Tangible business property (whether real or personal) has two dimensions of value: value as an object and value in producing revenue. The object-value of property can be insured against the aleatory risk of loss from various perils (“direct” property insurance). The revenue-producing value of property can be insured as well: providing indemnification for the loss of money that would have been earned during the time (hence, “time element” insurance) it takes to repair or replace the directly-damaged property.

Time Element Insurance Kicks In After Loss

Time element insurance coverage is only triggered if there is first an insured direct-damage loss to the subject property. As with direct property insurance forms, time element insuring agreements make reference to “covered causes of loss.” Care must be taken here: various “Commercial Package” insurance policies may include by endorsement additional direct-damage perils such as Earthquake, Flood and Mechanical Breakdown. The inclusion of coverage for direct damage from such perils does not automatically provide coverage from time element losses arising from them. Obviously though, earnings losses or extra expenditures following an earthquake are just as damaging as such losses following a fire. Agents and brokers should offer their commercial insurance customers the option of adding time element insurance against all perils that concern the buyer. Only then can an informed business decision be made.

Typically, time element insurance is purchased on real property (“buildings”) and on business personal property (“contents”). Fleet operators and contractors should also be concerned that their motor vehicles, various vessels and mobile equipment might be a significant (or the only) source of business revenue. What would happen to the business’ earnings if a tornado or serious fire hit the main terminal, docks or the contractor’s equipment yard, destroying trucks, boats or equipment? While time element insurance can often be obtained on these classes of property, we will not discuss these specialty areas any further here; however, attorneys need to keep in mind a client’s potential exposures to such losses.

As mentioned, businesses can be exposed to Extra Expense and/or to Business Income time element losses. Business Income can include (or may exclusively involve) rental income. A time element loss can arise from damage to a business’ own property, or could come from damage to someone else’s property. This latter type of loss is called “contingent business income” or “contingent extra expense” and can involve contributing properties (the plant of a supplier of key parts or raw materials), recipient properties (the warehouse of a manufacturer’s major customer), or leader properties (the big mall next door to a restaurant). These losses arising from “dependent properties” are insurable through the use of separate endorsements.

To identify and then quantify time element exposures, the person trying to manage this risk must ask, “What would we do if…?” The continuity of operation of some businesses might be so critical that they couldn’t afford to be shut down at all. A newspaper might fall into this category—it must publish every day no matter the cost, and would have huge exposures to the extra expenses involved in re-locating editing and printing activities, but might suffer no loss of subscribers’ or advertisers’ income at all. In contrast, if the ore crusher of a copper refiner burnt down, there might be no opportunities of any type to stay in business by applying extra expenses—their exposure here would be 100% to loss of business income. Under a variety of conceivable loss scenarios, though, most operations will have exposures to both business income and extra expense losses.

Upon careful analysis, many firms will find that their exposure to time element losses is as large as, or even greater than, their possible loss from any direct damage to property.

Smaller businesses eligible for coverage by BOP (Businessowners Policy) forms often find their policies automatically include Extra Expense Coverage and Business Income coverage for up to a year of their “actual loss sustained.” In many situations, this will suffice as protection. Larger or more complex businesses may also find that some time element insurance is included in the basic Property insurance forms or in broadening “extension endorsements” in their Commercial Package Policy (see “Can You Analyze a Property-Casualty Insurance Policy?” for tips on policy navigation).

Time Element Loss Exposure v. Coinsurance

Typically, though, most sizable business firms have their time element loss exposures covered through the attachment to the Property section of their policy of the “Business Income and Extra Expense Coverage Form” from ISO (form CP 00 30).[1] This coverage form includes coinsurance provisions. In property insurance, coinsurance operates like a quantity discount, encouraging insureds to buy limits high enough to cover most conceivable losses. The downside of a coinsured Property form is that if an insured has purchased limits that, at the time of loss, are below those required by the form, then the insured is penalized and receives less than 100% indemnity. The formula used by an adjuster to determine this penalty is:

_____(Limit of insurance purchased)_____ X (Amount of loss)
(Limit required by coinsurance % selected)

To estimate the “limit required” the insured would fill out a Business Income Worksheet (ISO form CP 15 15), providing actual numbers from a recently-ended 12 month period as well as estimated numbers for the upcoming 12-month policy period. To simplify, this worksheet subtracts (cost of goods sold) from (total gross sales) to get “100% of Business Income exposure for 12 months.”

If an insured thought it would take 12 months to rebuild following a major loss, he or she should be encouraged to select 100% coinsurance and buy a limit equal to the “100% of Business Income exposure for 12 months” shown in the worksheet. If the insured thinks that, even in a worst-case scenario, it would take only six months to rebuild, then a 50% coinsurance clause would be more appropriate, which would allow the purchase of a smaller limit (half as much) of insurance. If it is anticipated that likely losses would involve both loss of income and extra expense, then the limit selected should be increased (without increasing the coinsurance %) to provide for extra expenses arising from a serious claim.

For specialized or intricate operations (like a hospital or a complex manufacturing facility with custom machinery), it might take two, three or more years to rebuild—and 200%, 300% or higher coinsurance clauses (and respectively higher limits of insurance) would be selected. The higher the coinsurance % applied, the lower the rate per $100 of limits purchased will be—this is the “quantity discount” at work. On the same property, a $1,000,000 limit with 100% coinsurance might only cost 25% more than a $500,000 limit with 50% coinsurance.

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How Policies Are Organized

Almost all Property-Casualty (as distinct from Life, Accident and Health) policies are constructed in a similar fashion. A simple, “Monoline” (providing one “line” of insurance coverage like Workers Compensation, or Professional Liability) policy is composed of:

• Declarations Pages
• Conditions
• Coverage Form
• Endorsements

It is not unusual to encounter a “Package” policy, which provides several lines of insurance coverage (one example would be a Commercial Package policy that insures Commercial Property, Commercial General Liability, Inland Marine and Crime lines). A Package policy has a hierarchical format:

• Common (applicable to the entire policy) Policy Declarations Pages
• Common Policy Conditions
• Common Policy Endorsements
• Individual Coverage Parts (e.g., Property, or Crime), each one of which typically will contain:
o Declarations Pages for that Coverage Part
o Conditions for that Coverage Part
o Coverage Form for that Coverage Part
o Endorsements applicable to that Coverage Part

To Study a Policy, Start with the Declarations Pages

First, look at the name of the insurance company underwriting the policy; if it’s not familiar, go to the web site of A.M. Best Company (the most generally-referred to and respected financial security rating organization).* If the Financial Strength Rating is below A- (or some would say B++), further investigation might be needed into the company’s financials. Depending on the risk being insured, Best’s Financial Size Categories below V (which indicates an Adjusted Policyholder Surplus of at least $10 million USD) might be questioned. The “Outlook” from Best is also important: are the ratings “Stable” or “Under Review—Positive Implications” (these are good), or are the ratings “Under Review—Negative Implications” (a warning sign)?

Near the top of the Declarations you will find the “Named Insured and Mailing Address.” Check to see if the proper entity is identified accurately. The producing agent or broker will be listed. The Policy Period, usually one year, will be listed. If it is a Package policy, there will be a listing of Coverage Parts that might be included. Even though a Package policy might contain language relating to several coverage parts, a Premium dollar amount must appear on the Policy Declarations page next to that Coverage Part’s listing in order for that Coverage Part’s coverage to be applicable. There should be a Countersignature by an authorized representative of the insurer on the first page.

On the Policy Declarations page you should also find a Forms Schedule which will list all of the Forms and Endorsements that make up part of the policy. Package policies will list Common Policy forms on the main Declarations Pages, and will also list the form number of the various Coverage Parts’ Declarations Pages. Turning to those Coverage Parts Declarations Pages, you will find additional listings of Forms and Endorsements that apply just to each coverage part, respectively. Cross-checking the Forms Schedules with the body of the insurance policy is an important step; if one of the Declarations Pages lists a Form or Endorsement as being part of the policy, and one or more of those forms is missing (or a form appears in the policy that is not listed on any of the Forms Schedules), yellow lights should start flashing and someone should inquire, “What’s up?”

A Location Schedule will appear if an insured is covering operations at multiple sites: is the list complete and accurate? Where involved, there should be a schedule of Mortgagees and Lienholders (either on the Policy Declarations page or the Property Coverage Part Declarations): are they up to date and correctly listed? Sometimes policies cover additional insureds for a variety of reasons: are they correctly identified for all the appropriate Coverage Parts? Is there any conflict between various business contracts’ obligations and how those obligations are handled in the insurance policies?

If a Liability policy incorporates “Claims-made” language, the Declarations Page will list a Retroactive Date (and/or a “Prior and Pending Litigation Date”): are these dates correct (which almost always means, are these dates the same as the inception date when the insured first entered into uninterrupted Claims-made coverage for this type of insurance)? If a “retro date” or a “prior and pending date” has been improperly advanced on a renewal, a coverage gap has been created.

Next, Study the Endorsements and Conditions

After studying the Declarations Pages and checking the Forms Schedules, it might seem counterintuitive to next jump to a policy’s Endorsements instead of reading the Coverage Form or Conditions. Frequently, though, Endorsements replace, delete or add to language that appears in the Coverage Form or Conditions. If an Endorsement says something like, “Part (b) of Exclusion 21 in the General Liability Coverage Part is deleted in its entirety and replaced by the following….” then I would go to that exclusion (in the Coverage Part) and pencil in a note, reminding myself to later look at “Endorsement #5” instead of the language originally appearing. It wastes time to study a policy’s core language only to find out later that the language is not applicable, or has been modified, by endorsement.

In a Package policy, pay attention to whether each particular endorsement applies to the entire policy, or just to one or more Coverage Parts contained in the policy.

Common Policy Conditions (as well as Coverage Part Conditions) are critically important components of an insurance policy; they are overlooked or ignored at the peril of the insured. The Conditions talk about how and when coverage will be applied, and how it will operate under special situations. To get an idea of the sort of subject matter contained in policy conditions, here are the section headings in the Commercial Property Conditions (ISO form CP 00 90):

• Concealment, Misrepresentation or Fraud
• Control of Property
• Insurance Under Two or More Coverages
• Legal Action Against Us (the insurance company)
• Liberalization
• No Benefit to Bailee
• Other Insurance
• Policy Period, Coverage Territory
• Transfer of Rights of Recovery Against Others to Us

Any attorney can appreciate the import of topics like these.

Now Read the Coverage Form(s)

The Coverage Forms themselves make up the heart of any insurance policy, and I suggest you study them last, after reviewing their contractual context (the Declarations, Endorsements and Conditions). The main elements of a Coverage Form will vary by line of insurance, but you will find many of the following main sections in any Coverage Form:

• Coverage (sometimes called “Insuring Agreement”)
• Causes of Loss
• Exclusions
• Definitions
• Who Is an Insured
• Additional Coverages
• Extensions of Coverage
• Limits of Insurance
• Deductible
• Coinsurance
• Supplementary Payments
• Duties in the Event of Loss
• Conditions (applicable to just this Coverage Form)

Using these main headings for guidance, a reader can easily find the particular points that need to be communicated to clients about their insurance policies. Each section is contractually important, and many reference or modify other sections. For example, some peril or event may appear to be “covered” by reading the Insuring Agreement, but further study will reveal that certain particulars are limited or excluded by other sections.

Understand The Advantages Of Both Standard and Non-standard Policy Language

Unless there are compelling business reasons to do otherwise, insurance companies prefer to use industry-standard Forms and Endorsements in their policies. This is because there are years (sometimes decades) of precedent and court decisions that have established precisely what certain insurance policy language does, and does not, provide.

For those familiar with the insurance industry, standardized, widely-used policy Forms and Endorsements make it comparatively easy to analyze policy coverages. The most common forms in use in the United States today are provided by Insurance Services Office, Inc., or ISO. The second most widely used source of “standard” policy wording, used by more than 600 insurance companies, comes from American Association of Insurance Services, or AAIS. Any veteran of the commercial insurance business in the US will be very familiar with the wording, structure and import of a standard Form like ISO’s “Commercial General Liability Form” ISO Form #CG 00 01.

ISO and AAIS will modify and update various elements of various Forms from time to time; sometimes knowing the “edition date” of a Form is an important analytical element. The complete numerical designation of an ISO Form will look like “CG 00 01 12 04”—the last four digits refer to the edition date of that Form’s language (in this case, the December, 2004 Edition). AAIS and many other companies put the edition date in parenthesis following the Form number (“AG 100 20 (10/94”).

It may be that the exact type of insurance coverage that an underwriting company wants to provide may not be practicable to deliver using standardized Forms. For example, Directors and Officers Liability policies’ wordings are not standard from company to company; rather, one company (Chubb, for example, or Travelers) will develop its own wording for policy Forms of this type, and it will use this internally-standardized wording for most or all of its customers for this line of insurance. When the language details of such policies differs among companies for the same line of insurance, more care obviously needs to be given to reading every line and noting the differences (and analyzing the import of those differences).

If even a company’s own proprietary policy language cannot meet the needs of a particular insured, and if that insured is important enough to the insurer, an underwriting department can sometimes be persuaded to “manuscript” policy language that meets these refined needs. This type of manuscripted wording has usually never been tested by the courts. If your client is in a position to need such insurance policy customization, he or she might be well advised to bring you into the discussion with their underwriters to help make sure that the language winds up having the desired and intended effect.

Insurance policies are contracts, but they occupy a special niche in the wide field of contracts; knowing how to read and analyze them will be important for most attorneys.

*On your first visit to A.M. Best’s web site, you’ll be asked to register, providing your e-mail address and a password you select. Near the upper left-hand corner of the home page, enter the insurance company’s name, exactly as it appears on the policy, in the “Ratings and Analysis” box. On the Search Results page that appears, click on the insurance company’s name – this will take you to the Best rating for that company – including the Financial Strength Rating, Financial Size Category, and the Outlook.

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In the mid-1990’s, as businesses and not-for-profit organizations came to increasingly rely on their databases, web sites and e-mail systems, they started to experience problems, losses, and lawsuits arising from this new technology. Many were surprised to find that claims were denied because traditional, standard insurance policies weren’t drafted with cyber risks in mind.

There are two distinct loss categories related to this new electronic technology: first-party (loss of one’s own property or income), and third-party (losses arising from alleged responsibility for causing another’s loss). Reasons for protecting against exposures in either area include:

• Protecting the organization’s bottom line
• Protecting the organization’s reputation
• As an outgrowth of business due-diligence activities
• Meeting regulatory and legal requirements

Understand First-party Losses

Damage to a computer network’s hardware, software or data by a computer virus or from a hacker is a common first-party loss. In 2002, USDOJ after a member of the IT department at UBS Paine Webber was given a bonus below his expectations, he planted a “logic bomb” in the company’s computer system which, a couple of weeks after the employee’s termination, shut down the company’s trading platform at 9:30 a.m. every Monday for several weeks until the offending software could be found and removed. UBS Paine Webber spent over $3 million to correct the situation.

In addition to the direct losses involved, significant losses of revenue can arise from attendant periods of shut-down and cleanup. A widely-publicized event involved E*Trade, which suffered an insured loss in excess of $5,000,000 arising out of downtime following a hacking incident.

Thieves can steal money or other assets by breaking into or abusing rights to an organization’s systems. There have been hundreds of examples—just enter “cyber theft” or similar terms into your favorite search engine. Bill Wall has compiled a listing of many of the most-publicized hacking events, going back to1961.

A more recent example of first-party loss arises from extortionate threats to shut down (through a denial-of-service attack) or sabotage system elements. One incident involved a dismissed and disgruntled IT employee who hacked back into his employer’s system and then, over the course of several weeks, encrypted the entire database of his former employer. He subsequently (and anonymously) demanded $2 million in ransom to provide the encryption key. If law enforcement had not located the perpetrator and “convinced” him to turn over the key, it would have cost more than $10 million in super-computer and employee time to have decrypted the database independently.

Electronic discovery has become a complete sub-specialty in the practice of law. Organizations have been overwhelmed with the costs of producing electronic history and the ramifications of what has been found (or found to have been destroyed) in the process. (A good article introducing this subject appears at Jenner.)

Understand Third-Party Losses

Courts have found businesses liable for libelous content of employee e-mails. Other third-party loss occurrences have involved allegations of having a computer virus transmitted through a defendant’s computer network into the plaintiff’s system. Suits and claims involving misuse or appropriation of intellectual property are increasingly frequent, and include infringement of copyright and trademark as well as plagiarism. Even posting an unauthorized link to parts of another’s web site can lead to expensive litigation. (A good article on the perils of hyper linking appears at the Internet Library of Law and Court Decisions.)

“Professional” or E&O liability losses can arise from businesses that rely on computers, such as those suffered by a telemarketing firm whose automatic dialing system was inadvertently programmed to call hundreds of customers for a client bank to cross-sell a new bank product at 4:00 a.m. (!) instead of 4:00 p.m. This resulted (as one might expect) in a loss of business for the bank, which then sought to recover against the telemarketer.

Losses and costs involved with privacy law violations can be among the most severe, and contain elements of both first-party (costs to notify, interruption of business) and third-party (arising out of duties to protect customer or client data) losses.

Manage The Risks Through Loss Control

In the discipline of risk management, after exposures to loss have been identified (and perhaps quantified and prioritized), solutions for handling those risks should be selected and implemented. A widely-accepted solution to most risks is loss control—keeping the loss from ever happening and/or minimizing the severity of losses that do happen. Loss control solutions for cyber risks include information technology (“IT”) elements and policy/procedure implementations. Both of these solution sets should be thought of as “cost of admission” activities today. They are foundational components to any modern business plan.

IT solutions include:

• Establishing and maintaining good hardware and software firewalls
Making sure anti-virus and anti-spyware tools are always active on all servers and workstations, with regular updates
Installing intrusion detection and deterrent systems
Insuring encryption appropriate to the sensitivity of content
Performing regular and regularly-tested backups (with good security on the backup media)
Content filtering
Adopting ISO 17799 standards (www.iso-17799.com)

Clearly communicated, up-to-date and enforced policies and procedures are also requisite, and would include:

• A professionally-drafted IT security policy
Employee (and volunteer) Internet and e-mail use policies which are updated in the Employee Handbook
Well-considered disaster recovery plan, updated regularly and communicated to all key stakeholders and participants
Procedures for regularly patching and updating all software on all boxes

Keep in mind that these loss control activities are only a start, and that they are not 100% effective. IT solutions are typically developed in reaction to emergent, known threats, but the “bad guys” are often a step or two ahead. Policy and procedure implementation always depend on human beings; we all know what that implies.

Contractually Transfer Risk When Possible

Some of the cyber risks arising from relationships with vendors, customers, suppliers and the general public can be mitigated through the appropriate use of hold-harmless wording, indemnification agreements and/or carefully-worded privacy statements. Most lawyers will be comfortable navigating these waters.

Risk may also be transferred to underwriting insurance companies. However, standard business insurance policy language was drafted long before the Internet Era. Organizations that have lost valuable electronic data or intellectual property due to a variety of perils have usually been disappointed in their attempts to get their property insurers to indemnify them. Similarly, standard liability policies are triggered by policy-defined “Bodily Injury” and “Property Damage” events; courts have agreed with insurers that few third-party cyber-losses involve BI or PD.

Many of the gray areas that still might seem to be covered by traditional insurance forms have now been blacked out with the introduction of clarifying exclusionary endorsements and policy wording now commonly appearing on insurance renewals. The message is clear: if you or your clients want to be insured against cyber perils, buy cyber insurance.

Navigate The Forest Of Cyber Insurance

Fortunately, the market for such specialty insurance is sizable, growing fast and becoming more affordable. Unfortunately, the market for such specialty insurance is sizable, changing almost daily and contains no standardized products. Even a competent, experienced and technologically savvy insurance agent or broker has no business wandering through this territory alone.

Serendipitously, a few years back, our insurance agency established a working relationship with one of the true experts in the cyber insurance space—David Hallstrom, who works out of the Chicago office of Risk Placement Services, Inc., one of the largest insurance wholesalers in the country. He and other specialists in his office keep up with the world of cyber insurance. It takes someone with this level of involvement and experience to find the one best cyber-insurance solution for a particular organization or firm.

In the forest of cyber insurance, one can find scores of specialty policies that cover just a few perils, but there are at least a dozen modular policies that can be customized to include any number of coverage elements. Some of the major coverage options may include:

• Media Liability
Network Security
Professional (Errors & Omissions) Liability
Damage to Your Systems
Business Interruption
Electronic Theft
Threats / Extortion
Privacy Notification

In a subsequent article I will discuss the insuring agreements and some of the coverage elements for each of these classes of cyber insurance. Even a general knowledge of these coverages will not suffice, though, when it comes to recommending one policy form over another. For example, the majority of network security liability policies sold to technology firms (such as those who manage the networks for other businesses) contain an “intentional acts of employees” exclusion—despite the fact that more than one-third of the attacks against such firms arise out of the malicious acts of current or former employees.

While the most-publicized cyber breaches involve large companies, even the smallest organizations can be hit. Small and mid-sized firms often have fewer resources and skills for technology risk control, and may have only modest financial reserves; most would be wise to heed the advice to insure their cyber exposures.

Understand Privacy Rights

Recently, Privacy Rights Clearinghouse reported that “Over 167 million data records of U.S. residents have been exposed to security breaches since 2005.” This past January it was reported, “At least 35 states have enacted legislation requiring companies and/or government agencies to disclose security breaches involving personal information.” See NCSL for a schedule of states and their respective statutes.

Depending on circumstances and the types of records lost, the initial costs following a security breach will range from $10 to $30 per record (this would include internal investigation, notification costs, crisis management fees, and costs to comply with other state and federal statutes and regulations). A “Data Loss Calculator” also lists the damage amounts (from $1,000 to $22,000 per person) being sought in several pending class action lawsuits that involve data breaches. How many of your firm’s business or not-for-profit clients could afford a data breach? Have you made them aware of the risk?

The productivity gains and lifestyle improvements (or at least pace-of-life speedups) arising out of electronic technologies are dramatic and world-changing. These changes have concurrently introduced entirely new classes of perils and risks of loss. You would do well to include these cyber risks in your business analyses, and to be aware of the insurance and other risk management solutions that exist to manage them.

__________________
ACKNOWLEDGEMENT

I am indebted to David Hallstrom for help with the organization and content of this article, taken with his kind permission from one of his recent presentations.

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Insurance is one solution set contained in the broader field of risk management. The first step in the risk management process is to identify (and then to quantify) possible exposures to loss. Tangible and intangible property, business earnings and professional reputation are all subject to loss from a variety of perils and may be protected by various insurance products.

If you run into legal trouble, the advice you probably hear most often is, “First, hire a good lawyer.” It’s just as important to find a competent, energetic and detail-oriented insurance agent or broker. How can you tell if you’ve found such an individual? If, in the initial stages of the relationship, you find yourself growing weary of the broker’s curiosity about the details, context and business goals of your practice, then you’ve done a good job and can feel confident about your selection.

Who Must Be Insured?

Insurance policies may be: required by statute such as Workers Compensation (WC) or Automobile Liability; mandated by contract as in the insurance requirements that may be found in a lease; or elective yet prudent to obtain like Lawyer’s Professional Liability.
In most jurisdictions, a corporation is required to provide WC insurance on all employees even if there is only one employee. Statutes vary on whether the partners or members of LLCs, LLPs or other partnerships must themselves be insured by WC, but all non-partner (or non-member) employees, including part-time, temporary and family member employees must be covered. Even where permitted, a partner or LLC member should think twice before opting out of WC coverage; individual or group medical insurance policies often contain exclusions relating to injuries “insurable under a Workers Compensation policy.”

Vehicles Must Also Be Insured

Even if your law practice does not own or lease any vehicles, it is subject to the vicarious liability arising out of employees driving their own vehicles on errands for the practice. This exposure is called “Non-owned Auto Liability,” and insurance protection for it is routinely added to a Business Package policy (or it may be written on a stand alone basis). Liability insurance “follows the vehicle,” so the employee’s own auto policy would provide primary protection for both the employee and the practice until that policy’s limits were exhausted. Then the practice’s Non-owned coverage would step in to protect the practice but would not protect the employee on this excess layer unless “Employees as Insureds” coverage was added by endorsement. “Hired Car Liability” may also be acquired to protect the practice against at-fault accidents involving the use of rental cars by practice employees.

A Business Owners Package Has Many Advantages

For all but the largest practices, we suggest a Business Owners Package (BOP), which covers insurance on buildings and business personal property, Commercial General Liability (CGL) for bodily injury and property damage protection, and a number of more or less important miscellaneous insurance coverages. While there are some important differences among the particular sets of broadened and enhanced coverages included in the BOP contracts from various insurers, BOPs all share at least these advantages over most standard Commercial Package Policies (CPPs):

• BOP policies typically contain no coinsurance requirements (although you must carefully select adequate insurance-to-value limits on property coverages).
• “Time Element” (loss of business income and/or extra expenses following an insured property loss) coverages are on an “Actual Loss Sustained” basis payable for up to 12 months; this means you don’t have to worry about selecting adequate limits for Business Income/Extra Expense coverage.
• BOP policies typically include a large collection of extended/ enhanced coverages and favorable policy terms and conditions compared to standard CPPs.
• BOP policies almost always are provided on a very favorable rating schedule so that your practice will spend a lot less for a lot more protection.

Understand Liability Limits

Usually the Liability limits that can be provided in the policies discussed above (the Employer’s Liability component of a Workers Compensation policy, the Business Automobile Liability coverages, and the CGL in a BOP or CPP) are no more than $1,000,000. Practice managers should be aware that a law practice would be a target of opportunity for plaintiffs in the event of a catastrophic accident, and would be presumed to carry significant limits of Liability insurance. An Umbrella Liability policy should be part of your protection program, with limits as high as you can reasonably afford. When considering what limits to purchase for other Liability coverages discussed below, keep in mind that your Umbrella policy will not provide any excess coverage over them.

Even a small practice is significantly exposed to complaints and suits arising out of employment-related practices. Employment Practices Liability (EPL or EPLI) insurance is available and increasingly affordable, especially for practices that document their current HR standards for interviewing, hiring, harassment complaint handling, employee discipline and termination. Larger practices may find the best value in obtaining EPL insurance as a part of an Executive Liability Package that may also include Directors & Officers (D&O Liability), Trustees and Fiduciary’s (ERISA) Liability, and perhaps Fidelity Bonding (Employee Dishonesty) and other crime coverages.

Lawyers Need To Know About Lawyers’ Professional Liability

The insurance coverage most unique to a law practice is Lawyers Professional Liability (LPL). Like an EPL or D&O policy, LPL policies almost always have coverage triggered by a claim made (or made and reported) during the term of the policy. This is in contrast to most CGL or Business Auto Liability coverages, which are triggered by when an accident is alleged to have occurred. “Claims-made” policies involve a set of important-to-understand coverage elements:

• Claims-made is preferable over “claims made and reported.”
• Retroactive Date (on each renewal, be sure that the original Retroactive Date is maintained, and not “advanced”).
• Prior and Pending Litigation Date.
• Your answers on the policy application may be treated as warranties, rather than as mere representations.
• Extended Reporting Period provisions (how easy, and affordable, will it be to retire from practice—will you have to maintain renewal policies indefinitely?).

A discussion of these (and other related) elements of claims-made coverage would take up a lengthy article on its own. As a beginning, be sure your agent or broker is fluent in the concepts and terminology of this sub-specialty.

The terms, conditions and coverage provisions of LPL policies vary widely from insurer to insurer (and several offerings may be available from a single insurer). Ask yourself the following questions when seeking the best value in coverage features:

• Are defense costs “inside the limits” or “outside the limits”? Are defense costs advanced, rather than reimbursed?
• Do you have the right to select defense counsel on your claim?
• Is the coverage territory worldwide?
• What deductible is applicable? Is an annual aggregate deductible option available? Is first-dollar coverage on defense costs available as an option?
• Is there a consent-to-settle clause? (Your reputation could suffer if an unfounded, frivolous but damning claim were settled by the insurer for economic reasons.)
• Is the policy non-cancelable by the insurer (other than for non-payment of premium)?
• Are the definitions of “predecessor firms” and “successor firms” acceptable to your situation?
• Is there non-imputation language such that innocent parties would still have coverage even if someone else committed fraud or concealed information on the application?
• Is vicarious liability explicitly included in coverage language?
• How broad are the definitions of key terms such as “claim” and “wrongful act”?
• Is an unlimited extended reporting period (“tail” coverage) available as an option to protect you into retirement for example?

Assess Your Insurance Coverage Regularly

No single policy is likely to include the best features in every area mentioned above so you’ll need to consider which are the most important, and seek out insurers willing to provide them to your firm. A good resource for other coverage elements can be found in the “Coverage Analysis” section of the ABA’s Insurance Information page.

Policy contract language is not the only value component of an insurer’s offering. An insurer’s financial strength and stability will enable a company to devote resources and energy to defending claims and paying them if due. Every year or so, check your insurers’ ratings by A.M. Best and Company. For LPL and EPL carriers, consider the potential value of loss control services and pre-claims hotlines. You might ask how long an insurer has been offering the insurance coverage being considered, and determine its regional or national ranking in writing that line of insurance. Other things being equal, a carrier that is “admitted” in your state is preferable to a non-admitted carrier (see the “Carriers” section of the ABA Insurance Information page referenced above).

Following these guidelines will optimize the hedge against adversity that a well-designed insurance program provides.

Post from: The Complete Lawyer

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