IRMI Update—Issue #113
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
May 17, 2005
In This Issue
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 Web site, 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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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
-
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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