Could Your Commercial Insurance Policies Put You Out Of Business? Part 1
Coverage Gap #1: Incorrect Named Insured What Could Possibly Go Wrong? Who's On First? Could there possibly be a more critical component of any commercial insurance policy than the Named Insured wording? Incredibly, many brokers don't seem to think so based on the fact that so many policies contain incorrect or incomplete wording! Why is the Named Insured section so important? Simply because if the wording is incorrect then the entire policy could be nullified, making everything that follows (e.
g.
limits, deductibles, etc.
) moot.
If the entire policy is not nullified, then at the very least coverage may be denied for those entities that are not properly identified on the policy, creating a major coverage gap.
What, me worry? Let me give you an example of what I'm talking about.
In the following true story only the names have been changed to protect the innocent! A few years ago we reviewed a Property & General Liability "Package" policy for a medium sized manufacturer of plastic goods who had been in business for approximately 15 years.
The insurance broker who wrote this policy had over 20 years of experience, and worked for a large regional insurance brokerage.
The Named Insured on the policy read: "The Plastic Parts Company" That's it, nothing more, nothing less.
So what's the problem? Glad you asked! The problem is that this was an alarmingly incomplete Named Insured, to such an extent, in fact, that it is doubtful the policy would have responded to any serious claim.
It turns out that "The Plastic Parts Company" was merely the DBA of an (unnamed) Corporation, the sole owners of the Corporation were a husband and wife, and their shares were held in a Family Trust.
Here's how the Named Insured should have been structured:
When this error was pointed out the Corporation President's initial reaction was "Well, I'm not too worried because I'm sure the insurance company would cover a claim anyway".
WRONG! Never count on an insurer's benevolence.
In dealing with insurance companies it's important to remember a couple facts:
So What's A Business Owner To Do?: So how do you assure that the Named Insured on each of your policies is proper and complete? Simply list each and every entity (e.
g.
Trust, Corporation, Partnership, Joint Venture, DBA, AKA, Individual, etc.
) that has an interest in the business.
Make sure that the wording accurately reflects the exact and complete legal names of each entity, and the relationships between those names.
Then, go one step further, and try to identify any de facto trade names, DBAs, or AKAs.
These should be listed also.
What do we mean by a de facto trade name? Here's a real example, and again the actual names have been changed.
We were asked to evaluate coverage for a Non-profit Corporation providing various social services to disabled citizens.
Starting at square one, we examined the Corporate name, which was the only Named Insured on the policy, was accurately identified as "California Disabled Services, Inc.
" (again, not the real name).
However, the insured's website address, building signage, and even the way they answered the phone was "Cal Disabled Center".
Even though "Cal Disabled Center" was not a formally filed DBA, we arranged to have it added to the Named Insured as the Corporation was essentially holding itself out to the public under that name.
Here are some things you can investigate in an attempt to identify if you have some possible de facto trade names:
This should be the first thing you evaluate in reviewing your insurance program.
Best of all, any deficiencies you find in your Named Insured wording can be fixed for free.
g.
limits, deductibles, etc.
) moot.
If the entire policy is not nullified, then at the very least coverage may be denied for those entities that are not properly identified on the policy, creating a major coverage gap.
What, me worry? Let me give you an example of what I'm talking about.
In the following true story only the names have been changed to protect the innocent! A few years ago we reviewed a Property & General Liability "Package" policy for a medium sized manufacturer of plastic goods who had been in business for approximately 15 years.
The insurance broker who wrote this policy had over 20 years of experience, and worked for a large regional insurance brokerage.
The Named Insured on the policy read: "The Plastic Parts Company" That's it, nothing more, nothing less.
So what's the problem? Glad you asked! The problem is that this was an alarmingly incomplete Named Insured, to such an extent, in fact, that it is doubtful the policy would have responded to any serious claim.
It turns out that "The Plastic Parts Company" was merely the DBA of an (unnamed) Corporation, the sole owners of the Corporation were a husband and wife, and their shares were held in a Family Trust.
Here's how the Named Insured should have been structured:
- "The John Doe & Jane Doe Family Trust;
- Plastic Manufacturing Company, Inc.
, A California Corporation - DBA: The Plastic Parts Company;
- John Doe & Jane Doe Individually As Their Interests May Appear"
When this error was pointed out the Corporation President's initial reaction was "Well, I'm not too worried because I'm sure the insurance company would cover a claim anyway".
WRONG! Never count on an insurer's benevolence.
In dealing with insurance companies it's important to remember a couple facts:
- Insurance companies are quite good at collecting premium, however when it comes time to pay a claim, especially a very large claim, they are very good at finding ways to pay back as little as possible; and
- Insurance policies are legal contracts between the Named Insured and the insurance carrier.
Therefore, especially because an insurance carrier's ultimate obligation is to its shareholders (not to the policyholder), they carefully follow any policy wording that allows them to minimize payments or deny claims outright.
So What's A Business Owner To Do?: So how do you assure that the Named Insured on each of your policies is proper and complete? Simply list each and every entity (e.
g.
Trust, Corporation, Partnership, Joint Venture, DBA, AKA, Individual, etc.
) that has an interest in the business.
Make sure that the wording accurately reflects the exact and complete legal names of each entity, and the relationships between those names.
Then, go one step further, and try to identify any de facto trade names, DBAs, or AKAs.
These should be listed also.
What do we mean by a de facto trade name? Here's a real example, and again the actual names have been changed.
We were asked to evaluate coverage for a Non-profit Corporation providing various social services to disabled citizens.
Starting at square one, we examined the Corporate name, which was the only Named Insured on the policy, was accurately identified as "California Disabled Services, Inc.
" (again, not the real name).
However, the insured's website address, building signage, and even the way they answered the phone was "Cal Disabled Center".
Even though "Cal Disabled Center" was not a formally filed DBA, we arranged to have it added to the Named Insured as the Corporation was essentially holding itself out to the public under that name.
Here are some things you can investigate in an attempt to identify if you have some possible de facto trade names:
- Website urls & email addresses
- Product packaging
- Phone answering practices
- Advertising & promotional material
- Signage
- Invoices, business cards, and other stationary
This should be the first thing you evaluate in reviewing your insurance program.
Best of all, any deficiencies you find in your Named Insured wording can be fixed for free.