THINKING ALOUD (BusinessLaw) BUSINESS RISKS: Insured, but not covered!
I have seen many storms in my life. Most storms have caught me by surprise, so I had to learn very quickly to look further and understand that I am not capable of controlling the weather, to exercise the art of patience and to respect the fury of nature.— Paulo Coelho: Brazilian Novelist
QUICK GUIDE on the subject: Insured, but not covered!
Mistakes in insurance applications could lead to a policy being refused, cancelled or made void - did you know that such errors could stay with you for life?
I know some small business owners just do not have time and patience to read and digest the articles in this hub -- navigating through the technicalities can be exhausting.
This Quick Guide hopes to help small business owners. It aims to prevent irrecoverable claims under commercial insurances because of misinformation.
1. As a business owner, you should not be attracted to low premium quotes from insurance companies. Insurance companies may use it as a business strategy to gain sales promptly because a detailed examination of other policy terms may change your mind.
By keeping premiums down, the insurance company shifts costs to you (the insured) in the form of co-insurance, deductibles and other out-of-pocket expense. That will leave you vulnerable if you make an insurance claim.
2. Some industry experts say that policies have also left many insured scratching their heads regarding separate deductibles such as for Employee Medical Insurance and an ever changing list of drugs that require co-insurance or not covered at all. Whatever the policy type may be, you should be aware of constant changes in policy guidelines. See what is covered and what is not. Do not just ask your administrative assistant to file these notifications away. Someone in your company must be responsible for keeping track and understand the implications of insurance policy changes.
3. Do you buy commercial insurance online? Even if you can get an insurance company to cover your commercial risks, it is not a good idea. Yes, policies purchased online may be cheaper than those obtained through an insurance agent. The disadvantage is the lack of face-to-face interaction. The online agent may overlook complexities of your business or changes that may occur over time.
So the short answer is: Employ the services of an insurance agent.
4. When buying commercial insurance, you should take care not to misrepresent any given situation. Always disclose all facts of circumstances when completing an insurance proposal form. As such, if your factory premises had an accidental fire five years ago but you decided to self-insure instead of making an insurance claim because the damage done was minimal. You now decide not to disclose it in your new insurance proposal and that spells trouble for you in the long term. There is no need for the insurance company to dig into your historical past to know if you have been truthful in your answers before accepting your insurance proposal. Each year you paid your insurance premium on time. All went well. You made no damage claim on your insurance policy. But some years down the road, your factory premises might encounter a big accidental fire resulting in substantial damage claim, your past would suddenly be an important matter to the underwriter. Your claim may be rejected for reason of non-disclosure of a fire that took place before coverage was accepted by your current insurance company.
A simple misstep can wipe out all great efforts put into a business life time.
Little English-Chinese Dictionary
Ambiguous = mó léng liǎng kě
revenue driven = bàolì qūdòng
caught in the bind = xiàn rù kùn jìng
walk the talk =shuō dào zuò dào
a scene of devastation everywhere = mǎn mù chuāng yí
disaster caused by flooding water = fàn làn chéng zāi
Directors and officers liability Insurance (D & O)
- Defence Costs –
Writer: Chén Róng
This statement is to reiterate what was said previously. "Directors & Officers Liability Insurance (D & O)" is liability insurance entered into by a company to cover wrongful acts of its directors and officers, and in the event of legal actions taken by a third party. The sums insured and payable to the directors and officers of a company, (or to the company) are reimbursements for losses incurred for legal actions brought against them.
Companies are now going global and so are directors of companies who may hold directorship or other senior positions in foreign companies, such as subsidiaries or joint venture firms. It is common for D & O Insurance policies to provide cover for defence costs - expenses incurred if directors or officers are being sued and held liable by a court of law. The insurance company may not be obliged to pay out defence costs at the time these expenses incurred. In other words, the directors concerned will not get reimbursed until they have already paid for the expenses incurred. The insurance term is "pay to be paid". It resembles an indemnity insurance policy. Nevertheless, that is how some D&O insurances work. However, if a country's law mandates that an insured should get reimbursed immediately as a matter of rights of the directors to access defence costs, directors and officers will free themselves of the need for prior funding. Otherwise, directors and officers defending liability claims may be out of pocket for defence costs at the point of litigation.
Nevertheless, directors should note that they may also not get access to any money for defence costs if D&O insurance has a single limit to cover both defence costs and claims. This may be expressly as a policy term. And if any third party asserts a claim against the directors which is greater than the limit of the policy, the insurer has no obligation to pay out defence cost under a single limit cover.
Another point worth noting is that civil and criminal actions are brought against directors/officers simultaneously. It is common. A D&O policy can extend costs arising out of criminal defence and similar regulatory investigations by the authorities -- but no two policies are the same. Some policies do not cover criminal defence costs. Besides, the laws of some countries may give rise to doubts as to whether directors can rely on their D&O policies to pay criminal defence costs when they are also facing a civil claim for damages by a third party. It raises the questions whether the insurance company (1) can, or (2) should, pay out defence costs pending the outcome of the claim.
For directors and officers concerned, their plight will be an almost insurmountable challenge to raise fund for their defence costs within a short time. One way out of this probable conundrum is to ensure that policy terms arranged should specify a separate limit for defence costs (to include criminal defence costs), as opposed to liability. It is important for any potential director to check it out before agreeing to hold a board seat. For existing directors who are not aware of this probable legal cost, they should arrange to have the policy terms amended to provide separate limits for liability and defence costs. It is equally important that directors should ensure that the defence cost limits are sufficient, as litigation costs in some countries can be exceedingly high. Defence costs should be in amounts to cover for the worst case scenario where directors have to defend a claim and may need independent legal representation.
The writer is not an insurance broker. He has no superior knowledge of D&O insurances. But he knows just enough to warn of trouble and the need for action; knowing that there are lots of small companies out there probably groping in the dark and with no professional managers in their employ.
It is about high time they get your insurance broker out for coffee.
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Goods Sold may be Insured, but not Covered!
Writer: Chén Róng
This short write-up serves as a reminder to sellers or exporters that if goods landed at a place other than the contracted destination for delivery – their goods may be insured but not covered!
Exporters of goods are now increasing selling their products on Delivery Duty Paid (Incoterm 2010-DDP). This trend is a result of sellers now upping their ante on better customer service for worldwide sale and delivery. This may also be the buyer’s requirement in the Business-to-consumer segment and, therefore, explicit wording to this effect be included in the contract of sale. In any case, under the revised rules – INCOTERMS 2010 – Delivery Duty Unpaid (DDU) has been eliminated, which means, it is no longer a delivery option for sellers.
Effectively, DDP (Delivered Duty Paid) means that the seller is under obligation to deliver goods to the destination cleared for importation and thus bears all risks and costs, including duties and taxes to comply with that obligation. However, the seller arranging for customs clearance in European Union countries is not always legally possible and the probable results are:
- The rule for DDP is that customs clearance must be done on the account of the seller. If for some reason, the buyer refuses customs clearance in his name and all liability attached to it – which he has legal rights – the seller may be left in a quandary.
- Some European Union countries may specifically require the place of delivery be written next to the DDP incoterm in clearance documentation; or that freight cost mentioned on commercial invoices. If these requirements are not met, the DDP Incoterm will be disregarded.
The likely outcome would be: Goods may land in a place other than the contracted destination for delivery.
Imperative that all documentations, the Contract of Sale included, must clearly show the place goods are to be delivered; particularly so if it is a location other than the buyer’s warehouse. The place of delivery should show its full name, street address, city, state, province and country. If vital information is excluded, cargo insurance coverage may cease at an inappropriate place. This means the seller will bear all risks of lost and damage from the moment goods landed at a place other than the contracted destination.
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The European Union (EU) is an economic and political union of 28 countries. It operates a single market which allows free movement of goods, capital, services and people between member states.
The European Union countries are:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
Thank you for reading the articles. Do you think the articles in this hub are helpful to small business owners particularly in Asia and Pacific countries?
Insured, but not covered!
Writer: Chén Róng
Painting of a scenario
Think of this scenario: You are in the business of salvaging tractors, equipment, beach boats and vehicles wrecked by storms. There is an insurance policy covering against the loss and damage to gears and equipment. One day, your manager reported that expensive salvage equipment including underwater cameras were lost in transit. You made an insurance claim on the equipment insurance policy. To your great surprise, the insurance company refused to indemnify you for the loss. The insurance claims manager pointed out an exclusion clause in the policy that reads: "insured against loss and damage to equipment in course of salvage operations at the time of loss". It may be an unfair term; equally, it may appear ambiguous. It is true that ambiguities in policies occur, and their interpretation is almost always made in favour of the insured party, but litigation is a lengthy and costly process. Meantime, you have to dip into your reserves to buy new equipment for an upcoming project. It causes undue inconveniences and, if the loss is great, cash flow becomes problematic if business has not been rosy for the past year.
The insurance business is revenue driven? Yes, because it is not a charity. No, it is not the business of insurance companies to benefit out of the insured's ignorance and misrepresentation of facts; you have been paying premium for years and until now, there was no claim made on the insurance policy. The law cannot come to the rescue of an insured that chooses not to read policy terms, and carefully to ascertain that he understood all stipulations therein. No two policies are the same. For every insurance type or category offered, an underwriter has exclusive right to place whatever it may deem fit and fair for inclusion in the 'Covered' section of the policy. In my opinion, it is not a good idea to buy business insurances online, just because it is more convenient to do so. It is better to work with insurance brokers. I did. Insurers generally are keen to have as good an understanding of the risk as possible at inception, so let their insurance surveyors visit your premises to assess and understand the business themselves, prior to compiling the insurance quotation.
Caught in the Bind?
Yes, unfortunately some people found themselves in the following circumstances:
1. Insured, but not covered out of ignorance on facts.
2. Insured, but not covered out of non-disclosure and misrepresentation of facts
Insured, but not covered:
Owing to ignorance on facts
Extreme weather condition is now a new phenomenon. This abnormal condition now poses a threat to the human race. This was evident, in December last year, when Typhoon Bopha's rampage created a scene of devastation everywhere; Asian properties particularly those in the Philippines were severely damaged. Business owners with badly damaged properties caused by windstorm had to prove the cause of loss in the claim statements; they were insured on 'Named Perils' terms.Under legal requirement, the burden of proof of loss falls on insureds. This is not the case with an All-Risk insurance coverage. Others were shocked to learn that disaster caused by flooding water was excluded and, hence, their claims were turned down. Reason: windstorm and flood are two separate policies. Damages caused by Typhoon Bopha will exclude flood damages -- limitations and non-covered items that most business owners do not know about, or do not care to know the reason why until they have a loss on hand. In countries like Australia, the law protects the insureds. Underwriters must inform insureds, in no uncertain terms, on whether a prescribed contract covers flood damages. This law may not exist in other jurisdictions hence; business owners should take heed of policy limitations.
Business owner may have to take note of another precaution: Certain flood insurance contains definition of what constitutes flood; and the type of flood that will be covered under policy terms. Generally, flood may be defined as (1) sea water; (2) heavy rain, and (3) waterways such as rivers and lakes. Policy may, hence, define flood as flood expected to occur every 30 years, or near thereto; flood caused by heavy rainfall of say between 30mm per hour and 80mm per day. It is just an example as definition may vary with different policies
Insured should stay on top of things!.
Fire Insurance Policy may set out precautions and procedures which must be complied with. It is not good enough just simply acting with reasonable skill and care if there are specific procedures to be followed. Coverage can be denied for such non-compliance even if compliance would not have prevented the damage done.
I was once the Company Secretary of a listed group, and one of its subsidiaries had shipyards on Pulau Samulun is an offshore island in Jurong Industrial Estate, Singapore. Hot-work -- welding, riveting, flame cutting and spark-producing operation - to ship-sections were everyday occurrences at the shipyard. Since legal matters and insurances came under my purview, there was a need to ensure supervisors 'walk the talk' and not just pay lip service to safety first regulations. Making regular visits to various shipbuilding and ship repairing yards would ensure these technical chiefs practiced what they preached on safety regulations. We also had subcontractors working on our premises. These workmen were not specially trained in-house. Putting the matter in simple terms, a globule of molten metal could cause material to burn slowly without flame – a process called ‘smouldering’. That could lead to a serious fire after work had finished. It would be an insured event not covered! Should fire break out as a result, the shipyard would make to bear all responsibility for the consequential loss. Hot work might be the proximate cause - subcontractors who did not exercise care such as maintaining a fire watch for a reasonable period (say 30 minutes) after completion of a welding job. People in senior management must never adopt a laissez-fair attitude toward risks. If work procedures at business premises are contradictory to those set out in the policy terms, it may result in no insurance coverage. Do not be caught out!
Ignorance comes with a price. Company directors and officers (especially company secretaries and legal counsels) should be alert to risks of industrial accidents. Corporate executives may run the risk personal liabilities; they may have to pay out of their own pockets for consequential loss when risks of industrial accidents are not covered or adequately covered by their respective employers. Although the James Hardie saga is an Australia company law case, it did raise the profile of directors (and officers) for errors and omissions in managing companies in Asia Pacific. There is no need for detailed analysis as the legal case is readily available online. But its implications for directors and officers of companies are significant.
Directors and Officers Insurance (D & O liability insurance) and Errors and Omissions Liability insurance are often in the same breath discussed as if they are one and the same thing. No, the two titles are not the same thing under two different names. Errors & Omissions deals with performance failures and negligence relating to products and services; whereas D &O concerns the performance and duties of management - errors and/or omissions in management policies. Generally it can be extended to include employment practices liability (harassment and discrimination suits) and fiduciary liability. All legal costs and penalty fines imposed by a court of law for liabilities similar to James Hardie's case will be recoverable under a D & O Liability Insurance policy, if any. The same claim when made against the underwriter of Errors and Omissions Liability insurance will not succeed.
Next, we need to know that Directors and officers insurances (D&O Insurance) vary considerably with different insurers. The majority of such insurances exclude coverage for fines and penalties incurred. Legislation, such as that in Australia, may not allow a company to pay premiums for insurance contracts to cover an officer against liabilities involving a wilful breach of duty or improper use of position or information. This is something for corporate executives to mull over. A company will often provide an indemnity relating to costs and liabilities arising out of the performance of their duties. However, here again, legislation may prevent companies from indemnifying an officer against certain liabilities incurred from a contravention of the law (including certain legal costs incurred in defending or resisting proceedings).
Directors and officers (including, as applicable, general counsel) should review their liability position periodically to see whether or not the D&O insurance offered by their own company is sufficient under circumstances above explained. If it is not so, company executives may wish to consider purchasing a supplementary personal insurance, for example, statutory liability insurance.
Insured, but not covered:
Owing to non-disclosure and misrepresentation of facts
Utmost good faith is the basic principle in insurance contracts, legally obliging all parties to reveal to the others any information that might influence their decision to enter into the contract. It is also called uberrima fides in Latin. The law regards insurance as a special contract.
A merchant contract works on the principle of 'caveat emptor (or Buyer Beware) which does not require the seller to disclose all known facts at the time of selling. With 'caveat emptor', a buyer may not recover damages for defects that renders the good unfit for ordinary purposes; certainly not the case without consumer’s protection laws to protect him. An insured person, on the other hand, has to provide full disclosure of the exact nature and potential risks envisaged; and doing so without misrepresentation of facts relating to the subject of insurance - a pre-contract obligation. The law requires an insured person to display utmost good faith in his dealing with an underwriter. He has to disclose all known circumstances and information before the underwriter accepting insurable risks.
Misrepresentation may be an assertion by words or conduct that is not in accord with the facts; and such an error of fact from the insured to his underwriters at the proposal stage of insurance. The misrepresentation may be done intentionally or negligently made. At the proposal stage for Fire Insurance coverage, an applicant may be asked the question: Have you ever had a fire at premises in question or elsewhere? No affirmative answer should be given without a second thought. The consequent of a careless answer can be serious if a subsequent investigation reviews a fire had taken place at rented premises some years back. The underwriter may decide the policy void for misrepresentation or no disclosure after the discovery of the material fact in question. He may also determine that fraud has taken place if their investigators believe the misrepresentation was intentional (not just an error) and turn over the case to the authorities for prosecution.
Similarly, trade credit insurance insures suppliers against the risk of non-payment of goods or services by their buyers. The sale & purchase contract may be made with a buyer in the same country as the supplier (domestic risk) or a buyer from another country (export risk). The insurance covers non-payment for reason of buyer's insolvency. It may cover non-payment - or protracted default - when payment is not forthcoming after an agreed extended credit period - often referred to as protracted default. It may also cover the risk of non-payment following an event outside the control of the buyer or the seller (political risk cover) - that money cannot be transferred from one country to another. Trade credit insurance policies are flexible. They allow policyholder to cover the entire portfolio or just key accounts against corporate insolvency, bankruptcy and bad debts. But watch that exclusion clause.
- The credit risk that is insured has to have a direct link with an underlying trade transaction, i.e. the delivery of goods or services. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy.
An unresolved dispute in a business deal may not go down well with an underwriter. Parties may be asked to resolve any dispute, prior to involving the insurer. In which case, if an insured seller were to lie by not disclosing the existence of an unresolved dispute with the buyer, the consequence will be: insured, but not covered.
This article hopes to illustrate that every business should regard its insurance contracts as important as all other commercial agreements. Managers responsible for negotiating the insurance contract should be careful in ensuring that there are no misrepresentations in the application and negotiations leading to the issuing of the insurance policy. Documenting the negotiation is highly recommended, and navigating this tricky stage of the contract should be done with advice from both the company's insurance broker and its legal consultant.
People who suffer from triskaidekaphobia - a fear of the number 13 - will live the year 2013 with some trepidation. Or does it necessarily have to be so? There is truth in saying the insurance business is an industry which relies heavily upon both good luck and good management for its prosperity. The good luck enjoyed by the industry may depend a lot on the weather because of huge storm-related losses in the past years. The industry does not have to rely on the ignorance and erroneous representations of its policy holders to stay in business; and to achieving a profitable 2013. Certainly, it does not.
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The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations