RISK MANAGEMENT


THE HUNGRY WOLF SYNDROME

Producers who misrepresent facts to avoid losing an account
are hungry wolves who may lose more than just the account

By Donald S. Malecki, CPCU


One of the least-used risk management techniques is "avoidance"--when demands are unreasonable, it may be smart to walk away from it all.

Whether the insurance market softens this year and insurance agents can once again place insurance without the existing headaches cannot be accurately forecast. However, what can be predicted, with a fair amount of certainty, is that whether the market opportunities open up or not, many insurance agents will be spending a lot of time in the courts because of some of their business practices today.

The following is what's becoming a typical scenario--lamented by one producer--where insurance agents are veering toward a path that leads to subpoenas and complaints. "We're being pressured into adding language to certificates of insurance," the producer reports. "When we refuse to add this language, our client's usual reply is that if we don't comply, the client will find someone else who will; and there are many insurance agents who will do so."

Hungry wolf syndrome

No one who's been in this business for any period of time can deny the accuracy of this scenario. There are insurance agents who'll go to any lengths to preserve a client, even if it means adding information on certificates that misrepresents the truth. This is known as the "hungry wolf syndrome"--a term borrowed from the construction industry to define contractors who undertake work even when they're not experienced enough to do so.

The types of demands being made on those who furnish certificates are many and varied. Among the more common ones are:

* Certificates that look like standard ACORD documents but are different.

* The certificate holder will be given 60 days' advance notice of cancellation, nonrenewal, or material change of the policy.

* The certificate holder and its officers, directors, partners, employees and agents are additional insureds on all policies, except workers compensation.

* A severability of interest or cross liability clause or endorsement applies to commercial general liability and excess liability policies.

* Contractual liability coverage applies to liability assumed in the indemnification clause of the contract between the certificate holder and the named insured.

* Coverage applies on a blanket basis for the X, C & U hazards.

* Contractual liability limitation endorsement, CG 21 39 or its equivalent is not included in the CGL or excess liability policies.

Mistaken identity

Not all insurance companies use ACORD certificates. Most of the time, one can tell the difference between an ACORD certificate and an insurance company certificate. However, there are some entities that issue their own certificates, and they so closely resemble the ACORD certificates that some could be misled into thinking they are in fact completing an ACORD certificate.

A comparison of one such manuscript certificate reveals that it contains the same disclaimer as the ACORD document; that is, the certificate does not amend, extend or alter the coverages afforded by the policies shown. However, one of the subtle differences that may not be noticed concerns notice. From the standpoint of notice of cancellation, nonrenewal or material changes, 30 days' notice will be given. The ACORD form, on the other hand, states that the insurer will endeavor to provide notice of cancellation.

Another practice is to force insurance agents to use the Evidence of Property Insurance, ACORD Form 27, for purposes of confirming all of the coverage requests. The reason for using this form, which may not be clearly obvious, is that it contains no disclaimer unlike ACORD certificate 25-S.

The matter of notice

The insurance agent who crosses out the word "endeavor" having to do with the certificate's notice of cancellation and inserts 30, 60 or 90 days as the advance notice period for any cancellation, nonrenewal or material change is asking for trouble. The reason is that the only one who has the privilege of receiving notices under liability policies, in general, is the first named insured and such notice is limited to nonrenewals and cancellations. See, for example, ISO Commercial General Liability coverage part condition 9, and common policy condition A.

Some insurers will accommodate certificate holders by providing them notice of cancellation or nonrenewal. In fact, the policy commonly is endorsed to reflect this intent. However, even here, notice is not given when there is a material change in the policy (whatever that may mean).

The fictitious insured syndrome

Another syndrome popularized primarily by insurance agents is where the certificate reflects the holder as an additional insured, but no such status actually applies to the policy. The good news is that some insurers have attempted to reduce these problems by automatically including persons and entities as additional insureds, whenever they are shown to be as such on the certificate.

The bad news is that the coverage for additional insureds varies widely, and the blanket additional insured automatically encompassing certificate holders requesting additional insured status may fall short of the coverage requests. The point to remember here is that it should not be assumed that blanket additional insured endorsements are broad and all encompassing. Nothing could be further from the truth!

Another related issue is when a certificate truthfully reflects the holder as an additional insured. It is important to note that no one other than the entity so named is considered to be an additional insured. In other words, additional insured status may not extend to the additional insured's officers, directors, partners, employees and agents. Generally, the only one who has the privilege of including its officers, directors, employees, etc., is the named insured or "you" of the policy.

Whether insurers will accommodate requests to add an additional insured's entourage is open to question. It is a subject that needs to be referred to the insurer for approval and policy modification.

The monkey see, monkey do mentality

Whenever a certificate holder requests confirmation of a severability of interests provision, what actually is being sought is coverage in case one insured sues another insured. Barring only the fellow employee exclusion, the standard ISO CGL policy, for example, does not contain such an exclusion involving other insureds. In fact, this policy confirms such protection under the condition 7 titled "separation of insureds," (the modern term for severability of interests).

The problem is that this concept of severability can be nullified in a number of ways. One of them is with the issuance of a "cross liability exclusion." Thus, whenever the request is made for a severability of interest or cross liability endorsement, the natural conclusion is that the one making the request doesn't have a clue as to what is being requested.

As it often turns out, severability of interest protection is granted automatically by the CGL policy, whereas the umbrella liability policy often contains a cross-insured exclusion precluding coverage for suits between insureds, just as is commonly requested by the certificate holder. The best way for a certificate holder to learn the difference is to get burned, so-to-speak.

Broad contractual liability coverage

It's uncertain what the rationale is behind the request that a certificate reflect that contractual liability coverage encompass liability assumed under the hold harmless and indemnification agreement between the parties. Is the intent to reflect that coverage applies to the sole fault of the indemnitee, i.e., the party attempting to transfer its financial consequences of liability to others? Or, is the intent to make the policy coverage equate to what is being assumed?

Many people do not realize that the standard ISO CGL policy automatically includes broad form contractual liability encompassing the sole fault of the indemnitee. Of course, coverage is contingent on whether such broad form transfers of liability are not void and unenforceable by law. If not, coverage applies.

It doesn't seem possible that the certificate holder is actually asking for confirmation that the policy applies to whatever has been agreed to between the parties. No one in his or her right mind would go so far to say that the policy encompasses all of the agreements of the contract. Yet, as some people know, desperate people do desperate things.

What one insurance agent did recently was to place an asterisk after that particular request dealing with contractual coverage stating: "Subject to all of the policy's terms, conditions, and exclusions." That is one of the better ways to deal with that request. In fact, to the extent insurers will accommodate such requests, they usually make a similar notation.

After all, it is well known, at least among seasoned insurance veterans, that the scope of contractual liability coverage, even under the broadest liability policies, falls short of what generally is attempted to be transferred in these hold harmless and indemnity agreements.

Legitimate requests

The last two items listed above, dealing with confirmation of X, C & U coverage and the nonapplicability of contractual limitation endorsement, CG 21 39, are perfectly legitimate requests for confirmation. The situation, as it exists today with construction contractors, is that quite often, coverage is being whittled down.

It is not unusual to see a contractor's liability policy with exclusions attached precluding coverage for liability arising out of the explosion, collapse, or underground (X, C & U) hazards. The broad form contractual liability coverage automatically built into the CGL policy also is being narrowed with attachment of the above endorsement, CG 21 39.

Just last year, ISO introduced two exclusions precluding coverage for broad form property damage coverage after operations have been completed. One exclusion is site-specific and the other applies on a blanket basis. Some insurers also are limiting coverage to the classification listed in the policy schedule or to certain locations.

It is no small wonder that certificate holders are requesting confirmation that these exclusions or limitations do not apply. In fact, since the introduction of the ACORD certificate 25-S in 1997, the authorized representative is required to list all exclusions added by endorsement, specifically for the purpose of appeasing the worried certificate holder who makes requests that these types of exclusions do not apply.

It has been somewhat of a surprise for some insurance agents completing these certificates to learn that such a request is being made to show these exclusionary endorsements. To overlook this requirement and not list the exclusions is a misrepresentation of equal weight to those who simply reflect false information on certificates.

Words of wisdom

One of the least-used risk management techniques is "avoidance." Simply stated, it means that when demands are unreasonable, it may be smart to walk away from it all. In fact, construction contractors confronted with the "hungry wolf syndrome" are being told the same thing.

Barring legitimate requests, insurance agents should show on the certificate only what the policy reflects, no more or no less. The certificate should not be viewed as an endorsement or a request for one.

It is uncertain when the completion of certificates became the obligation of insurance agents. It was probably in 1976 when the ACORD certificates first became available. Prior to then, it was not unusual for certificates to be issued by the underwriters or insurance company employees.

One underwriter recently commented that his company was pondering the idea of issuing certificates electronically. Sounds like a great idea. If this were implemented, it might meet the first requirement of certificates; that is, expeditious confirmation of coverage being provided. It might also alleviate all of the problems besetting insurance agents who are being pressured into issuing certificates with information containing half-truths. In fact, it would be nice for a change to transfer the pressure of issuing certificates onto the insurers where it rightfully belongs. *

malecki The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.