While recent comments by Federal Reserve Chairman Ben Bernanke suggest that the nearly two-year-long recession may be nearing an end, the economic downturn is likely to remain a force behind additional and potentially uninsured risks for a long time.
Even if a company survives the recession relatively unscathed and does not have to materially alter its operations, it still faces two common sources uninsured risks.
o First, key business partners might be affected by the recession, which in turn may impact their ability to fulfill contracts.
o Second, to counter falling demand for its main product, a company may branch out into less familiar production areas–opening it up to unforeseen, and uncovered, liability.
To ensure they are not inadvertently creating insurance coverage complications, business owners should frequently re-evaluate their risk exposures so they purchase the most appropriate coverage, including excess and surplus lines coverage. Throughout the economic downturn, excess and surplus lines insurers continue to offer a coverage safety valve for the toughest and most unique risks on the market–like new and unfamiliar products–as well as higher limits of excess liability coverage.
Since it is not always easy to recognize the different risks created by business partners or in-house revenue-generating efforts, business owners should reach out to their insurance broker for assistance in the review process.
A FALSE SENSE OF SECURITY
To illustrate how a business partner's financial trouble can impact a company, consider a product distributor that is an additional insured via a vendors' endorsement on the general liability insurance policy purchased by the product's manufacturer.
In a stronger economy, the distributor may not be concerned about whether its own liability limits would sufficiently cover it for a third-party product liability claim that names the distributor as well as the manufacturer. In today's economy, however, the distributor should reconsider relying on another company's insurance coverage to protect its own assets.
If a claim arises after the manufacturer has gone out of business and the manufacturer's insurance policy has expired, the distributor might have to bear the financial burden of that claim, making the distributor's coverage limits far more important.
A review of a business partner's operations and contracts also might reveal that even if the partner does not fold, its indemnification guarantees from counterparties might not be all that sound. At the same time, the company's own coverage might be inadequate, due to some insurance purchasing decisions designed to trim short-term coverage costs.
For example, consider a hotel or a retailer that retains an outside security firm. Under its contract with the security firm, the hotel manager or retail business owner might have negotiated a stipulation that it would be named as an additional insured on the security firm's professional liability insurance policy.
Meanwhile, in negotiating its own general liability insurance, the hotel or retailer decided to lower its premium by rejecting personal and advertising injury coverage. After all, it reasoned, exposure to slander and libel exposure is minimal, since the hotel or retailer does not have any broadcast or print media operations and its advertising never mentions competitors.
What the hotel or retailer failed to understand is that personal and advertising injury insurance also often provides coverage against third-party claims of invasion of privacy, detention and false arrest, unless otherwise excluded–all risks to which the security firm may expose the hotel or retailer. Other insuring provisions of general liability insurance typically do not cover such claims.
Personal and advertising injury coverage would be a vital–and relatively inexpensive–protection if the security firm's coverage for a loss proved inadequate or if the security firm folded and a claim was filed after its professional liability coverage had lapsed.
BRANCHING OUT
Over the past year or two, business owners might have inadvertently created additional potentially uninsured exposures for themselves as they responded to the recession's impact on revenues by offering new products or services or by broadening the customer base for existing offerings.
Consider a company that has assembled garden rakes for many years and is very knowledgeable about the quality of handles, tines and fasteners that are available from suppliers. To replace lost revenue resulting from a diminished demand for rakes, the company begins to assemble hammers as well.
The assembler is far less familiar with the hammer parts supplier industry and, therefore, faces a learning curve in evaluating price and quality. As a result, the assembler could be at far greater risk for product liability claims.
A manufacturer producing a new product is especially susceptible to leaving itself exposed to new product liability risk if it purchases liability insurance from both the surplus and the standard admitted lines markets to cover risks in different operations.
For example, the manufacturer's surplus lines insurance policy might cover third-party liability claims arising from just one of its products–rollercoaster cars–while its standard admitted lines insurance policy covers third-party liability risks associated with the manufacturer's remaining product lines.
If the manufacturer begins producing the chain that pulls rollercoaster cars up a track's first incline, there is no guarantee that either policy covers third-party risks associated with the new product.
New product liability exposures could arise even if a policyholder does not add an item to its product mix but only offers an existing product to a previously untapped customer segment.
For example, a plumbing parts manufacturer that previously focused solely on commercial and industrial accounts tweaks a product to make it suitable for residential use. As a result, the number of sales for the part soars–and so does the manufacturer's product liability exposure.
Following a product failure, flooded commercial and industrial lavatories frequently will not generate nearly as big a loss as flooded home toilets, where costly flooring and carpeting could be damaged or ruined in thousands of homes, creating the potential for class action lawsuits.
A service provider could also find itself in similar circumstances.
Consider a concrete contractor that has worked on only commercial projects during its many years in business. Due to shrinking revenues, the contractor has picked up some residential construction projects as well.
While the nature of the contractor's work–pouring concrete–is unchanged, residential construction work can create different exposures than does commercial work. Therefore, liability policies for commercial contractors often exclude construction defect coverage for residential work.
An insurer might agree to remove or modify the exclusion in some circumstances, but the underwriter may first have to be informed that the contractor has begun working on residential projects.
As astute business owners devise ways to survive, and even thrive, despite current economic conditions, their E&S underwriters and brokers should be part of any business plan modification. To help keep their businesses thriving for the long term, business owners need to ensure that potential liabilities are properly covered.
Robert Lala is senior vice president-primary casualty for Liberty International Underwriters, a specialty lines division of Liberty Mutual. Mr. Lala is based in Chicago and he may be reached at robert.lala@libertyiu.com.
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