Risk & Insurance Chalkboard : Risk Management & Commercial Insurance Consultants : Risk Resources : Audits, Claims Assistance, Litigation Support & Testimony

Most business interruption policy forms will include extra expense coverage to the degree it reduces the business interruption loss. One might think that with this built in coverage there is no need for additional extra expense coverage. Not so. Let's assume a retailer has a fire and incurs cost to temporarily lease another location and for additional advertising expenses. When it comes time to settle the business interruption loss with the insurance adjustor (read  forensic accountant here), he will look at subsequent sales when the retailer is back in business. If sales increased by 10% due to an improved economy, the case will be made that the retailer made up the lost sales thereby disallowing the extra expense incurred because it did not reduce the loss of income.

Chip Merlin makes the point that the adjustment of these losses needs to be much more prompt. Many business interruption claims are not settled until well after the policyholder has returned to business. The accountants drag this out, often to be sure the lost income or sales was not made up in subsequent months. One measure to circumvent this delay is to purchase pure extra expense coverage that will apply whether or not the cost incurred reduces the business interruption loss. These expenses should be reimbursed by the insurer up front as they are incurred, because there is no need to validate that the costs help reduce the BI loss.

How much coverage to buy? Always a tough question. We have developed a user friendly worksheet to assist in determining the types of expenses that could be incurred after a loss. Since this is always a calculated estimate it is best to be conservative in establishing the limit. It is inexpensive insurance and it is always better to have too much rather than not enough. In recent years a new term, "demand surge" has evolved out of major catastrophes such as tornadoes, hurricanes and earthquakes. This relates to the increased cost of materials and supplies when a catastrophic event spikes the demand.  Generators, temporary phone lines and computer equipment may cost well in excess of your estimate in these situations. I guess this is why it is best to buy a snow blower in July rather than January.

The moral of the story is be sure you have more than adequate Extra Expense coverage so you can get back in business in the most expeditious manner. The longer the delay the greater the chance that resumption will never occur.

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Nothing will result in a quicker denial of coverage by an insurance company than when an entity being sued is not listed as a named insured on a particular insurance policy.  This is an area which often receives little attention by insurance agents and brokers (and their clients). 

But why is this?  The answers are numerous, but a common denominator is that whomever places the insurance either does not understand (a) how the "insured" provisions in insurance policies operate (there are differences) and/or (b)  the organizational structure of their client.  Organizations are often comprised of multiple entities that take different forms/structures and operate in multiple states or countries.  For instance, an organization that owns a hotel may have a separate entity to own the hotel, another to hold the liquor license, another to hold the management contract, another to act as the employer, and well, you get the picture.

The lack of attention and understanding is illustrated very well by David White in a posting on his Law and Insurance Blog  entitled "Policy Covering 'Any Subsidiary Corporation' Does Not Cover LLC's."  The case discussed involves a utility company suing its insurer after the insurer denied coverage for a claim arising from employee theft.  The theft was related to two LLC's acquired by the utility. The insurance policy in question covered the utility and "any subsidiary corporation now existing or hereafter created or acquired."  The issue boiled down to whether or not  LLC's are "subsidiaries".  The court concluded that LLC's are not "subsidiaries" and therefore coverage did not apply.  The court's reasoning focused on the fact that LLC's are not corporations (read the case (pdf) for the complete particulars and reasoning). 

Situations where an entity is not insured under a policy because there was a failure to properly list it as an insured are entirely avoidable.   Where possible an "omnibus named insured" provision or endorsement should be in incorporated into insurance policies.  Such modifications generally do not result in any additional premium.  Underwriters typically will agree to provide omnibus wording once they understand the structure of the organization.  Ask and you shall receive.

An example of such omnibus wording is:

 “[Insert parent entity name]  and any divisions, subsidiaries, affiliated or associated companies, sole proprietorships, partnerships, corporations, trusts or joint ventures, previously, now or hereafter created, and any other entity which is owned, controlled or managed by any of the foregoing.” 
 

Keep in mind that any such provision can and should be customized.  The key is to craft wording which properly encompasses the various entities comprising an organization.  As with many things having to do with insurance contracts, the devil is in the details.

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Parks Chastain did a nice job in describing coinsurance penalties in his January 6, 2010, blog entry.  This post is entitled "The Co-Insurance Penalty - Or Insufficient Insurance To Value - And Its Impact On An Insured."  This appears in the Tennessee Insurance Litigation Blog.  Mr. Chastain correctly describes the "insurance to value" concept and the coinsurance penalty calculation, which is imposed upon an insured in the event property is undervalued for insurance purposes.

I would like to to take this a step further by stating that coinsurance penalties, wherever they appear in commercial property, builders risk or other inland marine policies, should be avoided altogether.  These provisions may apply to physical damage to buildings, contents and other property, as well as time element coverages such as loss of revenue. 

While some policies do not have a coinsurance provision, the vast majority do.  The way to accomplish removal of a coinsurance provision is to request and obtain an Agreed Value policy coverage extension or endorsement from the insurer.   This is also sometimes referred to as an Agreed Amount endorsement.  In either case the extension or endorsement will suspend or waive the coinsurance requirements altogether.

Insurance underwriters will not necessarily issue a coverage extension or endorsement automatically.  The underwriter will often review internal or external property valuation guidelines to gain assurance that the insured amounts reflect the valuation method(s) set forth in the insurance policy.   In some cases the underwriter may ask additional questions of the insured.  Once satisfied the underwriter will proceed to issue the extension or endorsement.  In some cases there is a modest additional charge made for the added coverage.  In other cases it is issued at no additional cost.

Conclusions:  Coinsurance provisions do not help insureds.  On the contrary, these clauses are designed to financially punish insureds.  The potential penalty can commonly be removed by following a few simple steps.

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The U.S. Chamber Institute for Legal Reform announced the results of its1st Annual Most Ridiculous Lawsuit of the Year Poll. Nominees were drawn from FacesofLawsuitAbuse.org, a public awareness website that shows how frivolous lawsuits affect small businesses and average families.

The Top Five Most Ridiculous Lawsuits of 2009 are:

• Neighbor sues woman for smoking in her own home;
• Double-murderer sues to claim his victims’ classic Chevy pickup;
• Holocaust denier sues Auschwitz survivor, alleging memoir contains “fantastical tales;”
• Tourist sues hotel, claiming swimming pool got daughter pregnant;
• Illegal immigrants sue rancher who stopped them on his property at gunpoint and turned them over to the Border Patrol.

But my favorite, which was the September 2009 finalist, did not make the cut.   The case involves a woman who fell and was injured at the dolphin show at the Brookfield Zoo, a world class zoo that I have visited many times.  The plaintiff alleges that the Zoo “recklessly and willfully trained and encouraged the dolphins to throw water at the spectators in the stands making the floor wet and slippery", "failed to provide warnings of the slippery floor" and “failed to provide mats … when the staff knew the floor would get wet and slippery,” among other negligent acts.

Everyone who attends a dolphin show knows there is going to be excitement, thrills, and yes, lots of water being splashed about.  That is part of the experience.  While being injured is unfortunate, to not take personal responsibility and then file suit against the Zoo is ridiculous.  I wonder what Flipper would say.  Probably that he was just doing his job.

The moral is that even with good risk management practices frivolous suits are part of life for American businesses.  Unfortunately we all end up paying the added price.

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