Insurance 101:

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Insurance 101 Understanding and interpreting
your policies RIMS 2012 Philadelphia,
PA April 17, 2012
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Insurance 101

• Michael G. Mangino Insurance Advisor BP Corp
  North America
• Christopher M. BrophyManaging Director
• FTI Consulting
• Lawrence A. Hobel
• Partner
• Covington Burling LLP

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Agenda

• Overview and General Principles
• First Party Coverage
• Third Party Coverage
• Resolving Insurance Coverage Disputes
• Game Risks and Rewards

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I. Overview and General Principles

• Who has the Risk of Loss
• - First Party (risk to insured)
• - Third Party (liability to others)
• What is at Risk of Loss
• - Injuries to Persons or Tangible Property
• - Employees
• - Intangible Property
• Business Loss
• Who is at Risk of Liability for Loss
• - Insured
• - Management of Insured
• - Affiliated Entities
• - Contractual Parties (Additional Insureds)

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I. Overview and General Principles

• To what extent will Insured participate in risk
• Old Fashioned Way (Fixed Amount, Subject to an
  Audit)
• Use of Deductibles or Self-Insured Retentions
  (SIRs)
• Retrospective Premium Plans
• Captive Insurers and Reinsurers
• Contractual or other requirements for insurance
• Contractual provisions and Additional Insured
  Requirements
• Who should obtain the insurance
• Worker Comp/Auto
• International Risks and Local Policies
• Structures to Be Considered
• - Risk Specific Coverage
• - Package Policies (Multiple lines in one
  policy)

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I. Overview and General Principles

• Plain language is applied where it is ambiguous
• To figure out what the plain language means, you
  need to read the provisions as a layperson would
  (not in a hyper-technical way) and in the context
  of the policy as a whole
• Where language is ambiguous i.e., where the
  language is susceptible to two or more reasonable
  meanings the courts generally undertake to
  ascertain the reasonable expectations of the
  insured
• Determine whether specific language is standard
  or manuscripted
• Courts allow the use of extrinsic evidence to
  ascertain the insureds reasonable expectations
• If the meaning is still not determined, the
  language is generally construed against the
  insurer
• Exclusions
• Are construed strictly against the insurer
• Even if unambiguous, must be clear and
  conspicuous to be enforceable

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1. Overview and General Principles

• When Claim/Loss Occurs
• Notice to Insurers
• Precautionary and requirement of notice of
  potential loss
• Notice of Claim/Loss
• Tender of Defense
• Insurer Response
• Accept without Reservation, Denial or Reservation
  of Rights
• A Policy defense (e.g., failure to give notice
  or to cooperate)
• A Coverage defense (e.g., alternative theories of
  negligent and intentional tort are plead, and
  only negligent acts are covered)
• Reservation of Rights
• Insurer seeks to avoid waiving of rights to
  contest coverage even though insurer may
  undertake performance under policy
• If Dispute Later
• Obligation of Insurer to reserve on specific
  issue
• Policyholder Performance Conduct/Waiver/Estoppel

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II. First Party Coverage

• Perils Insured
• Property Loss Issues
• Replacement Cost v. Actual Cash Value
• Like Kind and quality
• Code Upgrades
• Business Interruption
• Period of Indemnity
• Extended Period of Indemnity
• Measuring the Loss
• Likely experience if loss did not occur
• Lost sales less discontinuing costs
• Idle Periods
• Make-up
• Extra Expense

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II. First Party Coverage

• Focused Coverage for Certain Losses
• May include third party protection
• Data Breach Loss
• Crime Dishonesty
• Building the Tower
• Premiums and self-insurance
• Binders and consistency in policy language
• What happens if coverage dispute
• Appraisal provisions
• Arbitration provisions
• Number of Occurrences and Loss
• Misrepresentation and Application Process

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III. Third Party Coverage

• Primary
• Lower limits of Liability
• Limits can be per occurrence or annual
• Typically provides defense obligation above
  policy limits
• Excess-Umbrella
• Difference between Excess and Umbrella coverage
• Typically defense costs within policy limits
  (Ultimate Net Loss)
• May or may not follow form
• May contain additional exclusions

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• Third Party Coverage
• What Triggers Coverage?

• Claims Made Coverage
• Claim made during the policy period
• Be certain to review the definition of claim
• May also include the threat of a claim
• May require that the claim be reported during
  policy period
• Can usually purchase extended reporting period
• May have a retro date
• Examples DO, EO, Crime-Fidelity

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• Third Party Coverage
• What Triggers Coverage?

• Occurrence Coverage
• An event, or continuous or repeated exposure to
  conditions which results in personal injury or
  property damage during the policy period.
• May have Funnel language
• Can Trigger more than one Policy
• Long Tail Claims
• Exposure when claimant exposed to product
• Manifestation when injury reasonably capable of
  medical diagnosis
• Injury in Fact when actual injury even if not
  manifest
• Continuous trigger from exposure to
  manifestation (and possibly beyond)
• Allocation pro rata, all sums, who pays as to
  coverage gaps
• Each injured person a separate occurrence, each
  property as separate occurrence or Claims
  Aggregate

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• Third Party Coverage
• Duty to Defend

• Right and duty to defend any suit seeking
  damages even if the allegations of the suit are
  groundless . . .
• Defense based upon potential for indemnity
• - Generally insurer cannot look behind
  allegations of the underlying action
• - Defense continues until no potential for
  coverage
• If an insurer reserves its rights based on a
  coverage defense, the insured generally is
  entitled to independent counsel (Cumis counsel)
• If the insurer reserves its rights, it may have
  rights to seek reimbursement of defense expenses
  allocable solely to non-covered claims

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• Third Party Coverage
• Duty to Indemnify

• Indemnity Language GL coverage
• - We will pay those sums that the insured becomes
  legally obligated to pay as damages because of
  bodily injury or property damage or personal
  injury or advertising injury to which this
  insurance applies.
• Damages
• Equitable Relief
• Punitive Damages
• Administrative Requirements vs. Court Judgments
• Consent to Settlement Clause

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• Third Party Coverage
• Other GL Issues

• Owned, rented or occupied property
• The Insureds product
• - But may be covered if incorporated into a
  building or other product
• Exclusions
• - Faulty workmanship
• - Worker Comp
• - Pollution Exclusions
• - Intend/Expect
• Cooperation and Settlement
• Misrepresentation and Disclosure
• Successor Access

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• Third Party Coverage
• OCIPs

• Owner Controlled Insurance Programs
• Owner purchases insurance to protect itself and
  contractors
• Typically involves managing Risks for
  Construction and OM Projects
• Focuses on contractually required Worker Comp and
  GL Insurance
• Reduces potential for coverage disputes and cross
  suits between contractors OCIP is a no-fault
  site

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• Third Party Coverage
• OCIPs

• Pros and Cons
• Typically can obtain higher limits than
  Contractors
• Reduced potential for coverage disputes and cross
  suits between contractors. However, aggregate
  stop loss provisions may trigger such disputes
• Contractor and Owner interests are more aligned
• Owner pays up-front costs. Owner should control
  claims defense and management
• Contractor loss experience can impact rates and
  contractors cost of business
• Sometimes difficult to demonstrate cost savings

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• Third Party Coverage
• DO and Professional Liability

• DO Insurance
• Suits against Directors and Officers
• Securities actions against the company
• Professional Liability Insurance (EO)
• - Suits alleging errors and omissions in
  professional work

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• Third Party Coverage
• Basics of DO Insurance

• Side A
• Insure directors and officers when they are not
  indemnified
• Side B
• Insure corporations when they indemnify their
  directors and officers
• Side C
• - Insure corporations for certain types of direct
  liability

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• Third Party Coverage
• DO Exclusions

• Wrongful Profit
• Deliberate Criminal or Fraudulent Act
• In fact vs. final adjudication - settlements
• Insured vs. Insured
• Severability clause
• Prior Claims
• Regulatory Exclusions

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• Third Party Coverage
• Basics of EO Coverage

• Covers claims of negligence, misrepresentation,
  violation of good faith and fair dealing, wrong
  advice
• For a Wrongful Act
• In the rendering or failing to render
  Professional Services
• Coverage for Loss Resulting from a Claim made
  (and reported?) during policy period

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IV. Resolving Insurance Coverage Disputes

• Litigation Provisions
• Mediation Requirement
• Choice of Law
• Choice of Forum
• Arbitration Provisions
• Choice of Law (Bermuda, NY, English)
• Choice of Forum (Canada, London, Singapore,
  Bermuda, New York)
• Selection of ADR Organization and Rules
• Managing Conflicts among Clauses