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COMMERCIAL LINES C LAIMS THAT CAUSE PROBLEMS

COMMERCIAL LINES C LAIMS THAT CAUSE PROBLEMS. Terry L. Tadlock, CIC, CPCU, CRIS Coastal Plains Insurance Hilton Head Island, SC terry@coastalplains.com. 1. INTRODUCTION.

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COMMERCIAL LINES C LAIMS THAT CAUSE PROBLEMS

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  1. COMMERCIAL LINES CLAIMS THAT CAUSE PROBLEMS Terry L. Tadlock, CIC, CPCU, CRIS Coastal Plains Insurance Hilton Head Island, SC terry@coastalplains.com

  2. 1 INTRODUCTION Each of the following are claim situations that have occurred or versions of claims we can see taking place based on decision of similar type claims. Each of these situations will be discussed in a claim scenario and then discussed using the appropriate policy language and endorsements needed. Some can be fixed others are gaps we may just need to make the insured aware.

  3. BUSINESS AUTO CLAIMS

  4. HOW TO DETERMINE COVERAGE Is the auto involved a covered auto NO N O C O V E R A G E YES Is the person seeking coverage an “insured” NO YES Does any Liability Exclusion apply YES NO COVERED

  5. 1 Claim #1 – “Covered Auto” A Deceptive Term” Your insured owns Patterson Construction Company. They are a large general contractor in your city. The owner, John Patterson out of the goodness of his heart bought his granddaughter, Amanda, a new car. The car was titled in Amanda’s name. John has called your agency which insures all of Mr. Patterson’s personal and business insurance. Mr. Patterson has requested you add the new car to his business auto policy. Amanda’s husband Mark works as a foreman for Patterson Construction and will use the vehicle occasionally.

  6. 1 Claim #1 – “Covered Auto” A Deceptive Term” You have written a Business Auto policy with Liability coverage using Symbol 2, 8 and 9. The limit of liability is $1,000,000. 2 Owned "Autos" Only Only those "autos" you own (and for Liability Coverage any "trailers" you don't own while attached to power units you own). This includes those "autos" you acquire ownership of after the policy begins. 8 Hired "Autos" Only Only those "autos" you lease, hire, rent or borrow. This does not include any "auto" you lease, hire, rent, or borrow from any of your "employees", partners (if you are a partnership), members (if you are a limited liability company) or members of their households. 9 Nonowned "Autos" Only Only those "autos" you do not own, lease, hire, rent or borrow that are used in connection with your business. This includes "autos" owned by your "employees", partners (if you are a partnership), members (if you are a limited liability company), or members of their households but only while used in your business or your personal affairs.

  7. 1 Claim #1 – “Covered Auto” A Deceptive Term” Several months later Amanda is involved in an accident with another vehicle injuring two passengers seriously. Amanda is determined to be at fault. The injuries of the other parties total over 1 million dollars. Much to your surprise the insurance company had denied coverage. The carriers’ position is that Amanda is not an “Insured” under Patterson Constructions Business Auto policy and the vehicle involved in the accident was not a covered “Auto” under Patterson Constructions Business Auto Policy.

  8. 2 Claim #1 – “Covered Auto” A Deceptive Term” Question 1 – Do you agree with the company’s position that Amanda is not an “Insured” under the Business Auto policy? SEE POLICY LANGUAGE ON PAGE 2

  9. 2 Claim #1 – “Covered Auto” A Deceptive Term” Question 2 – Based on the Symbols language above, do you agree that the vehicle is not a covered “Auto?” Question 3 – What effect will this denial have on the Excess Liability policy for Patterson Construction? Question 4 – Would your answer concerning this claim change if the policy was written with Symbol 1? 1 Any "Auto"

  10. 2 Claim #1 – “Covered Auto” A Deceptive Term” Question 5 – Do you think this is a common occurrence with business owners today? How would the retail agent or company know about this exposure? Can you think of a solution to this problem? SOLUTIONS?

  11. 3 Claim #1 – “Covered Auto” A Deceptive Term” Review: CA 99 16 Hired Autos Specified As Covered Autos You Own Will this endorsement help?

  12. 4 Claim #2 – Employee Hired Auto “What Does It Really Do?” Your insured manufactures and distributes machine parts for a variety of farm machines. Your client has several sales persons that travel in their respective region of the country with the responsibility of selling their products. You have written their commercial package which includes a Business Auto policy covering their fleet of vehicles. Also, on occasion it is necessary that the sales person rent vehicles when traveling to a destination too far to drive. Realizing this exposure you have added Employee Hired Auto CA 20 54. You have reassured your client that this endorsement is needed to protect the company and the employee when renting vehicles.

  13. 4 Claim #2 – Employee Hired Auto “What Does It Really Do?” One of the sales persons is on a business trip with his supervisor seeing their largest customers. The sales person has rented a car in their own name for use on the trip. He will simply turn in his expenses at the end of the trip for reimbursement which is company policy. During the trip to see several clients they have taken the largest client to a nice dinner. After several drinks and a lot of food the supervisor decides to drive due to the amount of alcohol consumed by the sales person. On the way back to the hotel the supervisor has an at fault accident resulting in a law suit against the company and the supervisor.

  14. 4 Claim #2 – Employee Hired Auto “What Does It Really Do?” When the claim is filed with the insurance carrier they immediately issue a “Reservation of Rights” letter stating they will continue to defend this claim until further investigation is completed. Three weeks later a formal denial of this claim is issued.   Question 1 – Assuming the insured has symbols 2, 8 and 9 (same language as on the previous page) on the declarations page would this be covered claim?

  15. Claim #2 – Employee Hired Auto “What Does It Really Do?” You have written a Business Auto policy with Liability coverage using Symbol 2, 8 and 9. The limit of liability is $1,000,000. 2 Owned "Autos" Only Only those "autos" you own (and for Liability Coverage any "trailers" you don't own while attached to power units you own). This includes those "autos" you acquire ownership of after the policy begins. 8 Hired "Autos" Only Only those "autos" you lease, hire, rent or borrow. This does not include any "auto" you lease, hire, rent, or borrow from any of your "employees", partners (if you are a partnership), members (if you are a limited liability company) or members of their households. 9 Nonowned "Autos" Only Only those "autos" you do not own, lease, hire, rent or borrow that are used in connection with your business. This includes "autos" owned by your "employees", partners (if you are a partnership), members (if you are a limited liability company), or members of their households but only while used in your business or your personal affairs.

  16. 4 Claim #2 – Employee Hired Auto “What Does It Really Do?” Question 2 – Is the Employee Hired Auto CA 20 54 the correct endorsement to use in this situation. Question 3 – Do you agree with the adjuster or have they made a terrible mistake? Let’s take a closer look at this endorsement and the potential problems that it may present.

  17. 6 Claim #3 – Employees As Insureds – Not As Broad As You May Think Coastal Realty is a commercial real estate company in your city. Coastal hires new sales persons as independent contractors, but after 1 year if goals are met they are moved to full time employee status. You have written a Business Owners Policy (BOP) for them as well as a Business Auto Policy for a few vehicles they allow key employees to use. After meeting with the owner of Coastal you realize that there are not enough fleet vehicles for all of the sales persons and many of them use their own cars when making sales visits with clients. You have explained that these employees although they would be covered under the Business Auto policy while driving a company owned vehicle would not be covered while driving their personal vehicles.

  18. 6 Claim #4 – Employees As Insureds – Not As Broad As You May Think 1. Who Is An Insured The following are "insureds": a. You for any covered "auto". b. Anyone else while using with your permission a covered "auto" you own, hire or borrow except: (2) Your "employee" if the covered "auto" is owned by that "employee" or a member of his or her household.

  19. 6 Claim #4 – Employees As Insureds – Not As Broad As You May Think The owner of Coastal finds this totally unacceptable and wants you to make sure all employees are covered under the Business Auto policy. To satisfy this request you add CA 99 33 Employees as Insureds to the Business Auto policy and assure the owner they will now be covered.

  20. 6 Claim #4 – Employees As Insureds – Not As Broad As You May Think A claim is reported to your agency a few weeks later. One of the employees while in their own vehicle was involved in an accident and it appears they were at fault. You report the claim to the company assuring the owner that it will all be taken care of. You are shocked when the denial of the claim comes. The company reports that in their investigation of the claim it was determined that the employee was using their car, but the car was not being used in business. The employee after a sales call went to a nearby casino to satisfy their addiction to gambling.

  21. 6 Claim #4 – Employees As Insureds – Not As Broad As You May Think Question 1 – Do you agree with the adjuster’s assessment of the claim? Question 2 – Isn’t the Employee As Insured Endorsement designed for this exposure? Question 3 – What do you tell the owner when you find out the employee did not have a Personal Auto policy because you assured them they were now insureds under the Business Auto policy?

  22. 7 Claim #4 – Employees As Insureds – Not As Broad As You May Think Review: CA 99 33 Employee As Insureds Will this endorsement help?

  23. COMMERCIAL PROPERTY CLAIMS

  24. 8 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Your insured has negotiated an extremely favorable lease. In part due to the length of the lease, 10 years and the fact they are splitting the cost of installing all improvements to the building needed to operate their business. You have written a Building and Personal Property Coverage form covering the full value of the improvements as well as the value of their business personal property.

  25. 8 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” You are notified late on Friday afternoon that there was a fire at the insureds location. Being the attentive agent you are you stop by the location only to find the insured outside as the fire department finalizes their procedures. From the looks of it a total loss will result. You comfort your client the best you can and assure him his insurance will take of the monetary losses.

  26. 8 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” The claim is filed and the company begins their investigation. Everything appears to be in order and a check is cut for the business personal property. When the client asks about payment for the loss to the improvements and betterments the adjuster tells him that there will be no payment made for those items. The client is confused; after all you said his insurance would take of this claim.

  27. 8 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Question #1 – What is a tenant improvement and betterment? Do these improvements qualify? Your Business Personal Property located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet of the described premises, consisting of the following unless otherwise specified in the Declarations or on the Your Business Personal Property – Separation Of Coverage form: (6) Your use interest as tenant in improvements and betterments. Improvements and betterments are fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and (b) You acquired or made at your expense but cannot legally remove;

  28. 8 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Question #2 – Who is responsible for insuring tenant’s improvements and betterments?

  29. 9 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Question #3 – Could the improvements made part of the building be considered “Building” coverage for the building owner? If so, could they not be insured under the building owner’s policy?

  30. 10 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” 1. Covered Property Covered Property, as used in this Coverage Part, means the type of property described in this section, A.1., and limited in A.2., Property Not Covered, if a Limit of Insurance is shown in the Declarations for that type of property. a. Building, meaning the building or structure described in the Declarations, including: (1) Completed additions;

  31. 10 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Question #4 – Does this information lead you to believe the adjuster is correct? If so, the improvements will be built back which is a relief to your client, but he is now wondering why he paid a premium to insure something he is not getting paid for. 7. Valuation We will determine the value of Covered Property in the event of loss or damage as follows: e. Tenants' Improvements and Betterments at: (3) Nothing if others pay for repairs or replacement.

  32. 10 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Question #5 – Would your answer to these questions change if after the loss the building owner decided to terminate the insureds lease and sell the property to a new owner that was converting the building into a parking garage?

  33. 10 Claim #1 – Tenants, Improvements and Betterments…”What In The World Are They?” Valuation We will determine the value of Covered Property in the event of loss or damage as follows: e. Tenants' Improvements and Betterments at: (2) A proportion of your original cost if you do not make repairs promptly. We will determine the proportionate value as follows: (a) Multiply the original cost by the number of days from the loss or damage to the expiration of the lease; and (b) Divide the amount determined in (a) above by the number of days from the installation of improvements to the expiration of the lease. If your lease contains a renewal option, the expiration of the renewal option period will replace the expiration of the lease in this procedure.

  34. 10 Claim #2 – Margin Clause – The Good, The Bad And The Ugly Your insured owns a group of retail stores and a warehouse used to prep and hold inventory prior to moving to the retail locations. You have written the insurance on a Building and Personal Property Coverage form on a blanket basis with Agreed Value at a limit of $9,500,000. At the time the account was written the statement of values are as follows: Building Contents Retail # 1 – $500,000 $2,000,000 Retail # 2 – $500,000 $1,000,000 Retail # 3 – None $3,000,000 Warehouse – $2,000,000 $ 500,000

  35. 10 Claim #2 – Margin Clause – The Good, The Bad And The Ugly Six months into the policy period the insured reports a claim at the warehouse location. A fire has destroyed the building and contents. In the proof of loss that is filed he reports the building replacement value at $2,500,000 and the contents at 1,000,000 for a total of $3,500,000. You assure the insured that the limit written of 9.5 million will be sufficient to cover the loss. Much to your disappointment the insurance company adjuster has only offered $3,000,000. Needless to say the insured is not happy and wants to know why the reduction of $500,000. The adjuster refers him to an endorsement know as a “Margin Clause.”

  36. 10 Claim #2 – Margin Clause – The Good, The Bad And The Ugly Question #1 – What is a “Margin Clause” AKA Occurrence Limit of Liability? Occurrence Limit of Liability – Version 1 The premium for this policy is based on the Statement of Values on file with the Company, or attached to this policy. In the event of loss hereunder, liability of the Company, subject to the terms of paragraph one (1) above, shall be limited to the least of the following: a. The actual adjusted amount of the loss, less the applicable deductible(s). b. The total stated value for the property involved, as shown in the latest Statement of Values on file with the Company, less applicable deductible(s). c. The Limit of Liability or Amount of Insurance shown on the face of this policy or endorsed onto this policy.

  37. 10 Claim #2 – Margin Clause – The Good, The Bad And The Ugly Occurrence Limit of Liability – Version 2 B. 100% of the individually stated value for each scheduled item of property, time element or other coverages shown in the latest application or Statement of Values on file with the Company, less applicable deductibles or self-insured retentions. If actual cash value applies, the maximum payment of 100%. Question #2 – Could the adjuster be correct?

  38. 18 Claim #2 – Margin Clause – The Good, The Bad And The Ugly Review: CP 12 32 Limitation On Loss Settlement – Blanket Insurance (Margin Clause)

  39. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets You are currently bidding on an older downtown office building. Due to its proximity to the coast and age of construction you have not been able to get a quote from an admitted carrier. Refusing to give up you contact one of your brokers who gives you an indication that they have a London market that will write the property and be competitive. You assure him the completed Acords will be there soon.

  40. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets As a student of insurance you are very familiar with Ordinance or Law coverage and the fact this client will certainly need the coverage. You are very careful to include in your request not only Coverage A, but also Coverage B at 20% of the value of the building and 25% of the building value for Coverage C.

  41. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets It’s getting close to renewal date and you call your broker who promises a quote any day. You let him know that you have to present your quote in two days and must have his numbers no later than noon tomorrow. As promised the quote arrives at noon the next day and you quickly review and enter the information into your proposal. You notice on the quote that Ordinance or Law is included. By the way, it was an impressive quote.

  42. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets After your stellar presentation the owner of the office building explains that his current insurance was being non-renewed and all the quotes he has received was in the Excess marketplace. He goes on to say that your presentation was by far the most professional and he would like for you to place the order and write his insurance. Just what we wanted to hear! You call the broker and have her bind the coverage. She does so and tells you that the policy will be arriving shortly.

  43. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets Unfortunately, the claim arrives before the policy. The office building suffers a total fire loss and will have to be totally rebuilt. You are a little anxious, but are sure you did a good job with the coverages. The building values appear to be in order, but it will take every bit of the limit to rebuild. The ordinance issues will have to be worked out, but you think the limits you have should be sufficient. Much to your surprise the adjuster has informed you that the limit of insurance is all they will be offering. This policy does indeed have Ordinance or Law coverage but it is part of the limit, not in addition. You are stunned and sit staring into the distance wondering the possible outcome.

  44. 13 Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets Question #1 – Are there differences between the coverage offered in the E&S world and the admitted marketplace?

  45. Claim #3 – Ordinance Or Law – Differences Between Admitted and Non-Admitted Markets Review: CP 04 05 Ordinance Or Law Coverage Various Company Forms

  46. INSURANCE CLAIMS THAT CAUSE PROBLEMS Terry L. Tadlock, CIC, CPCU, CRIS Coastal Plains Insurance Hilton Head Island, SC terry@coastalplains.com

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