E&O Insurance and Your Contracts - Any Connections?
March 18, 2013
I am seeing a very disturbing trend in the alarm defense area. Very sizable claims, some well in excess of policy limits, and alarm companies that cannot produce a proper contract with the plaintiff - subscriber. Really bad mix.
You have to understand that the insurance industry's attraction to writing alarm E&O insurance was, and is, the existence of contracts that permit the contracting away of liability. With these contracts in place the insurance company expects two things, at least: that claimants will be deterred from bringing claims in the first instance because of the contract provisions, and second, that because of the contract provisions the insurance company will be on the hook for providing defense cost, but won't have to pay out on the damages.
So what do you think happens when the alarm company can't find a proper contract, assuming there was one to begin with? The insurance carrier is forced to spend much more defending the case and is often forced to settle for significant amounts. Not exactly the model business plan the insurance carrier had when fashioning the alarm insurance program.
What do you think happens next? The insurance carriers have to make a decision to either exit the alarm insurance program or raise premiums. If it exits then those insurance companies remaining raise premiums. In either case, the alarm companies that do not use proper contracts - all the time, with every single subscriber - contribute to this problem.
I can understand when an alarm company is faced with the prospect of having to agree to a subscriber's form contract, or omit many of the protective provisions from its own alarm contract. At least the alarm company is making an informed decision to risk not having a proper contract in place. But alarm companies that are just sloppy or worse, routinely don't bother with, or believe in, contracts, are going to cause problems for themselves and others in the alarm business eventually.
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Question - what's a certificate holder?
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Ken,
Many jurisdictions require a copy of the contractor's liability insurance when applying for a permit and/or a license. Some of those jurisdictions require a certificate of insurance with the jurisdiction listed as the certificate holder. I'm curious what it means when the city is the certificate holder.
Thanks,
Mark
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Answer
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A certificate holder is a party names on the policy for notice purposes. The certificate will generally state that the certificate holder is entitled to 15 or 30 notice of cancellation by the carrier, renewals or other information that affects the policy. A certificate holder is not an additional insured and has no coverage protection under the policy.
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Question- re additional insured
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Ken,
I have heard that there have been companies that have abused the additional insured on insurance certificates. We have restricted who we allow to be an additional insured status. Is there an document that would limit the additional insured to only situation that involved the primary insured?
Regards,
TP
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Answer
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Yes. The term additional insured can have very different meaning and confer different rights. You should be adding an additional insured who is covered to the same extent that you would be covered as the primary insured, not for more than your liability and not only for the additional insured's liability. You don't want your policy to be primary for the additional insured unless it's your actions that invoke the policy coverage. Be sure you're using a broker from The Alarm Exchange - they know the alarm industry.
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Question on Increasing Limit of Liability
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Ken,
I receive your daily email and had a question about a prospect I am working with that wants us to increase our limits of liability. He is comparing it to his current vendor who is using the following language;
“If XYZ company is nevertheless found liable under any legal theory for loss, damage or injury caused directly or indirectly by occurrences or the consequences therefrom which the equipment and/or services are intended to deter, detect, avert or record, XYZ’z liability shall be limited to the sums paid by Customer for the Equipment or Services at issue as customer’s sole remedy”
Our prospect is assuming that this language is intended to cover the entire investment they made for both the installation amount and any monthly service fees which have been paid. I find this hard to believe. There current system is quite large, and I would ballpark the investment they made for the entire access system to be beyond 5 figures.
Any thoughts?
CC
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Answer
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Yes. If you are considering increasing your limit of liability perhaps you should be asking yourself how your insurance carrier feels about that. If you're using a carrier with even half a brain they asked if you use alarm contracts and asked to see your form. The carrier looked for the limit of liability clause, and it didn't expect to see and didn't see a limitation of $100,000 or more. You need to be certain that your carrier will cover you for this increased limit. You will have to read your insurance policy very carefully to see if you will be covered for this increased exposure.
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