In addition, the tenant's policy was to extend cover to include "common" areas of a shopping mall against bodily injury and or property damage or loss "howsoever" caused.

    Needless to say, this was not acceptable. The lawyers backed down, and a more realistic certificate was issued and accepted, but perhaps it shows where their legal counsel and the risk manager thinking is going, but, this is taking risk transfer to a whole different level. I understand certificates are a necessity in business, but let's not sell the farm along with them and create requirements on insurers, brokers, and their clients that may not be followed through or fulfilled.

    —Dan Maguire, Account Executive,
    Aon Reed Stenhouse Inc., Vancouver, BC

  • I agree that the verbiage of "will endeavor to" is outdated and inappropriate. If, in fact, other parties are relying on certificates of insurance to acknowledge the existence of coverage, why should the carrier be unwilling to notify when coverage is canceled or nonrenewed? Is it habit, laziness (increased cost), or fear that drives their unwillingness to have them issued correctly?

    I do understand the problem about renewals, because unfortunately many renewals go down to the wire before final renewal terms are established. Most carriers and agents would not want to be required to send notice to every certificate holder 30 to 60 days before expiration, when they believe the coverage will be renewed on time and proper certificates issued prior to expiration.

    These dilemmas should be able to be worked out with effort on the part of all parties in the industry.

    —Don Hurst, Senior Executive Vice President,
    Mullis Newby Hurst, LP, Dallas, TX

  • I agree the insurer should give notice. It should be easy for them to do these days, now that everything is on computer. How about the agent? Ours gives us "endeavor to" wording all the time. This is required by many prime contracts, plus we have a very solid relationship with our agent. However, I have a very hard time getting the same from subcontractors, and have given up for the most part. We have a particular problem in Florida where lots of subs use leased work comp. The leasing companies don't give notice to anyone (us or the state) when the leasing agreement is terminated. (Not to mention no coverage for sub-subs and undeclared "employees.")

    —Vae Hyde, Risk Manager,
    Biltmore Construction Co., Inc., Belleair, FL

  • Given that the world of commerce which supports the insurance industry goes to much trouble and expense to verify insurance and given that the insurance carriers have steadfastly refused to solve the certificate problem, I think that the business community ought to press for legislation at the federal and state level to require the insurers compliance with the notice requirements contained in insurance certificates. I do not like government involvement, but there are times and places where good order requires responsibility on the part of key players.

    —Donald Waddell, President, WRISC, Inc., Eugene, OR

  • I see and understand both sides. A solution to the issue may be to transmit evidence of insurance to a database similar to what we have here in Georgia on personal and business automobiles. If insurance is canceled or lapses, then impose a fine to the insured for failing to maintain insurance. As agents and brokers, we sometimes insure both the general contractor and subcontractors. In my opinion, a database that keeps track of insurance validation and compliance makes it fair and a level playing field for all parties.

    —Cameron Davis, Producer, Brown & Brown, Canton, GA

  • I do not agree that the insurance company should be obligated to send notice of cancellation or nonrenewal to a certificate holder. Main reason being is that on some accounts there are numerous certificate holders (some being over 1,000) and talk about saving trees—this would be a very large expense to the company. However, I do feel if the account is canceled midterm by the company—then I would agree that the certificate holder should be advised.

    —Shari Karaszewski, Supervising Service Representative,
    Liberty Mutual Insurance Company, Brookfield, WI

  • I have always felt that the "endeavor to" wording was in the certificate because the carrier cannot guarantee that the certificate holder will receive the cancellation. Unless the carrier physically delivers the cancellation, they can only "endeavor to" give notice of cancellation to the certificate holder.

    —Dennis Krebs, Commercial Lines,
    EMC Insurance Co., Kansas City, MO

  • We do a great deal of insurance consulting for lenders and this is a constant issue. One method would be for ACORD to create a document called an "Evidence of Commercial Casualty Insurance." This document would be similar to the Evidence of Commercial Property Insurance (ACORD 28) or the form it replaced (ACORD 27). The form would convey all the rights and privileges afforded under the policy as the ACORD 28 does for property insurance. It wouldn't have the "will endeavor" wording.

    I believe that one problem is that the companies have pushed the function of issuing certificates, etc., to the agents and brokers and are concerned that many certificates are issued incorrectly, and many never reach the carrier or the policy file. Carriers feel that most certificates of any value are used to indicate additional insured status to the holder, in many cases there can be a great number of additional insureds coming and going on a larger account. This is particularly true when a policy is written with blanket additional insured coverage, if required by lease or contract. The carrier is not endorsing the policy with each change and therefore would have great difficulty keeping track of which holders are entitled to notice.

    This is not usually a problem on property insurance since there are generally less entities (mortgagees or loss payees) entitled to notice.

    As more and more buyers use the risk transfer mechanism to reduce their own loss experience, therefore demanding additional insured status from their contractors, tenants, and suppliers this problem will become even more difficult. In some cases in our state, carriers writing liability insurance for property owners are demanding that their policyholders obtain contractual indemnity/defense protection and the backup coverage from every vendor, contractor, tenant, etc. In many cases, this is becoming a warranty under the CGL form and failure to have appropriate contracts and insurance protection will void coverage.

    I suggest the creation of a casualty evidence form as the only real way to guarantee that the holder will receive the notice to which they are entitled. We are certainly open to hearing other suggestions as to how we can eliminate the problem.

    —Charles Weisblum, Chairman,
    MLW Services, Inc., New York, NY

  • The thing you're missing is that, in an effort to escape responsibility, many insurance carriers long ago instructed their agents NOT to send them copies of issued certificates—they're not about to reverse course. It also doesn't solve the problem of blanket additional insured clauses of various flavors. It also doesn't help in those states where premium finance companies can actually effect cancellation for nonpayment of an installment (they don't know who the certificate holders are).

    Having said all that, I certainly am in favor of eliminating the "endeavor to" clause but I don't think there's a chance in hell that it will happen except for a few "enlightened" carriers here and there.

    —Philip Lieberman, Lieberman
    Consulting Services, Caldwell, NJ


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