Opinion

A stress test for your insurance program is a prescription to consider

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Print this page by Collin Hite

Many larger companies have risk management departments.  The job of the chief risk officer is to gauge potential problems for the company, manage those risks and insure against them.  Risk officers work closely with brokers to put into place the requisite insurance program.  Smaller businesses go through a similar process, but usually assign the duties as collateral job functions.

Brokers provide a valuable service to clients.  They know the available coverage in the marketplace and what are the best carriers to consider.  If there is a claim, they can initially file it with the carrier and assist in trying to secure coverage if there are problems.  However, if companies wish to ensure they have the best insurance coverage in place, there are two additional steps to consider.  First, an insurance audit is worth undertaking by most policyholders.

An audit is a very worthwhile function; it serves as a second opinion on the program.  In this project, an insurance coverage attorney can look at the insurance program to analyze the policies for any possible gaps in coverage.  Generally, the business operations are considered and compared to the scope of insurance coverage.  Gaps then can be addressed with the broker to ensure they are filled if considered too large a risk.

For clients who really want to know they are covered, a more in-depth review is required.  A stress test on your insurance program is warranted.  In this instance, an insurance audit is conducted.  Then various coverage scenarios are played out in hypothetical situations and coverage analyzes are conducted.  Just as financial institutions are judged you can internally test your insurance program.  This can be an intensive process to have coverage counsel test your program(s) against various loss scenarios, but it can be far less stressful and expensive than facing a catastrophic loss with coverage issues.

Once a company goes through a coverage stress test, the full scope of coverage concerns can be addressed.  The serious gaps in coverage can be fully addressed, with the broker working with the insurer provide coverage.  Manuscript policies or endorsement can be considered as necessary.  Then, in subsequent renewal periods, the insured can fall back on program audits as needed. 

Any policy, policies or an entire insurance program can be audited or subjected to a stress test.  A classic example of the complexity of policy language is in Directors’ & Officers’ insurance.  As Business Insurance magazine just noted in a recent article, “board discussions about D&O liability insurance can amount to a once-a-year, 10-minute discussion.”  Being pro-active in truly understanding the insurance of concern is a strategic risk management tool that will serve a company and its board well.  The broker can provide benchmarking to select appropriate limits, general policy language, and the best insurers.  The audit can dive into the actual language of the policy to find gaps and ambiguities.  The combination ultimately creates much better coverage for the insureds.

It is unfortunate when a policyholder learns of gaps in insurance coverage after the loss.  The costs associated with such gaps are almost always more significant after a loss when the policyholder must cover it or litigate the coverage question.  Audits and stress tests can help ensure the owner is not left on the hook in such scenarios. 

Collin Hite is the practice leader of the Insurance Recovery team in Hirschler Fleischer’s Richmond office. He handles insurance recovery and coverage litigation nationally in the areas of business interruption, cyber/data breaches, construction, business torts, products liability, directors’ and officers’ liability, employee dishonesty, intellectual property, environmental and bad faith matters. For more information, please contact Collin at 804-771-9595 or chite@hf-law.com.

 


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