XYZ Company. Insurance Policy Assessment

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1 XYZ Company Insurance Policy Assessment Assessment Conducted by: Student A Student B Student C 1

2 This report of our findings in exploring XYZ s exposures to financial loss and current methods of managing them is based on our interviews with your employees, our reviews of your contracts and advertisements, and our analysis of your present insurance program. It is based on the documents and policies we were given. If any endorsements, contracts, or additional policies exist, we are unaware of them and, of course, they are not addressed in this report. Some of our observations are little more than that. For example, when we suggest reviewing limits on policies or coverages we are not saying they are presently inadequate, simply that they warrant review. We are not qualified property appraisers. Therefore, our judgment that the current limits on the buildings and business personal property are probably inadequate is a layperson, not a professional, assessment. Likewise, when we point out that the words in the policies sometimes appear to create a potential gap in coverage, we are speaking as laypersons, not attorneys. We did not research legal precedent or prior court rulings on any of the wordings we analyze here. On the other hand, words have meanings and the policies are legal contracts. We consider it important that the words, commonly understood unless defined in the policy itself, reflect the intentions of the underwriter and you the client. Misunderstandings or misconceptions need to be dealt with before a loss occurs, not in court afterwards. This report does not in any way reflect on the competence or service of your insurance agent. It must be remembered that there are limited underwriting markets available for nonprofit organizations, plus the relatively small premiums your policies generate do not give your agent much negotiating strength with insurers. Some of our recommendations may be impossible to implement because no underwriter is willing to make the changes or provide the coverages. If nothing else, though, you will at least be 2

3 aware of the issues presented and may choose to take other action to deal with the coverage issues raised. Declarations The declarations have some inconsistencies, the first of which was in the naming of the insured throughout the policies. Insurance policies are legal contracts; therefore, it is critical that the parties are correctly identified. That is, the named insured on each policy should read, XYZ. There is also a disparity between the forms listed on the declarations pages of the policies and the forms actually in the policies. The Policy Declarations state important facts about the insurance contract: who is insured by what insurance company, for what period of time, where in the world, a number of others, including what endorsements apply to the policy. The forms listed on the Declarations and the forms actually included in the policy need to match exactly. A number of forms are in the policies, but not on the declarations pages: CP 7901 (10 00), CP 7901 (10 00), CG 7901 (09 00), CG 7060 (07 86), CR 7910 (05 00), CG 7902 (09 00), CP 7902 (09 00), and CI 7901 (07 86). Additionally, three forms are listed on declarations pages, but not included in the policies themselves: CG 7920 (03 98), IL 0935 (07 02), CG 2162 (09 98). These discrepancies may be little more than clerical errors, but one cannot know how significant they are without determining which endorsements actually apply. Conditions The required notice of cancellation by the insurer is 60 days. Since XYZ is such a unique organization and few insurers write this kind of account, this notification period may be too short. We would recommend inquiring about increasing the length of this 3

4 period to 90 or even 120 days, to provide more time to replace the coverage, in the event it is ever needed. If you were canceled or non-renewed, it would be a black mark on your record and would make it even more difficult to find a replacement carrier. The more days your agent has to accomplish it, the better. Comprehensive Property and Liability Policy The limit for the office business personal property in Bloomington is currently $80,000, and the policy includes a coinsurance clause. If subjected to coinsurance, it is very important that the facility be insured for the required amount. For example, suppose the actual value of the contents is $120,000. The coinsurance requirement is 90 percent. Under coinsurance, you must have insured at least 90 percent of the $120,000 replacement value at the time of loss, or $108,000, to avoid a coinsurance penalty. In the event of a total loss, the insurer would pay the policy limit of $80,000, but most losses are partial losses. In this case, let s say the loss is $50,000, the insurer would pay 74% of the loss, which is calculated by dividing the actual coverage purchased ($80,000) by the minimum amount required ($108,000). Thus XYZ would recover only $37,037 and suffer a $13,000 uninsured loss. This example illustrates how important it is to insure a building for the correct value when there is a coinsurance clause. Along these same lines, it is important to consider the limits on the other XYZ Properties. The Pontiac office policy limit is $20,000, and the Pontiac storage facility limit is $10,000. Since the policy has a coinsurance clause, it is important to evaluate each of these limits carefully. The best way to eliminate this potential uninsured loss is by eliminating the coinsurance clause and adding an agreed amount endorsement. 4

5 The deductible on the policy is $250. It is unlikely that XYZ would report a small loss. Thus, you might consider raising the deductible to $500 or $1,000 and enjoy premium savings. In section A. 2. e. Contraband is excluded, which is defined as stolen goods in transit. This means that if property was stolen and the thief has an accident while fleeing, the property destroyed in the crash would not be covered. This exclusion needs to be deleted or changed to show that it is only intended for a situation in which XYZ does the stealing. The Utility Services Direct Damage endorsement on the comprehensive policy (CP (04 02)) excludes electronic data. This endorsement covers direct damage to utility services away from premises only. With electronic data excluded, it is unclear what the endorsement is intended to cover. The commercial general liability limits coverage to designated premises, under Project Endorsement CG 2144 (07 98). This endorsement changes the Comprehensive General Liability into an Owner s, Landlord s, and Tenants policy, which is rarely seen today. An OLT limits coverage to what occurs on the premises and to what happens off premise that directly connects to the premises operations. We recommend removing this endorsement. Crime Policy Under the Commercial Crime policy, only money and securities inside and out are covered, with a limit of $20,000. We recommend making sure this limit is adequate. There is also an expired Employee Dishonesty policy but without the required ERISA endorsement. Both of these are required by Federal law for any entity with a pension or 5

6 profit sharing plan. [This goes in the Property section of the report Section A. 4. b. preservation of property conflicts with special cause of loss form. You are required to protect your property from further loss when a loss occurs. Thus, the basic property form says it will cover such property wherever it is for any cause of loss whatever. But then the Special Cause of Loss form excludes property in the open from loss caused by rain, sleet ice or snow. One form includes removed personal property and one takes away the coverage. Both forms should be consistent, preferably deleting the exclusion of property in open. In your Special Cause of Loss form (on page 4) you have no coverage for faulty, inadequate or defective maintenance. Since you are in an office complex and you can t control the maintenance of the whole building, XYZ should be covered for damages resulting from faulty maintenance by other tenants. Business Income From what policies that we were given we did not find a business income coverage. The organization has ongoing expenses such as bills and salaries. Business income insurance would help keep the organization going after a loss. General Liability The policies exclude all fellow employees and volunteers for injury or damage to fellow employees or volunteers. There is a standard endorsement that would add this coverage for no charge. There are no medical payments for volunteers. Since volunteers would not be covered under your Workers Compensation policy, you should see if this exclusion could be deleted for Medical Payments. Professional liability coverage is excluded in the general liability policy. 6

7 The policy includes as insureds employees and volunteers. In general this is a good thing. However, when coverage is restricted because of the acts of an insured, XYZ could be uninsured for problems caused by employees or volunteers. For example, under the personal and advertising injury liability policy, the personal injury excludes known violations of an insured. Instead of an it should be the named insured. Under the non-owned and hired auto liability the employees are not covered as insured s if they are using their own vehicles. The fire legal limit for the Bloomington office is currently $100,000. The policy limit needs to be high enough to cover the part of the building XYZ occupies. It is important to ensure that this is an adequate limit. XYZ may wish to check this value with the landlord or attempt to value the property on their own. Directors and Officers The Directors and Officers Liability Policy does not include fiduciary liability coverage. Fiduciary liability coverage provides coverage for alleged wrongful acts by the trustees or managers. Special Event Policy Legal liability for athletic or sports participants on the rented property is excluded as well as assault and battery. We recommend that participants be included under legal liability, since these are the groups that need to be insured for special events (e.g. wheela-thon). If many participants get injured during an event with a $250 deductible per claim it would become very expensive. Change the $250 deductible per claim, to a per occurrence amount, so that it is a set aggregate amount instead of a separate deductible for each person. This policy also excludes volunteers, who play a major role in running 7

8 special events. There is no umbrella or excess liability policy, so it is important to ensure that your policy limits are adequate. 8