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

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

  2. Insurance 101 Michael G. ManginoInsurance Advisor BP Corp North America Christopher M. BrophyManaging Director FTI Consulting Lawrence A. Hobel Partner Covington & Burling LLP

  3. Agenda Overview and General Principles First Party Coverage Third Party Coverage Resolving Insurance Coverage Disputes Game – Risks and Rewards

  4. 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)

  5. 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)

  6. 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 insured’s 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

  7. 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

  8. 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

  9. 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 9

  10. 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 10

  11. 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: D&O, E&O, Crime-Fidelity

  12. 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

  13. 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

  14. 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

  15. Third Party Coverage • Other GL Issues • Owned, rented or occupied property • The Insured’s 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

  16. Third Party Coverage • OCIPs • Owner Controlled Insurance Programs • Owner purchases insurance to protect itself and contractors • Typically involves managing Risks for Construction and O&M 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

  17. 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 contractor’s cost of business • Sometimes difficult to demonstrate cost savings

  18. Third Party Coverage • D&O and Professional Liability • D&O Insurance • Suits against Directors and Officers • Securities actions against the company • Professional Liability Insurance (E&O) • - Suits alleging errors and omissions in professional work

  19. Third Party Coverage • Basics of D&O 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

  20. Third Party Coverage • D&O Exclusions • Wrongful Profit • Deliberate Criminal or Fraudulent Act • In fact vs. final adjudication - settlements • Insured vs. Insured • Severability clause • Prior Claims • Regulatory Exclusions

  21. Third Party Coverage • Basics of E&O 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

  22. 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