Study 4 - Lines of Insurance: Liability-Related

Question 1

Excess Liability Policies

Answer 1

• typically follows form; coverage is no broader than what is provided by the underlying coverage
• also typically stands in excess of a single underlying policy
• declarations page list the underlying form that the excess policy follows

Question 2

Standalone Excess Policies

Answer 2

• Have their own distinct insuring agreements, definitions, exclusions, T&C’s
• Issued for a risk that has no primary policy as such

Question 3

2 Reasons Standalone Excess Policies are written

Answer 3

1. The excess policy may stand in excess of an insured’s SIR
2. The underwriter may want the excess policy to be more restrictive in its terms than the primary policy

Question 4

Umbrella Liability Policies

Answer 4

• Provides broader coverage than does the primary policy
• Can provide excess coverage over multiple primary policies
• Includes drop-down coverage

Question 5

Drop-down coverage

Answer 5

A clause in umbrella policies providing that the umbrella will “drop down” over reduced or exhausted underlying policy aggregate limits.

Some umbrellas maintain their own coverage terms when they drop down; others assume those of the primary policy

Question 6

Underwriting Excess and Umbrella Policies

Answer 6

• Obtain copies of the underlying wordings to understand what coverage they provide
• Establish whether the underlying policy is an occurrence form or a claims-made form
• Determine whether sub-limits in the underlying policy might reduce the threshold for the excess or umbrella policy to participate in a loss settlement
• Must be satisfied that the primary insurer is stable and financially strong enough to pay losses in the primary layer
• Need to know whether the primary insurer has a good claims department and reputation
• Must know that the effective and expiry dates of the excess/umbrella are concurrent with the effective and expiry dates of the primary
• Must determine whether the risk does business or engages in activity in the US

Question 7

Professional Liability Policies

Answer 7

• Cover the economic consequences of rendering or failing to render some professional service
• Unlike GL policies, PL policies do not require a third party to have suffered direct BI or PD for the coverage to respond
• Most PL policies exclude liability arising from BI & PD but certain professionals are likely to cause BI & PD and therefore the wordings for such insureds are tailored to meet their needs

Question 8

Reasons investigation and defense costs are such a large part of the cost of a Professional Liability claim

Answer 8

• Lawsuits against professionals threaten what may be the professionals’ most valuable asset: their reputation. Insured are therefore rigorously defended by their insurers
• PL claims are often more complex and require more expert involvement to determine damages and negligence than GL claims
• Not unusual for multiple defendants to be named in a lawsuit against a professional which might increase the cost of defense in establishing negligence to assess liability

Question 9

Common features of Professional Liability Policies

Answer 9

• They are written on a claims-made basis
• They contain an annual aggregate limit of liability aka general aggregate limit
• Defense costs are included in the policy limit (except QC) which makes the excess liability policy an important supplement

Question 10

Incurred but not reported losses (IBNR losses)

Answer 10

• An estimate of the amount of an insurer’s (or self-insurer’s) liability for claim-generating events that have taken place but have not yet been reported to the insurer or self-insurer
• The sum of IBNR losses plus incurred losses provide an estimate of the insurer’s eventual liabilities for losses during a given period

Question 11

UW Factors for Professional Liability Insurance

Answer 11

• The name of the applicant and the names of all the professionals working for the applicant
• The total number of the firm’s employees, including the non-professional staff (clerical staff)
• Whether an insurer has declined to insure or refused to renew a policy for the professional or for any of the professionals working for the applicant, and why
• The professional qualifications and experience of individuals performing the service
• Any allegations of professional negligence, whether oral or written
• Any contracts and contractual arrangements

Question 12

Risk Management Practices for Professional Liability

Answer 12

• Whether the applicant screens prospective clients before accepting them - have they been involved in lawsuits with other service providers
• Whether the applicant has guidelines to avoid and resolve conflicts of interest
• Whether the contracts used by the applicant specifically state the scope of the proposed work to be done for clients and whether the applicant documents discussions with clients
• Whether the applicant’s contracts limit the applicant’s liability for damages should the client sue
• What types of client the applicant serves and whether the clients are publicly traded companies (greater exposure to lawsuits)

Question 13

Questions to ask when rating Professional Liability Insurance

Answer 13

• Whether the applicant’s practice has grown or the applicant has cut back on business, and why
• Whether the applicant’s area of professional concentration has changed and whether the proportions of types of business in the applicant’s portfolio have changed
• Change in professional concentration would be a concern for 2 reasons:
  1. The scale of the project the architect is now pursuing is much greater which creates a greater chance that both errors will be made and those errors will have serious consequences
  2. The type of project the architect is now pursuing is different from what they have previously pursued which means it is new to them. Again creates a greater chance of serious error while they become familiar
• Whether the applicant’s mix of clients has changed over the years

Question 14

3 types of coverages usually provided under D&O policies

Answer 14

1. When their company itself will not indemnify them, the policy covers directors and officers for liability for their wrongful acts in discharging their legal duties for the company
2. When the company does indemnify its directors and officers, the policy will cover the company for the payments it makes in doing so
3. The policy also covers the company for its own liability in the event of a lawsuit against it

Question 15

Underwriting D&O Insurance

Answer 15

• Financial Strength
• Management
• Industry Standing
• General History
• Company Bylaws

Question 16

Potential D&O claims for non-profit organizations

Answer 16

• Wrongful termination
• discrimination
• mismanagement of funds
• inadequate training of volunteers or employees

Question 17

Wrap-Up Policy

Answer 17

• Insures against exposure to liability for loss or damage to third parties on the part of the participants in a commercial construction project
• Generally extends to include the owners, project manager, contractors, subcontractors, architects, engineers, and their consultants

Question 18

Advantages of Wrap-Up Insurance

Answer 18

• eliminates disputes among the insurers of the other parties
• reduces the loss adjustment expenses since their is only one insurer
• assures uniformity of coverage for all parties, avoids potential gaps in coverage
• assures the parties of minimum limits for each party and a single limit of insurance that applies exclusively to the project
• covers the full term of the project plus an acceptable comp ops period

Question 19

Disadvantages of Wrap-Up Insurance

Answer 19

• presence of a builders risk policy for the project reduces the wrap-up insurer’s exposure, meaning lower premium
• Coverage may not be as broad as under a contractors liability policy
• Does not eliminate the need for parties to maintain their own separate policies for work unrelated to the project

Question 20

Underwriting the Wrap-Up Policy

Answer 20

• the qualifications and expertise of the policyholder
• who the architect is, what kind of engineering expertise is required, and any unusual soil conditions that could cause loss to the building during or after completion of construction
• the prior use of the land, was is a manufacturing site where pollutants were discharged into a holding pond?
• what methods and type of construction will be used, will there be any blasting, shoring, underpinning
• details concerning loss control and exposures associated with the surrounding area
• the natural features of the site that may affect the project
• whether any part of the project is to be occupied before the project is complete