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Ask An Expert Briefs

IIABA's Virtual University VUpoint Newsletter
Vol. 18, No. 17 - Issue #428 - Friday, August 18, 2017
Copyright © 2017 by the Independent Insurance Agents & Brokers of America, Inc. 

The Virtual University’s Ask An Expert (AAE) service may be our best known member benefit. Daily we receive questions from members wanting help with denied claims, coverage and procedural issues, and agency management concerns. Our faculty includes some of the nation's foremost leading experts in the insurance industry. These volunteer faculty members generally charge for the time they give to our members. Think about that, the insight you get through our AAE service costs nonmembers THOUSANDS!

For the next two weeks, VUpoint subscribers have access to a few of these incredible insights right here. When the next edition of VUpoint is published, this AAE content go back into the members-only vault. And remember, beyond having access to all of our valuable Ask An Expert content, only members are allowed to ask the questions.
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Last week, the Virtual University sponsored a webinar detailing certificates of insurance – what they are and the problems they cause. During and following the webinar, we received many certificate-related questions. We have chosen a few for this edition of VUpoint.

D&O Insurance & Perceived State Law Protection

Question...

Recently the board of directors for a state-wide landlord association, of which I am a part, decided not to renew their directors and officers (D&O) liability insurance. They cited my state's nonprofit corporation act as the basis for their decision stating that the act provided protection to board members based on this provision: 

"No director shall be personally liable to the Association for monetary damages for breach of fiduciary duty as a director except for (i) a breach of the director's duty of loyalty to the Association; (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law; (iii) any transaction from which the director derives an improper personal benefit; or (iv) as further defined in [State code section omitted]."

Does this mean D&O insurance for non-profits in this is no longer needed, or does it just greatly reduce the risk?

Answer

FACULTY RESPONSES: You will notice all of the "excepts" which means coverage is still very needed. Also, people can still be sued for many things and will need defense to show why they are not responsible.

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They should ask their corporate lawyers since this requires legal advice. 

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I don't see that it reduced anything. It addresses liability TO the association, not to third parties who might sue them. Check out this VU article:

http://www.independentagent.com/Education/VU/Insurance/Commercial-Lines/Professional-Liability/WilsonDONeed.aspx

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If someone sues the board member where are they going to get their defense? Ok, maybe the law helps them but who's paying for the attorneys going to court to prove that the claim is barred, if it is barred?

Remember insurance premium are KNOWN, defense cost and judgements are UNKNOWN, most would rather pay the known premiums so they don't have to worry about the unknown. 

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What if you get sued? Who's paying for the attorney to defend the Ds and Os? 

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Look who they are NOT personally liable to – the association. It doesn't say anything about others.

Further, it's only for fiduciary duty – not acts or decisions.

I think that was a bad decision on the board's part.

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I think the board should maintain its coverage for several reasons. Our business is based on the re-interpretation of legal tenants, that in theory are codified by the legislature that their actions and or inactions have been deemed not responsible for such causation as not being recoverable.

I especially appreciate the sentence "knowing violation of the law". That obviously eliminates the theory that ignorance is no defense under the law. If you knowingly violate the law does that not make you guilty of some other codified section of the law but damages still will inure itself to the plaintiff. Will that theory withstand the upcoming legal challenges by denying the right to recourse of civil actions not specifically addressed in the law?

One must presume that because the legislature has so deemed that no recourse exists until the law is overturned by the state or federal court of appeals. If that does occur and the action is returned to lower court to be adjudicated and now that law has been overturned thereby relieve the defendant of protection from the litigant or parties to the litigant.

If your BOD is willing to have each member of the BOD sign waivers of indemnity in perpetuity from any and all future or previous litigation you may have a leg to rest upon.

I would advise in a most positive method explain to your client how often laws are reversed or amended.

The first 5 hours of billed time in 15 minute increments will have easily covered the cost of the premium proposed. Now think of your own E & O issue for the reasons in a very short response to your question.

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Like most Volunteer Protection Acts the directors are not held labile. However, the laws do not prevent a suit from being filed. If a suit is brought a court may have to determine if the law applies to the allegations. If you don't have D&O who will be paying for the defense? Substantial funds may be required to defend against even a frivolous claim. Are you ready to put up your own personal funds since there is no coverage for you under personal insurance policies for the types of claims that arising out of board service?

Even though some umbrellas have an exception for service on a not-for-profit board the umbrella responds to BI and PD claims. That is not what director suits deal with. 

Does the organization have the funds to pay for the defense? Also, the law provides protection for the directors only; you didn't indicate if the previous policy provided any protection for the entity. If it was also covered under the previous D&O policy, where does the organization now have protection if the claim is against them alone or in conjunction with the board?

Since the 80's the majority of claims against not-for-profits has been employment practice claims. Do they have separate coverage? Did they have the EPL coverage as part of the expired D&O?

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It's a question that requires input from a lawyer because it requires a comparison of the "protection" provided by the statute and the coverage provided by the insurance. Without attempting that comparison (because I'm not a lawyer and because I haven't got time to do it) I'm 100% certain that the statute provides some of the same protection as the D&O policy; but I'm equally certain that the statute doesn't perfectly duplicate the D&O coverage. In other words, there are things that can happen that are not covered by the statutes but ARE covered by your D&O policy. Making that determination, however, is not agent work, it's lawyer work, and if you get it wrong, you'll either be accused of practicing law without a license or you'll be sued for an E&O.

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This is a legal question that should be answered by the Association's attorney. That being said, note the statute applies only to personal liability of the individual directors. The entity is not provided protection by this statute. If the entity has no assets coverage may not be a big deal, or it may be. Once again, legal advice needed here.

Also, any fool can sue - without a D&O policy, there is no defense coverage for the individual directors to pay for a defense against aforesaid fool.

As an aside, I would note that some personal umbrella policies cover insureds who sit on nonprofit boards but only for the perils covered by the personal umbrella (typically BI, PD, and PI), so PUP coverage may not be adequate. 

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As a non-attorney, my reading of that statute focuses on the text pertaining to "breach of fiduciary duty." The actual fiduciary duty may be small. Yet, the possibility of miscellaneous errors and omissions as a director may be high. D&O coverage is still needed. Beyond the exceptions (i) through (iv) can still happen, in which case the entity coverage may be necessary, although the individual indemnification of the director responsible may evaporate.


Abbreviating the Insured's Name

Question...


What is your opinion regarding abbreviating an insured's name on their policy? Does it matter
?


Answer

FACULTY RESPONSES: It's a legal contract between the named insured and the insurance carrier. Abbreviation should be avoided.

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Yes, it matters. The Insured's Name should never be abbreviated. Always put their actual, legal name even if the name is a misspelling. I have seen claims denied over that very issue and lengthy litigation was needed to compel the insurance company to accept liability based on the intent. I even once insured a trucking company who faced the same issue with their FMCSA filings.

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Never abbreviate a Named Insured's name. 

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The policies should reflect the insureds' correct legal names. Unfortunately, sometimes insurers are forced to abbreviate because the "computer field is not large enough to insert the full name." Then at a time of loss some lawyers argue about wrong names while you and the policyholder had no choice about how it was issued. If it needs to be abbreviated on the declarations page you could ask for an endorsement in the policy to correctly state the names; some insurers will do that and some will not.

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It is if you're using a name that is different from the entity's legal name.

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Properly listing the insured's name is important to avoid confusion. If the named insured is ABC, Inc. it should be listed that way and not ABC or ABC Corp.

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My opinion is that insurance policies are legal contracts, and that the legal full names of all parties should appear on them. I think it's just asking for trouble to use an abbreviated version of a name—and what purpose would be served by that practice?

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Could cause a problem - If your insured is General Motors Corporation and you abbreviate it to a non-entity, GMC, you will find that the insured has no coverage and the insurer is deceived as to who or what it is insuring.

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To avoid confusion between all parties the First named insured should be fully written out so that in the event of a claim there will be no questions concerning responsibility. Avoid issues now rather than deal with them at the time of a claim.

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Don't ever do it.

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Good question for a lawyer. As long as there's no doubt about the insured' identity it shouldn't be a problem. There is a range of "abbreviation." William Arthur Smith is a slam dunk. We. A. Smith is also ok. W. Smith isn't too clear, especially with such a common name. To avoid the problem, don't abbreviate. Use the full name as it appears on the deed or title.

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I assume this is a commercial policy. The short answer is, don't do it. List the entire legal name of the organization.

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It could well matter depending on the extent of the abbreviation and the amount of the claim. I'm uncertain as to what "abbreviating an insured's name" means. For example, my dad's name was John but he went by Jack. He used John on all legal documents, hence the insurance policies used John. Words are important, especially in our business. Bottom line, I want the named insured to be exactly what is on the pertinent legal document or exactly as the business entity is legally named. Why would you want to "abbreviate" this?

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My opinion is that an insured's name on an insurance contract should be exactly the same – down to capitalizations and punctuation -- as the business name filed with the Secretary of State for the entity's domicile.

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Not smart! Names are not abbreviated on birth certificates, marriage licenses or death certificates. It may sound like it shouldn't cause a problem, but in many instances, it could. There is no reason to do it. The policy itself could end up pages shorter if abbreviations were allowed.

UM/UIM Response When PAP/BAP Does Not Provide Coverage

Question...

The president of a corporation decides not to carry uninsured motorist (UM) coverage on the commercial auto policy. The vehicle he drives is owned by the business entity and covered on the Business Auto Policy (BAP). The president is involved in a not at fault accident with an underinsured (UIM) driver (in this state, UIM is within the meaning of UM). He sustains an injury and needs to file an UM claim. Since his BAP does not include UM, he has no claim there. However, he does carry UM on his personal auto policy (PAP). Again, this is a company vehicle and is thus not listed on the PAP, but he is the named insured on the policy. My question is: can he file a UM claim on his personal auto policy? Ignore that he may be working and that WC would pay for his injuries; I know that is the remedy. I just want to clarify the UM question.

Answer


FACULTY RESPONSES: 
Not enough detail for an air-tight ruling, but exclusion "1" on page 12 seems to rule out coverage on the grounds that the injury occurred while occupying a vehicle that was regularly furnished for that person's use. The UM forms are peculiar to the various states, so there might be an unusual rule for this one. Check with your state's rules to be sure. Above all, report the claim and let the insurance company rule on it.

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Sure sounds like the vehicle is available for his regular use. If so, here is the plain exclusionary policy wording:

An "uninsured motor vehicledoes not include any vehicle or equipment:

a. owned by you, a relative, or a rated resident or furnished or available for the regular use of you, a relative, or a rated resident;

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You can FILE a claim on any policy though obviously that doesn't mean it's covered. Look at the UM exclusions in his personal auto policy. My state has one for vehicles furnished or available for your regular use that are not declared on the policy for UM coverage.

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This could exclude coverage:

Coverage under this Part III will not apply:

1. to bodily injury sustained by any person while using or occupying a motor ve­hicle that is owned by or available for the regular use of you, a relative, or a rated resident. This exclusion does not apply to a covered auto, a rental auto, or a temporary substitute auto that is insured under this Part III;