IRMI Update—Issue #113
An E-mail Newsletter for Risk and
May 17, 2005
In This Issue
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
On another note, I hit a nerve with my
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 P. Gibson, CPCU, CRIS, ARM
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today and choose the print or electronic version.
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
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
—Sandra Taylor, Commercial
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
—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,
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
—Kevin Still, A/E,
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
—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
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
—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"
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
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
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
—Dennis Krebs, Commercial
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
—Philip Lieberman, Lieberman
Consulting Services, Caldwell, NJ
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