Insurance coverage lawyers typically become involved only after a claim has been submitted and the insurer has questioned or denied coverage. Pre-loss review of insurance policies, in contrast, usually is handled by an insurance broker or agent.
Our experience has shown that the most effective approach to pre-loss review of a client’s insurance policies—that is, a review at the time of policy placement or renewal—involves both the client’s broker and coverage counsel (and, in larger organizations, in-house risk manager). Experienced coverage lawyers have detailed knowledge about what policy terms frequently give rise to disputes. Insurers are increasingly introducing non-standard policy forms and endorsements that are designed to undermine key policyholder protections. Brokers bring valuable knowledge regarding what forms are available in the marketplace and whether, and at what price, problematic terms can be altered via endorsement.
Below are some common issues that arise during the placement or renewal of an insurance policy, highlighting instances where policyholders can benefit from the expertise of a risk manager, insurance broker, and coverage counsel.
The complexity of insurance applications has increased over time, creating potential pitfalls. Inaccuracies or misrepresentations can lead insurers to rescind coverage after a loss. It is essential to ensure that all insurance applications are complete and accurate.
A common mistake policyholders make is failing to properly document their additional insured status on another entity’s insurance policy. It is essential to memorialize this status to ensure coverage can be established when needed. Typically, a policyholder receives a certificate of insurance as evidence of coverage. However, in most jurisdictions a certificate of insurance does not grant coverage; only the insurance policy itself does. The best way to document coverage is to obtain a copy of the insurance policy, specifically the additional insured endorsement. Relying solely on a certificate of insurance is risky because it may conflict with the actual terms of the policy.
In some jurisdictions, insurers are obligated to defend policyholders unless a court rules otherwise, and they cannot recover defense costs even if the court determines there was no duty to defend. Insurers have started adding endorsements to reverse this rule, requiring policyholders to repay defense costs if a court rules against the duty to defend. Policyholders should seek to remove these "recoupment" endorsements to safeguard their interests.
Many jurisdictions require insurers to demonstrate prejudice from a policyholder’s breach of a condition, such as a failure to provide notice or cooperate, to void coverage. Some insurers now include terms that eliminate this requirement, allowing them to void coverage for any breach, regardless of prejudice. Policyholders should carefully review their endorsements to ensure the "prejudice rule" is not negated.
Traditionally, a policyholder with layered liability insurance could settle with an underlying insurer for less than the full policy limit and still access excess coverage by "making up the difference." Many excess insurers now require the underlying insurer to pay the full policy limit before excess coverage applies. Insurance brokers often succeed in removing this language, but it remains prevalent.
Insurers frequently add choice of law provisions favoring jurisdictions with insurer-friendly laws. For example:
“It is hereby agreed that this Policy and any dispute, controversy or claim arising out of or relating to this Policy, shall be governed by and construed in accordance with the substantive internal law of the State of New York.”
Such provisions can significantly affect coverage outcomes, as interpretations of policy language vary by jurisdiction. Policyholders should request the removal of these clauses to avoid potential disadvantages.
London market insurers often include mandatory arbitration clauses, some requiring disputes to be heard in London or Bermuda. These clauses are generally enforceable. Policyholders should aim to eliminate arbitration clauses.
These endorsements require policyholders to maintain specific safeguards, such as fire extinguishers, sprinkler systems, or burglar alarms. Noncompliance can result in denial of coverage for otherwise covered losses. While rejecting these endorsements may not always be possible, policyholders must understand and comply with their requirements to avoid coverage issues.
Many property insurance policies include clauses limiting the time for filing a lawsuit to one or two years after discovering a loss. For example:
“No suit, action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless commenced within twelve (12) months after discovery by the Insured of the occurrence giving rise to the claim.”
Policyholders should opt for suit limitation periods of at least two years.
Conducting a thorough review of insurance policies during placement or renewal is a critical step in managing risk before an insured loss occurs. This pre-loss review is typically conducted in collaboration with a risk manager, insurance broker, or insurance coverage attorney. Organizations across all industries can benefit from such evaluations.
