Weak Insurance Coverage Could Expose Boards

By Michael S. Hale, Esq.

Purchasing insurance is indeed a complicated endeavor. All policies differ in their terms and conditions, and it is critical that the board spend quality time every year in assessing the cooperative’s coverages and getting the input of qualified advisors.

While many board members believe that the cooperative’s directors and officers liability insurance would cover them if there was a claim for inadequate insurance, this may very well not be the case.

The purpose of this article is to examine common insurance issues found in reviewing cooperative insurance programs and to make some general recommendations to boards on these important issues.

Cooperative Policy Contracts, Not Commodities

Insurance is one of the few industries where the product (i.e. the policy) is almost always purchased sight unseen with the actual policy contracts coming weeks or even months after buying them. This practice is a travesty that has hurt more businesses than can be imagined. Adding to the problem, many business attorneys, including those who specialize in cooperative law, may not have a good handle on insurance coverages and options and may, in fact, shy away from advising you in this area. Yet, when you think about it, one of the most important risk management measures a business can take is to transfer the risk of loss to an insurer so understanding the coverages is critical.

Think about this. How often would an executive enter into a lease agreement without checking with their legal counsel? What about a construction agreement or a purchase agreement? How about a land contract or equipment rental agreement? Most businesses engage their attorneys before signing such contracts. Insurance policies should be treated much the same way, but this is usually not the case.

The insurance buying process is one of the most serious tasks that a board can undertake.

As a board member, you should:

– Read your current cooperative business insurance policies. Get copies for yourself. You always want to be able to say as a board member that you made an attempt at reading these important policy contracts. However, even where policyholders do read their policies, they usually do not understand what they are reading or the options available to address the gaps so recognize that there are technical aspects of the policies that you most likely DO NOT understand. Check with your agent for further direction.

– Recommend the formation of an insurance buying subcommittee that can spend quality time understanding the cooperative’s policies and what is not covered.

– Avoid supporting a process of regular “bidding” of the cooperative’s insurance. Bidding implies that a commodity is being purchased and looks to which vendor has the lowest price. The lowest insurance premiums do not necessarily mean that the coverages are what are needed to properly protect the cooperative.

– Perform due diligence. Interview and hire insurance agents before agreeing to buy insurance from them. Evaluate their proposal based on the expertise and advice being offered. A cooperative is usually not served well by an agent who is a mere order-taker. Ask questions of insurance agents quoting on the insurance, including the following:

• How many cooperatives do you insure?
• Do you represent specific insurance companies that specialize in insuring cooperatives?
• What is the commission your agency would earn on this?
• What other related services do you include such as loss control and claims handling? • How does the cooperative’s current program differ from the one you are proposing? [Note: If the agent has not asked for a copy of the current policies, this is a major “red-flag.”]

– Ask for specimen copies of insurance policies being proposed.

– Consider recommending to the board that it hire an expert consultant or insurance attorney to review proposals and advise you of the price and coverages. Some of the things a good insurance coverage attorney or consultant does include:

• Analysis of cooperative’s insurance policies in relation to how they cover the exposures of the business and what critical gaps exist;
• Review of contracts as to how the exposures presented might or might not be covered by insurance policies;
• Drafting insurance requirements and waiver of subrogation provisions;
• Reviewing and comparing insurance coverage proposals offered by competing insurance agencies and advising the cooperative board on what it is buying; • Interviewing and making recommendations on insurance agencies;
• Working with the cooperative’s existing law firm on coverages.

Covered by D & O Policies:

While board members might think that any liability, he or she may have resulting from an insurance decision would be covered by the cooperative’s Directors & Officers (D & O) policy, this may not be the case. Many D & O policies contain an exclusion for decisions related to insurance coverages. If this is the case on your D & O policy, it would place an even greater emphasis on properly managing the insurance process and getting the right advice.

Other Suggestions

A checklist can be used to look for critical coverages.

1] Determine if the property insurance of the cooperative contains a dangerous coinsurance penalty provision that could make the cooperative a “co-insurer” of the loss with the insurer. Ask this question of your insurance agent. If the answer is “yes,” it may be time for a new agent.
2] One of the most common under-insured losses is in the area of having inadequate limits of insurance to replace a building following a fire or other covered cause of loss. How do you know if the selected limit is adequate? Especially in current times with building costs on the rise, this is a more important consideration than ever.
3] If you had to rebuild in a more expensive way to comply with current ordinances or laws, would you be properly covered? Look for what limit of insurance you have.

Leave a Reply

Weak Insurance Coverage Could Expose Boards

By Michael S. Hale, Esq.

Purchasing insurance is indeed a complicated endeavor. All policies differ in their terms and conditions, and it is critical that the board spend quality time every year in assessing the cooperative’s coverages and getting the input of qualified advisors.

While many board members believe that the cooperative’s directors and officers liability insurance would cover them if there was a claim for inadequate insurance, this may very well not be the case.

The purpose of this article is to examine common insurance issues found in reviewing cooperative insurance programs and to make some general recommendations to boards on these important issues.

Cooperative Policy Contracts, Not Commodities

Insurance is one of the few industries where the product (i.e. the policy) is almost always purchased sight unseen with the actual policy contracts coming weeks or even months after buying them. This practice is a travesty that has hurt more businesses than can be imagined. Adding to the problem, many business attorneys, including those who specialize in cooperative law, may not have a good handle on insurance coverages and options and may, in fact, shy away from advising you in this area. Yet, when you think about it, one of the most important risk management measures a business can take is to transfer the risk of loss to an insurer so understanding the coverages is critical.

Think about this. How often would an executive enter into a lease agreement without checking with their legal counsel? What about a construction agreement or a purchase agreement? How about a land contract or equipment rental agreement? Most businesses engage their attorneys before signing such contracts. Insurance policies should be treated much the same way, but this is usually not the case.

The insurance buying process is one of the most serious tasks that a board can undertake.

As a board member, you should:

– Read your current cooperative business insurance policies. Get copies for yourself. You always want to be able to say as a board member that you made an attempt at reading these important policy contracts. However, even where policyholders do read their policies, they usually do not understand what they are reading or the options available to address the gaps so recognize that there are technical aspects of the policies that you most likely DO NOT understand. Check with your agent for further direction.

– Recommend the formation of an insurance buying subcommittee that can spend quality time understanding the cooperative’s policies and what is not covered.

– Avoid supporting a process of regular “bidding” of the cooperative’s insurance. Bidding implies that a commodity is being purchased and looks to which vendor has the lowest price. The lowest insurance premiums do not necessarily mean that the coverages are what are needed to properly protect the cooperative.

– Perform due diligence. Interview and hire insurance agents before agreeing to buy insurance from them. Evaluate their proposal based on the expertise and advice being offered. A cooperative is usually not served well by an agent who is a mere order-taker. Ask questions of insurance agents quoting on the insurance, including the following:

• How many cooperatives do you insure?
• Do you represent specific insurance companies that specialize in insuring cooperatives?
• What is the commission your agency would earn on this?
• What other related services do you include such as loss control and claims handling? • How does the cooperative’s current program differ from the one you are proposing? [Note: If the agent has not asked for a copy of the current policies, this is a major “red-flag.”]

– Ask for specimen copies of insurance policies being proposed.

– Consider recommending to the board that it hire an expert consultant or insurance attorney to review proposals and advise you of the price and coverages. Some of the things a good insurance coverage attorney or consultant does include:

• Analysis of cooperative’s insurance policies in relation to how they cover the exposures of the business and what critical gaps exist;
• Review of contracts as to how the exposures presented might or might not be covered by insurance policies;
• Drafting insurance requirements and waiver of subrogation provisions;
• Reviewing and comparing insurance coverage proposals offered by competing insurance agencies and advising the cooperative board on what it is buying; • Interviewing and making recommendations on insurance agencies;
• Working with the cooperative’s existing law firm on coverages.

Covered by D & O Policies:

While board members might think that any liability, he or she may have resulting from an insurance decision would be covered by the cooperative’s Directors & Officers (D & O) policy, this may not be the case. Many D & O policies contain an exclusion for decisions related to insurance coverages. If this is the case on your D & O policy, it would place an even greater emphasis on properly managing the insurance process and getting the right advice.

Other Suggestions

A checklist can be used to look for critical coverages.

1] Determine if the property insurance of the cooperative contains a dangerous coinsurance penalty provision that could make the cooperative a “co-insurer” of the loss with the insurer. Ask this question of your insurance agent. If the answer is “yes,” it may be time for a new agent.
2] One of the most common under-insured losses is in the area of having inadequate limits of insurance to replace a building following a fire or other covered cause of loss. How do you know if the selected limit is adequate? Especially in current times with building costs on the rise, this is a more important consideration than ever.
3] If you had to rebuild in a more expensive way to comply with current ordinances or laws, would you be properly covered? Look for what limit of insurance you have.

Leave a Reply