A Few Myths, Misconceptions and Half-Truths about Insurance

Transcription

1 The University of Texas School of Law Presented: 41st Annual William W. Gibson, Jr. Mortgage Lending Institute September 20-21, 2007 Four Seasons Hotel Austin, Texas October 11-12, 2007 Belo Mansion Dallas, Texas A Few Myths, Misconceptions and Half-Truths about Insurance Aaron Johnston, Jr. Author contact information: Aaron Johnston, Jr. Munsch Hardt Kopf & Harr PC 3800 Lincoln Plaza 500 N. Akard Street Dallas, Texas ajohnston@munsch.com Continuing Legal Education

2 Table of Contents Page 1 Definitions Insurance Insurance Myths Half-Truth: If the lender is named as a loss payee on the borrower s property insurance, the lender is covered if the property is destroyed Open Clauses Closed Clauses Mortgage Holders Is all the Property Covered by your mortgagee s clause? The definition of Covered Property under ISO Form CP 00 10, Building and Personal Property Coverage Form, includes both Buildings and Business Personal Property Terminology Myth : We received our insurance certificates and that means we are covered ACORD Form 25 Certificate of Liability Insurance ACORD Form 28 Evidence of Commercial Property Insurance (2003 Ed.) ACORD Form 28 Evidence of Commercial Property Insurance (2006 Ed.) Practical Considerations Manuscripted Forms/Editions Misconception: If the property is destroyed the lender can take all the proceeds and apply them to the loan Actual Cash Value versus Replacement Cost Myth: Borrower Needs to Carry All Risks Fire and Extended Coverage Casualty Insurance Historical Background Basic and Broad (Named Peril) Forms Special (All Risks) Form Half-Truth: If the Borrower Carries Causes of Loss Special Form Commercial Property Insurance, He is Fully Covered All Risks Does not Cover All Risks Other Possible Glitches to Recovery Myth: Borrower Needs to Carry Business Interruption and Rental Loss Insurance Business Income and Extra Expense Business Income Rental Value Misconception: Subguard Insurance is a Substitute for Performance and Payment Bonds Subcontractor Default Insurance Deductibles and Co-Payments... 11

3 Table of Contents (continued) Page 8.3 Premiums Advantages and Disadvantages Bottom Line Myth: Borrower Needs to Carry Comprehensive General Liability Insurance Myth: Personal Injury is a General Category that describes the Damages and Losses Covered by Commercial General Liability Policies Coverage A Coverage B Coverage C Misconception: A Contractual Liability Endorsement will cover all of the indemnities given by the Borrower in the Loan Documents Exclusion/Exception/definition Broad Form Indemnities Defense under contractual Liability Myth: Business Auto Insurance has nothing to do with real estate Misconception: Umbrella Liability Policies and Excess Liability Policies are the same things Umbrella Excess Liability Underlying Primary Liability Misconception: Deductible Amounts and Self-Insured Retentions are the same things Deductible Self-Insurance ( SIR ) Sample Provisions Conclusion Exhibit A Standard Mortgagee Clause Exhibit B New York Standard Mortgagee Clause Exhibit C Certificate of Liability Insurance...21 Exhibit D Evidence of Commercial Property Insurance (2003 Ed.) Exhibit E Evidence of Commercial Property Insurance (2006 Ed.) Exhibit F Sample Provisions Exhibit G Insurance Requirements Exhibit H Borrower's Right to Self-Insure... 31

4 A FEW MYTHS, MISCONCEPTIONS AND HALF-TRUTHS ABOUT INSURANCE 1 DEFINITIONS. 1.1 INSURANCE. A contract under which a company in the business of insuring against losses undertakes to defend a party against, and compensate the party for, loss from a specified contingency or risk for a specified period of time in consideration for the payment by the insured party of a premium. 1.2 INSURANCE MYTHS. A myth is any invented story, idea, or concept 1 and mythology is a set of stories, traditions, or beliefs associated with a particular group or the history of an event, arising naturally or deliberately fostered. 2 Insurance myths are a group of beliefs associated with insurance that have arisen in the legal and lending industries because most attorneys and loan officers learn about insurance from reading forms. The implicit assumption upon which this method of education is based is that the author of the form knew what he or she was doing. This author s experience is that most forms are wrong. While the myth that the sun was really a shiny chariot driven by Helios had no scientific basis, the story was charming and did no harm to the lives of the ordinary Greek. However, myths about insurance can rapidly deteriorate into horror stories for lenders and their attorneys - more akin to Freddy Krueger than Helios. 2 HALF-TRUTH: IF THE LENDER IS NAMED AS A LOSS PAYEE ON THE BORROWER S PROPERTY INSURANCE, THE LENDER IS COVERED IF THE PROPERTY IS DESTROYED. 2.1 OPEN CLAUSES. If a loss payee has no independent right to enforce the policy, but is simply a recipient of payments when the insured becomes entitled to collect under the policy, the loss payee clause is referred to as an open clause. 3 The following is an example of an open clause loss payee provision contained in Insurance Services Office, Inc. ( ISO ) endorsement form CP B. LOSS PAYABLE For Covered Property in which both you and a Loss Payee shown in the Schedule or in the Declarations have an insurable interest, we will: 1. Adjust losses with you; and 2. Pay any claim for loss or damage jointly to you and the Loss Payee, as interests may appear. Although an open clause may permit the loss payee to adjust the loss and even receive payment, the drawback of an open clause is that the action or inaction of the insured can defeat the right of a loss payee to collect. Hence, a lender may learn too late that the Borrower/named insured failed to pay premiums, made a misrepresentation or failed to report a loss timely. 2.2 CLOSED CLAUSES. On the other hand, a closed clause, in effect, creates a separate contract between the insurer and the loss payee or mortgagee and contains language to the effect that the act or neglect of the insured will not invalidate the policy. The following is an example of an closed clause loss payee provision contained in ISO endorsement form CP For Covered Property in which both you and a Loss Payee have an insurable interest:

5 c. If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part, the Loss Payee will still have the right to receive loss payment if the Loss Payee: (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; (2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the Loss Payee. (Emphasis added) 2.3 MORTGAGE HOLDERS. A closed loss payee clause is also referred to as a standard mortgagee clause and provides special protections to the mortgage holder: that payment for covered loss will be made to the mortgage holder, not to the insured or to the insured and the mortgagee; that coverage applies for the benefit of the mortgagee even if the insured s claim is denied because of the insured s acts, subject to a couple of basic requirements; and that the mortgagee will receive written notice of policy cancellation by the insurer (Please note that the insurer is not committing to give notice if the borrower/named insured cancels.). Standard mortgage holder protection for buildings or structures only is built into the current ISO Building and Personal Property Coverage Form (CP 00 10): 2. Mortgageholders a. The term mortgageholder includes trustee. b. We will pay for covered loss of or damage to buildings or structures to each mortgageholder shown in the Declarations in their order of precedence, as interests may appear. c. The mortgageholder has the right to receive loss payment even if the mortgageholder has started foreclosure or similar action on the building or structure. d. If we deny your claim because of your acts or because you have failed to comply with the terms of this Coverage Part, the mortgageholder will still have the right to receive loss payment if the mortgageholder: (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; (2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgageholder. All of the terms of this Coverage Part will then apply directly to the mortgageholder. (f) If we cancel this policy, we will give written notice to the mortgageholder at least: (1) 10 days before the effective date of cancellation if we cancel for your nonpayment of premium; or -2-