Insurance Companies: Why I Love Them and Hate Them

Insurance Companies: Why I Love Them and Hate Them

Over the years, many of my clients have been manufacturers and distributors, many of them international companies. One of the most fundamental principles of risk management for these companies is to make sure they have a well structured insurance program. Having adequate insurance literally makes doing business in the U.S. -- notorious for its litigious nature -- possible.

International companies considering doing business in the U.S. are often told they need an accountant, and turn to an accountant to set up their business. In my view, using only an accountant is a fundamental mistake. In reality, a company doing business in the U.S. needs to engage three professionals: a business attorney, an insurance broker or agent, and an accountant. Ideally, these professionals should work together to limit the company's business risk. The same is true for new domestic companies.

This blog, however, is about insurance, so let's focus on that topic. Insurance companies make the promise of protection. Insurance companies often design and promote new products to deal with unique risks. Just this morning, I found announcements from insurers or brokers offering comprehensive pollution coverage and coverage for Foreign Corrupt Practices Act Liability. I also found an interesting piece about why privately held companies are considering (and need to consider) directors and officers liability coverage. Note: I provide links to these announcements only for informational purposes. I have not analyzed any of the products mentioned and do not endorse them. The reader must investigate any insurance product or service at its own risk.

Although it is a good thing that insurers and brokers are developing new products that can assist businesses in controlling risks, I must sound two words of caution. First, the reason that companies are coming out with these focused products is because they have tried to limit the coverage available under more traditional coverage, such as commercial general liability ("CGL") policies. I often see CGL policies that are so limited by exclusions and endorsements that calling them "general" liability policies borders on absurdity.

Second, even when these newly designed policies clearly provide coverage, that does not mean the claims department will acknowledge coverage. Here's a little secret about insurance companies: There is often little coordination between the underwriting department and the claims department. When underwriters design coverages for non-traditional risks and to bring in new premium dollars, it seems they do not tell the claims department. When the claims come in, as they inevitably will, the claims department may ignore the broader grant of coverage and deny the claim. I have seen this happen. If this happens, call an insurance coverage lawyer.

So there it is: Love and hate. I love insurance companies because they allow businesses to limit and control their risks in a litigious environment. I hate them for trying to endorse away their general coverage and when the claims department does not live up to the promises of the underwriters.

Read more articles on policyholder law at the Policyholder Blog, by John L. Watkins

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