Avoid these 7 insurance pitfalls
By Amy Elizabeth Stewart
Every business needs insurance – just in case the unthinkable (or the oh-so-thinkable) happens. Here are seven common mistakes policyholders make (but you can avoid):
1. Forgetting to read the policy.
Always read, and re-read, the policy. Pay particular attention to the limits, coinsurance, deductibles, endorsements and notice requirements. Don’t understand something? You’re not alone. Insurance policies are seemingly written to be as opaque and confusing as possible. Ask for clarification – from your coverage lawyer, broker or the insurer – for anything that isn’t crystal clear.
2. Failing to implement a continuous risk management review process
Risk management must evolve as fast as the risks themselves. Risk management should be a significant component in all critical decisions throughout your business. A comprehensive risk management process will encompass all areas of your business’ exposure to risk, including financial, operational, reporting, compliance, governance and public relations.
3. Confusing claims-made with occurence-based policies
An occurrence-based policy protects you from any covered incident that “occurs” during the policy period, regardless of when a claim is filed. Even after the policy period has ended, an occurrence-based policy may cover your loss. Claims-made policies provide coverage for claims only when the claim is first made during the policy period. This distinction will drastically impact which policy covers the loss in question and your notice responsibilities.
4. Assuming your lawyer works for the insurer
Your insurance defense lawyer paid for by the insurance company, works for you. Your business, not the insurance company, is the client. If it appears the lawyer is attempting to steer your defense outside of coverage or shows preference to the insurance company’s requirements that may be detrimental to your defense, there may be a conflict of interest that entitles you to a new lawyer (on the insurance company’s dime).
5. Ignoring a reservation of rights letter
Insurers routinely agree to provide coverage subject to a reservation of the right to deny coverage later should an exclusion or other limitation apply. The “reservation of rights” may also contain requests for additional information. Most policies include cooperation clauses, requiring you (the insured) to provide information so the insurance company can analyze the claim. You should review your insurer’s reservation of rights letter extremely carefully. If the letter contains errors, or requests more information, respond in writing as soon as possible. If the claim is large enough, it’s a good idea to hire a lawyer to press the insurer to provide unqualified coverage.
6. Assuming your insurance broker fully understands the company's risks
Brokers attempt to obtain as many insurance opportunities for you as possible. That is the purpose of their business. You, however, know your corporate risk better than anyone and, for this reason, should be intimately involved in the procurement process. Ask questions, not only to the broker but also directly to the underwriters. In consultation with your broker, do not hesitate to negotiate policy changes that adapt coverage to the particularities of your specific operations and exposures.
7. Failing to provide timely notice under all applicable policies
More coverage disputes arise from the insured’s failure to give timely, proper notice than any other issue. That’s why it’s important to understand the particular action that triggers the notice provisions in each policy. For example, some policies require notice before litigation is initiated; employment practices liability policies often require notice at the EEOC phase, before litigation; the notice provisions of a D&O policy may be triggered by a governmental investigation. Once you become aware of a potentially covered matter, identify the insurance policies that may be applicable and give notice early. Keep in mind that a single event can trigger more than one policy.