I had the pleasure of speaking at Perrin’s Emerging Insurance Coverage and Allocation Issues Conference in Philadelphia earlier this month. The conference covered a wide range of topical issues and sparked a lot of debate among panelists and conference attendees.
“Priority of Coverage – How to Determine Which Policies Apply and In What Order?” was the topic of my panel, which looked at challenges that arise when two parties engage into an agreement that contradicts their insurance policies. I moderated a debate between Selman Breitman LLP’s Sheryl W. Leichenger and Hermes, Netburn, O’Connor & Spearing, P.C.’s Elizabeth C. Sackett. We talked about how to evaluate coverage priority while keeping the notion of risk transfer in mind, as well as the extra complication of duplicative coverage for the same loss, indemnification agreements, and jurisdictional consequences.
The Hypothetical
Our presentation was built around a hypothetical beach resort called “Seaside” and a management firm called “Beacher.” Seaside and Beacher signed a Management Agreement (MA) in which Seaside was designated as the “owner” and Beacher was designated as the “operator.”
Both Seaside and Beacher were required by the MA to hold a $1 million primary general liability policy as well as a $10 million umbrella policy. As a result, Seaside obtained a $1 million GL insurance and a $10 million umbrella policy with Seaside as the listed insured on both policies, and Beacher qualified as an insured on the Seaside primary policy as Seaside’s “real estate manager.” Beacher had its own liability insurance, with primary coverage of $1 million and umbrella coverage of $10 million. Other Insurance clauses were included in all four contracts, indicating that they “will be excess over any other valid and collectible insurance for damages covered by that policy.”
The “Waterslide Boys,” Brian, Carl, and Dennis Waterslide, gave a concert at the resort one summer and were rewarded with a midnight room service snack. They felt ill the next day and were admitted to the hospital. Due to their illness, the Waterslide Boys had to cancel many shows. Following their recovery, the group filed a lawsuit against Seaside and Beacher, claiming damages for food sickness they allegedly contracted while staying at the resort.
The action was settled for $4 million, and the settlement agreement stipulated that the defendants were equally and severally accountable for the sum. An interim agreement was used to fund the $4 million settlement ($1 million each), with all four insurers retaining their rights to resolve the coverage and subrogation concerns at a later date. Soon after, Beacher’s primary and excess insurers sued Seaside’s primary and excess insurers, arguing that their policies gave them no responsibility to join in the settlement.
Questions That Arise
Beacher has two lines of coverage for the same exposure, Elizabeth explained: it has its own policies and qualifies as an insured under Seaside’s policies. For the food poisoning claim, all four policies are at risk. When there is duplication of coverage, we look to the Other Insurance clauses to see which takes precedence. All four policies can claim to be excess over any other lawful insurance for the same exposure because they all have the identical Other Insurance terms. When this occurs, the courts will rule that the Other Insurance terms are mutually repugnant, canceling out each other. In this scenario, the outcome is determined by the policy text rather than the MA.
The Other Insurance provisions are not mutually repugnant in this circumstance since they are not similar. The Beacher policies’ Other Insurance provision describes the circumstances in which they will respond on an excess basis. As a result, Seaside’s primary would offer initial coverage, while Seaside’s excess would provide Beacher with umbrella coverage. If Beacher’s line of coverage responds at all, it will only do so after Seaside’s $11 million in primary and umbrella coverage has been spent.
Different techniques to answering this question have been imposed by the courts depending on the jurisdiction:
Vertical Exhaustion Approach (Majority) – According to Elizabeth, vertical exhaustion is the most common method. If the policies contain the “insured contract” exception to the contractual liability exclusion, the court recognizes that additional insureds and Other Insurance provisions may establish the priority of coverage, but it also recognizes that the indemnification agreement could further change the priority of coverage established by the policies.
This strategy is based on the idea that an indemnitee’s insurer can sue an indemnitor’s insurer for equitable subrogation. Equitable subrogation allows an insurance company to act in the place of a policyholder and seek any rights that the policyholder may have under an indemnity agreement. The advantage of the bargained-for indemnification agreement is recognized when equitable subrogation is used to settle priority of coverage concerns.
Vertical fatigue is also supported by a judicial economy argument. Because resolving Other Insurance and extra insured concerns does not resolve the dispute involving indemnity agreements, the court prefers to avoid lengthy litigation.
Horizontal Exhaustion Approach (Minority) – In determining the priority of coverage, courts using the horizontal exhaustion approach do not regard indemnity agreements in contracts between the parties. One justification for this approach is that policies, not extrinsic contracts, decide coverage priority. The insurer’s obligations are determined by the policy’s terms and conditions. A second reason is that, in many cases, the indemnitee’s liability has not been determined. The Waterslide Boys settled their claim without a determination of responsibility in our hypothetical. The management agreement’s indemnity provision stated that Seaside would compensate Beacher for negligence, but that the indemnity duty would be overturned if Beacher was severely negligent or reckless. It could be argued that a court would be unable to establish whether the indemnity provision was triggered based on the information supplied. The horizontal exhaustion technique essentially acknowledges that the indemnity problem is premature. However, this appears to be a minority viewpoint.
Practical Considerations
Our conversation came to a close with some practical issues. We concentrated on items to think about in comparable scenarios.
Relationships between the parties are vital in choosing a reasonable outcome for all parties, as they are in most disputes. A successful outcome requires planning ahead of time and maintaining lines of communication open.
What does priority of coverage mean?
Payments in order of priority Most, but not all, directors and officers (D&O) liability insurance plans contain a clause that specifies the sequence in which policy money will be distributed to the policy’s various insureds.
How much insurance does Priority come with?
Priority Mail Express includes $100 insurance and a money-back guarantee on a certain planned delivery day. When ordered at retail, Priority Mail 1-Day service comes with a $50 insurance policy and no money-back guarantee.
What are the 4 types of recommended insurance and what do they each cover?
The four types of insurance that you must have, according to most experts, are life, health, long-term disability, and auto insurance. Always check with your employer first to see if coverage is available. If your employer does not supply the type of insurance you require, get prices from several different insurance companies. Those who provide coverage in a variety of areas may provide discounts if you acquire various types of coverage. While insurance is costly, the cost of not having it might be far higher.
Is there insurance on priority mail?
Get complimentary insurance with your purchase. Most packages now qualify for free insurance*** of up to $50 or $100 for Commercial Plus subscribers and this is assuming that existing Priority Mail rates remain unchanged.
What is not covered by USPS insurance?
Items that are perishable, combustible, or too fragile to withstand standard mail handling are not covered by insurance. If you’ve insured something online, you can mail it, deliver it to your carrier, request free package pickup online, or drop it off at a USPS collection box.
Why is it important to have adequate insurance?
Insurance is something that every business owner should think about. Because of the typically intimate relationship between business and personal assets, insurance is especially critical for small business owners.
If you’ve recently started a business, you may believe that insurance is a luxury that only large, successful enterprises can afford, but that you don’t need to worry about right now. After all, you’re working with limited funds, have staff (or at least yourself) to pay, and need to sell your product, among other things. In other words, you’re saying to yourself, “I’d rather spend money dealing with what I know will happen than what could happen.”
To some extent, this mindset isn’t entirely negative. Many small businesses have depleted their cash reserves by paying insurance premiums to protect themselves against losses that never occurred.
However, we’d want to dispel the notion that insurance is solely for the protection against accidents. The most significant reason you might need insurance is to protect yourself from legal risks.
In any case, if you realize how crucial insurance is to your company, you’ll be in a better position to figure out how much you need.
The importance of insurance to the health of your business
Life is full with unexpected events, some good and some negative. A storm may drop a bag of money on your driveway, but a tree limb on your roof is more likely! We frequently opt to insure ourselves against such unpleasant events. You can avoid much of the economic impact (known in the insurance industry as a “loss”) of such tragic events by paying an insurance premium.
When you cut through the jargon of any insurance policy, you’ll find that it basically boils down to this: In exchange for premium payments, one party (the insurance company) commits to pay another party (the insured) a specific sum of money if a covered economic loss occurs.
For instance, a powerful storm uproots a tree on your property, which then crashes on your house and floods your basement, resulting in $5,000 of damage. If you have a homeowners policy, the insurance company will pay you $5,000, less any deductible amount, because it has agreed to face the financial repercussions of such a risk (the share that you must pay).
You’ll have to compare the expense of insuring against a number of hazards against the financial effect of an uninsured loss as a business owner. Insurance rates can put a significant dent in any company’s budget. However, we cannot emphasize enough that when you start a business, insurance takes on a whole new meaning. In reality, rather than insuring against anything occurring to you, the most significant coverage you’ll buy will most likely be to protect you from liabilities related with what you or your employee might do to someone else.
Because of the clear economic link between the owner of a small business and the business itself, any big, uninsured loss that strikes either of the following may jeopardize the business’s continuous operation as well as the owner’s financial well-being:
Understanding Your Liability for Uninsured Business Losses
The financial and emotional toll of an uninsured loss on a company and its owner can be catastrophic. If a firm suffers an uninsured loss (such as the unintentional destruction of the company’s computer system or a lawsuit stemming from a “slip-and-fall” on the premises), the owner may be affected in two ways.
- To begin with, the loss may reduce corporate profits or force the owner to invest more money into the company to keep it afloat.
- Second, the owner may be legally liable to others for the loss of the business. The amount to which a business owner can be held financially liable for his or her company’s debts and legal judgements is determined by various factors, including the legal form in which the company is owned and operated.
Liability for sole proprietorships and partnerships
In general, if you operate a business as a sole proprietorship or partnership, you will be personally accountable for any debts or legal judgements owed by your company. The amount you may be obliged to pay is not limited to the amount of money you make or the worth of your firm.
Gail Gorgeous, for example, runs a company that creates and distributes hypoallergenic cosmetics. The business, which is not incorporated, earns $70,000 per year and is valued at around $200,000. A group of consumers experienced allergic reactions as a result of an error in the ingredients used in many eye liners, some of which were severe enough to necessitate hospital visits. Ms. Gorgeous will be liable for the entire $250,000 if the consumers’ claims total a quarter of a million dollars.
Corporate liability
If you conduct your business as a corporation (including a S corporation) or as a limited liability company (LLC), you will normally have “limited responsibility,” as defined by the law. In theory, this means that your legal obligation for your company’s debts is usually limited to the amount of money you put into it. To put it another way, you may lose your business, but you will not lose non-business assets like your home or car.
There are, however, exceptions to this norm of restricted responsibility. Your limited liability as a corporation may be revoked if:
- By acting as if corporate property or money were your own personal property, you show a lack of regard for the corporate structure.
- Your business is undercapitalized. That is, the company does not have anywhere near the assets it will require to meet its responsibilities.
- You willingly release yourself from limited liability (such as by agreeing to guarantee, as an individual, the debts of your corporation).
When a large sum of money is at stake in a lawsuit, attorneys will strive tirelessly to take advantage of such exceptions in order to collect legal judgments against you personally.
The impact of personal losses on your business
A small business owner’s uninsured personal loss can have a crushing effect on the company. What impact might personal losses have on a business? Apart from its owner, a solely owned, unincorporated firm has no legal existence. As a result, a big uninsured loss experienced by the owner can bankrupt the company. To pay off a debt, a business owner may be obliged to sell business assets even the business itself.
Although partnerships, corporations (including S corporations), and limited liability companies (LLCs) have different liability standards, you might be shocked to hear that a substantial uncompensated loss to the business owner can nevertheless cause injury to these types of firms.
Impact of personal losses on sole proprietors
If you’re like many small business owners, you operate under the “single wallet,” or as a sole proprietorship. Even if you keep separate business records (ideally), you and your business are one person in the eyes of the law. Even though the cause of the loss has nothing to do with the business, if an auto accident, a house accident, or similar unforeseen incident causes a large economic loss to you personally (rather than your business), your capacity to profitably manage your firm may be called into question.
For instance, a visitor at your house trips over a dog toy in your kitchen that is not part of your professional work area. The guest trips and falls, resulting in medical bills of $20,000 for her injuries. If she sues you for this amount and wins, and you can’t come up with the money, she may be able to force you to sell business assets to pay the $20,000 she owes you. Although your state may limit others’ ability to force you to sell your business property to pay off court judgements, you shouldn’t rely on these rules because they may not protect all of the equipment and inventory you need to run your company.
Personal losses and corporations or LLCs
Even if you’ve taken steps to create your company a separate “person” in the eyes of the law by forming a corporation or LLC, your personal financial losses could hurt your company.
Consider the following scenario: You’re backing out of your driveway and accidently hit a passing bike. The rider’s $2,000 Italian racing bike was damaged, and he was forced to pay $7,000 in medical bills. He sues you and obtains a $9,000 judicial judgment against you. You’re unable to repay your obligation.
There are legal and practical reasons why the wounded driver won’t be able to force you to sell or transfer your company’s corporate assets to her in this case. But it doesn’t mean you’re out of the woods: your company may have trouble obtaining loans in the future.
Typically, banks will not lend money to a small business unless the shareholders/operators agree to be personally accountable for the debt. A bank may view your guarantee as having minimal value if you have a substantial judgment against you.
Personal loss insurance is clearly necessary, as insurance is a critical tool to protect yourself and your business from the troubles that can arise as a result of a personal loss. Keep in mind, however, that insurance is only as good as the maximum coverage limits of your policy. Also keep in mind that some losses may be excluded from coverage.
How much comprehensive coverage should I have?
While governments and insurance companies do not compel drivers to obtain comprehensive coverage, if you finance or lease your vehicle, you may be required to purchase it under the terms of your contract. If you own your automobile outright, you should consider a comprehensive policy, according to WalletHub, if:
- You don’t have a substantial emergency reserve to replace or repair your car if it breaks down.
Modern cars last longer and cost more to fix than older cars, which were required to lose comprehensive coverage after six years or 100,000 miles. Most experts now advise having comprehensive insurance on your automobile if the cost of the premium is greater than 10% of the car’s market value minus the deductible.
This method from Insuramatch explains how to figure out if you should keep comprehensive coverage for your car:
- To check the six-month premium cost of your comprehensive policy, look at your monthly statement, the insurance company’s web portal, or your policy declaration page.
- Subtract the deductible amount from the value of your automobile; if you’re not sure, use a site like Kelley Blue Book to receive an estimate of its value based on the make, model, miles, condition, and special features.
- Subtract the amount of your six-month comprehensive coverage premium from the answer in step 2.
If you get a negative number, it’s more cost-effective to cancel your comprehensive insurance. Keep the comprehensive coverage if the result is a significant positive number. If your positive number is low, you can choose to keep this sort of policy or save the money and replace or repair your car yourself if necessary.
How much liability coverage do I need?
The liability element of your homeowners insurance protects you from lawsuits for personal injury or property damage caused to others by you, your family, or your pets, as well as court expenses and damages awarded.
To secure your assets, you need have enough liability insurance. The majority of homeowners insurance policies include a minimum of $100,000 in liability coverage, but larger limits are available, and it is widely suggested that homeowners purchase at least $300,000 to $500,000 in liability coverage.
Consider getting a separate excess liability or umbrella policy if you own property or have investments and savings worth more than your policy’s liability limitations.
Does priority flat rate include insurance?
It’s still our quickest domestic product, with a money-back guarantee and overnight delivery to most U.S. addresses, as well as up to $100 in insurance coverage.