BUSINESS OWNER’S GUIDE TO INSURANCE COVERAGE

BUSINESS OWNER’S GUIDE TO INSURANCE COVERAGE

By David A. Gauntlett*

INTRODUCTION

Business owners are often confronted by the need to explore insurance coverage to evaluate whether claims or problematic events arose requiring insurer involvement and subsequently, insurance coverage expertise. The mind numbing manner in which insurance policies limit, condition, and exclude coverage are not easily navigable for even the most knowledgeable and sophisticated business owners. Policyholders often need assistance in structuring submissions to their insurers supplemented by extrinsic evidence that clarify why potential coverage arises and the mindfulness of the traps posed by policy exclusions and conditions in their insurance policy.[1] As such, securing coverage counsel’s assistance is often the most cost effective way to evaluate, resolve, and fund litigation or pay for Loss arising from problematic events. Familiarity with the terminology and issues raised by potentially covered disputes will enhance decision-making about when insurance coverage counsel assistance needed.

STRUCTURE OF AN INSURANCE POLICY

A binder or certificate of insurance is not a policy. It merely confirms the insurance placed, reciting coverage limits, the insurer’s identity, and the coverage term. Insuring clauses or agreements specify the insured risks and exposures. Exclusions identify uncovered acts, conduct, and conditions and are construed against the insurer drafter. Endorsements change or redefine policies, often in the insurer’s favor, and can severely limit the scope of coverage. Modern policies often include as many pages in endorsements as they do in the basic policy.

The Declaration page specifies key details such as the insured’s name and address, when the policy commences and terminates, the premium payable, who the loss payee is or, critically, additional insureds, and other pertinent fact specific to the individually issued policy. The Schedule outlines insured items and insured locations and is typically an element of property coverage.

First-Party Coverage

First-party coverage reimburses policyholders directly for “Loss.” Typical perils covered are fire, theft, vandalism, water damage, and, with appropriate endorsements, mudslides and earthquakes. The policy name a “loss payee” and specify the “loss” payable to the “loss payee” in addition to, or even instead of, the insured. A typical “loss payee” would be, for example, the mortgage holder on an insured property. Some defenses that would defeat an insured’s claim may not be asserted against the mortgagee, but, the mortgagee’s recovery is limited by its insurable interest, typically the amount of indebtedness of the mortgage.

Other “loss payees” include lease property land holders, those who have contingent interest in property, as well as remaindermen such as the owners of art work loaned out to galleries or museums. Critically, “loss payees” are not additional insureds. A “loss payee” must have a quantifiable, insurable interest in the insured property. This is not a requirement to be names as an “additional named insured.”

Third-Party Coverage

General Liability policies, initially described as Comprehensive General Liability policies and thereafter named, with insurer pressure, as mere Commercial General Liability policies (“CGL”), encompasses, presently, since 1986 in an Insurance Service Office (“ISO”) form, “bodily injury and property damage” and “personal and advertising injury.”[2] A critical element is that there be “damages”, however, “damages” can be broadly defined to include equitable as well as legal remedies and in certain circumstances can extend to restitutionary recovery.[3]

ERRORS AND OMISSIONS COVERAGE

Professional Liability

Those engaged in a profession, a term which has been expansively interpreted over the years, deals with “errors and omissions” (“E&O”) or “wrongful acts” arising out of the insured’s professional practice or capacity. A key distinction between Professional Liability policies and CGL policies is that E&O policies are “claims-made” and, typically, “claims-made and reported” coverages. This means that what is critical is when the claim is asserted not where the act omission or offense is committed.[4] As the term “professional” has expanded so has circumstances where insurers seek to eliminate their exposure for deemed professional services. The range of E&O insurance policy availability has expanded exponentially to include risks far beyond traditional professionals.[5]

D&O Coverage

Directors and Officers (“D&O “) policies are a form of E&O coverage issued to companies or non-profit organizations that arise, not out of their profession, but from their responsibilities as directors and officers of an organization. Insurers increasingly have added problematic “professional liability” exclusions to D&O policies. Their over-breadth can be challenged as many courts have limited tier scope.[6]

Media/Cyber Liability Coverage

Media coverage should be a primary component of policyholder’s portfolio. It expands the scope of coverage to a range of businesses and intellectual property torts.[7] But, Media/Cyber policies only supplement CGL policies relying on a form of “personal and advertising” coverage within policies. Cyber coverage, when supplemented by a Crime policy can extend coverage to some social engineering fraud claims.[8]

EPLI Coverage

While most Employment Practices Liability Insurance (“EPLI”) expressly preclude coverage for wage and hour claims, where such claims are conjoined with covered “wrongful termination,” discrimination, or other covered claims, the lawsuit in its entirely is subject to a defense duty.[9] Wage and hour supplements may also be available but they often do not provide any indemnity coverage for an award based on wage and hour violations.

THE DUTY TO DEFEND

Defense Fees and Reservation of Rights

CGL policies’ primary benefit conveyed to insureds is the duty to defend. Some forms of defense recognition provide that the insurer will pay, via reimbursement, defense fees incurred by an insured without controlling selection of counsel or their appointment. Other policies allow the insured a choice as to whether they will allow the insurer to control defense at its expense or secure their own defense counsel who must look to the insurer for the reimbursement of their defense fees. 

In California, Civil Code Section 2860 governs the reimbursement obligation of an insurer. Where an insurer cannot establish that the rate it pays to “appointed counsel,” frequently described as “panel counsel,” because they do not profess to have, nor cannot establish, the expertise to defend the most complex of the included elements of a potentially covered lawsuit, they may not be able to use a benchmark rate to avoid their defense duty.[10]

“Additional Named Insured”

“Additional named insureds” are entities or individuals protected under the same CGL or Professional Liability policy covering the insured. They are entitled to a defense against claims arising out of covered acts. Critically, “additional insureds” may not be specifically “named” in order to be covered under the policy. They may be identified by category within the policies definitions or expressly appear in the Declarations page.

Excess Insurance

While an Umbrella policy has broader coverage than that of the primary, however, there may be circumstance when the excess insurer/umbrella, with such coverage, may be required to drop down to cover losses below their attachment points even without an underlying insurer’s insolvency because of the broad scope of coverage provided.

Subrogation

Subrogation addresses the insurer’s right to recover from the actual torts-feasors where they incur losses which they have had to pay for the benefit of their insureds under an insurance policy. Subrogation rights derive from principles of indemnity, but is typically a provision specifically stated within the policy. Subrogation provisions should be carefully reviewed when policyholder secure insurance coverage. Significantly, no insurer can exercise its subrogation rights against its own insured. Indeed, some jurisdictions go so far as to limit subrogation rights not only against the insured, but also another party also insured within the same policy for the same risk.[11]

CONCLUSION

The best decisions in evaluating insurance coverage arise when insured retain knowledgeable coverage counsel to address complex claims. Knowledge of case law as well as insurer’s underwriting goals can enhance the likelihood of early resolution through negotiations and well-supported coverage claims facilitate negotiations that can avoid unnecessary litigation expense. The same is true of conflicts over who controls counsel avoiding conflicts on those issues that can lead to expensive battles after the fact.

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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com. 

[1] See, David A. Gauntlett, Assuring Pre-Tender Fees Are Recoverable by Providing Proper Notice to Insurers. www.gauntlettlaw.com. (June 2021)

[2] But see, David A. Gauntlett, Narrow, Narrower, and Narrowest. www.gauntlettlaw.com. (August 2021)

[3] Christopher C. French, Insurability of Claims for Restitution, 18 U. Pa. J. Bus. L. 599 (2016)

[4] See, David A. Gauntlett, Reach for the Stick: Why Dynamite is Less Dangerous Than “Claims Made & Reported” Policies. (September 2021).

[5] See, David A. Gauntlett, The Professional Services Exclusion: Opportunities and Limitations in a Variety of Insurance Disputes. American Bar Association (2015)

[6] Atl. Healthcare v. Argonaut Ins. Co., Case No. 19-14420-CIV-Rosenberg/Maynard, 2020 U.S Dist. LEXIS 192241 *19 (S.D. Fla. Oct. 20, 2020) (“Other allegations, however, do not arise from providing or failing to provide medical or health related professional services. Indeed, most of the allegations… pertaining to business decisions that plaintiff… made in handling the Facility’s affairs… these allegations do not relate to any kind of professional services medical or otherwise.”)

[7] See, David A. Gauntlett, Finding Appropriate Media Policy Coverage. www.gauntlettlaw.com. (October 2021)

[8] See, David A. Gauntlett, Insurance Coverage for and IT Consultant’s Role in Media/Cyber Policy Application. www.gauntlettlaw.com. (October 2021)

[9] See, David A. Gauntlett, Ten Tips on Employment Practice Liability (“EPL”) Insurance Coverage. www.gauntlettlaw.com (April 2021)

[10] Los Angeles County Bar Association Professional Responsibility and Ethics Committee, Formal Ethics Opinion No. 501. Los Angeles County Bar Association (May 17, 1999); see also, Christopher R. Wagner, Making Reservation., Los Angeles Lawyer (June 2003)

[11] Seaboard Surety Co. v. Gillette Co., 64 N.Y. 2d 304, 311 (1984)