Businesses that seek to change insurers in the wake of the financial distress that has beset American International Group face many potential pitfalls, a law firm is warning.
The alarm for risk managers was sounded by Anderson Kill & Olick, which noted a recent consulting firm survey that found 71 percent of AIG corporate insurance customers intend to get quotes from competitors.
Cort Malone, a Kill & Olick insurance recovery attorney, warned that the decision whether to switch insurance companies should not be made purely on the bases of price and financial strength.
Attractively priced insurance from solvent carriers will not meet the policyholder's needs, he said in a statement, if it does not pay claims.
According to Mr. Malone, issues that risk managers must consider if the insurance portfolio is to work as planned include:
o Pitfalls of a new application process: A change in insurance companies always requires filling out entirely new application materials, which entails a risk of forgetting to include critical information. A simple error, such as leaving off one particular location on a schedule of proposed insured properties, in some cases leads to an insurance company seeking to rescind an entire policy. One solution: request that your new policy include a clause broadening coverage to include inadvertently omitted sites.
o Policy limits: Growing companies outgrow existing insurance limits at regular intervals. When inviting new bids, risk managers may find that they can obtain greater limits for the same (or even lower) premiums. If the market hardens, as some are forecasting, it's crucial not to skimp on limits–unless the risk is covered by purchasing additional layers.
o Additional layers: An alternative to increasing primary policy limits is purchasing excess or umbrella coverage. Excess/umbrella generally provides greater limits for potentially catastrophic exposures–often at a relatively low premium–because the coverage does not kick in until exposure reaches a high level.
o Claims handling history: Switching insurance companies and programs is not merely a by-the-numbers decision because each insurance company has its own way of dealing with claims. A policyholder should regard past claims handling experiences with its current insurance company as a key factor in deciding whether to switch.
o Mandatory policy clauses: One example of these provisions is a clause forcing policyholders to arbitrate claims for which coverage seems to be clearly provided under the policies at issue. Avoid policies including such clauses, or insist on their removal.
o Pre-existing conditions: Common insurance policy exclusion bars coverage for "pre-existing conditions" known to a "responsible insured" but not disclosed or identified in new policy applications. This type of exclusion can make it very difficult to secure coverage for certain risks, especially risks endemic to the company's business.
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