insurance 102
DESCRIPTION
Insurance for LawyersThird Party CoverageSurety BondsTRANSCRIPT
Insurance for Lawyers 102
Business InterruptionInland MarineSurety Bonds
But first, a quick review• First Party Property Insurance
– Pays for loss to covered property at the Premises caused by or resulting from covered cause of loss
– Pays regardless of fault– Requires an insurable interest
• Third Party Liability Insurance– Pays damages for which policyholder is
legally liable because of bodily injury, property damage, personal injury or advertising injury caused by an occurrence to which this insurance applies
– Pays legal bills and other defense costs, usually in addition to limits of liability
Review
• Additional Insured Parties– Not good for property coverage– Can be used to ‘stack’ liability coverage
of several policyholders– RTFP
• Read the “other insurance” clauses of both policies and the contract requiring the coverage
• The language of these endorsements is in flux
• Most clients will have nothing more than an insurance certificate
Time Element Coverage
• Not covered by property insurance (unless specially endorsed)
• Two distinct coverages:– Lost Income– Extra Expense
• Three different forms– Lost Income Only– Extra Expense Only– Combination
Business Income InsuranceThe In$uringClau$e
• We will pay for the– actual loss of Business
Income you sustain due to the
– necessary suspension of your “operations” during the
– “period of restoration”
Battlefields
• Business Income– The term "business
income" means the net profit or loss before income taxes that the insured would have earned or incurred, plus continuing normal operating expenses, including payroll, that are actually incurred.
That’s the definition in ISO form CP 00 30 07 04
• Other definitions are possible– “Use & Occupancy” paid
a fixed dollar amount per diem
– “Gross Earnings” policies likewise superseded
Insuring Clause Continues
• Suspension must be caused by direct physical loss of or damage to property…at the premises…for which a Business Income Limit of Insurance is shown in the Declarations
• Loss or damage must be caused by or result from a Covered Cause of Loss
• Some physical loss is required
Still More Insuring Clause• Action by Civil AuthorityWe will pay for the actual
loss of “business income” you sustain and necessary “extra expense” caused by action of civil authority that prohibits access to the described premises due to direct physical loss to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
There are limits…• When outbreaks of BSE
resulted in the closure of US borders to tallow being imported from Canada, there was no coverage found under the Civil Denial of Access clause
• Was this result correct?• Should the outcome
differ if the tallow was excluded at the border because it was rancid?
Important to Note• Policyholder can make a BI claim for
property it does not own• Don’t even need to have a lease• ABM had coverage for the WTC even
though it had no property interest in the buildings
• Anyone who derives economic benefit from property can recover lost business income caused by or resulting from covered casualty to the property but this is a recurrent battlefield
Battlefields• Absent damage to the
property described in the Declarations, there is no Business Income coverage– Airlines’ losses due to no
business following 9-11 did not trigger coverage
– Ongoing battles over whether contamination is physical damage that can trigger this coverage
– Lost Computer Data
Battlefields
• Sometimes, Business Income insurance is broader than property insurance– A loss that causes a building to become
unstable, but is not otherwise damaged: the property policy might not pay for the loss but the BI sometimes will
– Mechanical breakdowns may be excluded from the property coverage but an accident that causes a suspension of operations should trigger BI coverage
Battlefields
• Causation– The cessation of business can be caused
even without physical harm to the covered property
– If operation of premises rendered unsafe or unlawful, the fact that it is physically possible to operate the facility does not preclude Business Income claim
– Or the policyholder may have an interdependency claim
Battlefields
• Proof of lost income is daunting– Nearly impossible for
new businesses– Established businesses
need more and more to satisfy the Daubert standard instead of normal accountant testimony to establish amount lost
Insuring Clause: Extra Expense• We will pay Extra Expense
(other than the expense to repair or replace property) to: (1) Avoid or minimize the "suspension" of business and to continue operations at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.
• (2) Minimize the "suspension" of business if you cannot continue "operations".
Battlefields
• Total Cessation Issues• Can you have extra
expense while still operating?
Battlefields• Period of Restoration
– “Virtual” Restoration• Should/Could/Would• What about off-premises
property? 100/500/1000 foot penumbra of coverage
– What is getting restored?• State of the Art or Functionally
Obsolete• There may be a difference
between Business Income and Property Damage Recovery: PD doesn’t pay to make the insured property better but Business Income might have to include bettering in the Restoration Period
Time Element Summary• Property Insurance pays the value of stuff but that may not be enough to save the
enterprise• When business is interrupted by a casualty, insurance is available to cover the lost
income and the exceptional expenses of operating from temporary facilities• Be aware that specific coverage forms exist for Civil/Military Authority, Service
Interruption, Ingress/Egress/Access Denial• Instead of deductibles, these policies have a “waiting” or “exclusion” period• If the policyholder has property insurance, review that policy or coverage part too!• Coordinate with the ‘disaster recovery’ benefits available from many commercial
property insurance companies• Consider definitions of covered property under property coverage to reinforce
claim of damage to property sufficient to trigger Business Income policy• Contingent business income insurance adopts a much broader view of the
property and can be triggered by interdependency losses• Commercial output coverage also incorporates time element coverage
Inland Marine• Commercial Property
Insurance is designed for stuff that stays put and does not change
• Automobile coverage is one exception, but the risks of owning, operating and maintaining motor vehicles are fairly simple even though they move around
Ocean Marine
• The “First” form of insurance
• Marine Cargo• Marine Hull• Generally covers the
insured objects against all perils of the sea (and more) subject only to stated exclusions
Life and Cargo Come from the Sea• By the mid-18th Century,
Lloyd’s was established as a fixture of insurance and other joint-stock or mutual companies sprang up to insure other objects, such as buildings
• Marine insurance companies saw many opportunities in coming ashore
Marine Coverage War• Marine coverage moved
onshore through two opportunities in particular– Continuing Transit
Coverage: goods continue to move inland after unloading
– Many structures, while they stay put, are subject to perils unlike those to which other properties are exposed• Bridges, piers, docks,
wharves, quays
Marine Coverage War• Marine insurance next moved
to “builders risks,” or first party property coverage for buildings under construction
• Once they had insured the building under construction, the Inland Marine insurance company might not be in a big hurry to lose the coverage and the premium, so they stuck around even after a commercial property company could and would have insured the risk
Head to Head No Contest• Inland Marine insurance
was usually written on an all-risk basis
• Commercial property insurance was legally precluded from open peril coverage
• IM can cover all of the articles used with a building
• Commercial Property insurance was exclusively monoline
Nationwide Marine DefinitionIM Can Cover These Kinds of Things
• Imports• Exports• Domestic Shipments• Bridges, Tunnels and
Other Instrumentalities of Transportation and Communication
• Personal Property Floater• Commercial Property
Floater• Professional Property
Floater
• Floater: the term suggests marine flavor– Personal Property Floater
covers furs, jewelry, fine art, cameras, silverware
– Commercial Property Floater covers builders and installation risks, mobile theatrical equipment, live animals, salesmen’s samples, contractors’ mobile construction equipment, floor plans, electronic data, inventory of musical instrument dealer, furrier, art gallery
Is Inland Marine a Dinosaur?• The emergence of the
Special Multi Peril policy in the 1950s and the Commercial Package Policy in the 1980s reduced the IM advantage
• Commercial Companies blithely ignore their limitations and write Builders Risk policies with Special Causes of Loss
• Jerry Trupin believes that it makes no difference
• New York State Insurance Department Disagrees
• Circular Letter 22 (2001)• NYS Insurance Law
governs policies sold from or into the State or covering objects located therein
Inland Marine: How to Decode
• First Principle: it’s first party property insurance• Same principles apply as to Commercial Property
Insurance– What Property is Covered?– Whose interests are covered?– What causes of loss are covered?– What payments are called for?
• ACV or Replacement Cost• Coinsurance
Inland Marine: Covered Property
• For Floater Coverage, this can be challenging because the covered property changes– Auto dealer sells a car and obtains a new one from
the manufacturer– Coin dealer, art gallery, gun dealer– Transit coverage—when does it begin and end?
• Particularly important to understand the alphabet soup of INCOTERMS
• INCOTERMS interfaces with law of sales, carriage of goods by sea, The United Nations Convention on Contracts for the International Sale of Goods
INCOTERMSGovern Risk of Loss, Duties and Rights of Parties• Remember that under the UCC there are two
basic flavors of contract: shipment and delivery– Under a shipment contract, the seller discharges his
duty by shipping the goods by common carrier to the buyer
– Under a delivery contract, the seller discharges the contract by tendering the goods at the buyer’s designated point
• There are then further layers of complexity regarding insurance, risk of loss, etc that can make international trade at risk of misunderstanding
INCOTERMSUniform Shorthand for Sales Contracts
INCOTERM Decoded Meaning
GROUP E Departure UCC Shipment Contract
EXW Ex Works Buyer picks up. If Seller loads, loading is at Buyer’s risk
GROUP F Main Carriage Unpaid Freight Collect
FCA (named places) Free Carrier Delivered to designated place cleared for export
FAS (named vessel) Free Along Side Maritime-only variant of FCA
FOB (named vessel) Free On Board Like FCA but risk of loss divides at ship’s rail
INCOTERMSUniform Shorthand for Sales Contracts
INCOTERM Decoded Meaning
GROUP D Delivrance Arrival Contract
DAF Delivered at Frontier Buyer takes delivery at frontier, Buyer clears export-import
DES Delivered Ex Ship Seller holds goods on board named ship (usually owned or chartered) Buyers pays duties and cost of unlading
DEQ Delivered Ex Quay Like DES but Seller unloads ship to quay
DDU Delivered Duty Unpaid
Like DES but delivery to point other than port
DAP Deliver at Place Tender to Buyer at stated location
DDP Deliver Duty Paid Tender to Buyer at stated location with all duties and VAT paid
INCOTERMSUniform Shorthand for Sales Contracts
INCOTERM Decoded Meaning
GROUP C Main Carriage Paid
CFR Cost and Freight Shipment contract, price includes cost of goods and freight to stated destination. Maritime only
CIF Cost Insurance Freight
Shipment contract, price includes cost of goods, freight to stated destination and marine cargo insurance on the shipment
CPT Carriage Paid To Inland/Multimodal Variant of CFR
CIP Free Along Side Inland/Multimodal Variant of CIF
Builders Risk
• Buildings Under Construction– Special risks
• Fire• Collapse!!!!!• Elements• Theft
– Multiple Parties’ Interests• Owner• General Contractor• Trade Contractors• Lenders
Builders Risk• Coordination with
Construction Contracts• Whose property is it?
– Who’s the named insured on the policy?
– Who holds the insurable risks in the project?
– Coverage for “your” materials and equipment is not the same as coverage on materials and equipment of others
• When does coverage attach?
• When does coverage terminate?
Builders Risk
• New construction is especially vulnerable when utilities are connected…
• During hookups of new mechanical equipment…
• During testing and commissioning as part of final acceptance
Coverage, Exclusions and Exceptions O My
• Exclusion for mechanical breakdown is especially troublesome– Refers to devices that use
electrical or mechanical power, centrifugal processes, compressed gas and live steam
– Exceptions often present for testing and commissioning
• Hot Testing/Cold Testing refer to running equipment with or without feedstocks
• Usually pertains to performance of an industrial project– Can the factory produce
10,000 Flow-Through Tea Bags per day or can it not?
– Commissioning usually includes heavy duty and long-cycle
Surety Bonds
• Surety bonds resemble insurance policies…
• They are sold by insurance companies…
• Insurance companies collect premiums for them…
• They do transfer some risks…
• But…
Primary Obligation• The bond is triggered by
something else• That ‘something else’ is
the primary obligation• The primary reason for
the bond is to assure that a financially-capable payor stands behind the principal’s promise
• But if you don’t show a breach by the principal you don’t have a claim against the surety
Surety Bonds ≠ Insurance
• Insurance is underwritten on the presumption that there will be some losses
• Surety bonds are underwritten on the premise that there will be no losses
• Any losses the surety does pay, it expects to get back one way or another
Tri-Partite Agreement• Quintessential surety
bond has three parties:– Principal: typically
obligated to perform an act (appear in court, finish a construction project etc)
– Beneficiary: the obligee to whom the principal’s primary obligation is owed
– Surety: deep-pocket who agrees to pay for the principal’s failure
• The obligation of the surety is strictissimi juris
• At common law, any modification of the primary contract made without the surety’s assent would exonerate the surety
• Even if the change was favorable to the principal or surety
Don’t Forget the Primary Contract• Construction Contracts
contain elaborate provisions regarding changes in the contract
• Complicated body of law and practice grew up as to the kinds of ‘minor adjustments’ that did not exonerate the surety and the ‘change orders’ that required its assent
Modern Flexibility• The “standard” form, AIA
form A312 expresses the surety’s waiver of notice of changes under the contract documents
• However, most courts recognize that changes can be so fundamental that the surety cannot be held to guarantee the changed contract
• Strictissimi juris is also attenuated by the ‘newly’ commercial surety industry
Primary Obligation
• Common drafting paradigm: principal and surety promise to pay a certain sum of money to the beneficiary but if the condition of the bond occurs, then the bond is void and without effect, but otherwise it remains in full force and effect
Penal Sum• The amount stated in the bond—
the penal sum—states the greatest amount for which the surety expects to be liable
• Usually, that is true, though a surety who simply stonewalls a project can be caught in a Bi-Economy trap
• The bond at the right is said to be “conditioned for” John Doe appearing in court on his next appearance date
• This kind of bond is in the nature of a forfeiture bond
Know all men by these presents that we are firmly bound unto Sheriff of New York County for the penal sum of one million dollars, for the payment whereof we hereby bind ourselves our heirs and assigns; and the condition of this obligation is that if the principal John Doe shall appear in Part AP-1 of the Criminal Court of the City and County of New York on June 1, 2011 at 9:30 AM then this bond shall be void, otherwise to remain in full force and effect
s/John Doe, Principals/ABC Bond Company, Surety by
E.Z.Springer, its attorney in fact
Construing the Bond• Condition or Covenant?
– A bond conditioned for the performance of an act is construed under General Obligations Law §7-301 to contain a covenant either to cause performance or to pay
– As a result, most bonds are not construed as forfeiture bonds…the surety pays the principal’s damages, up to the penal sum
Construction Bonds• Construction uses many
bonds– Bid Bond– Payment & Performance
Bond– Completion Bond– Lien Discharge Bond
• Some bonds are required by law
• Others are critical to the smooth operation of the Project Finance arrangements
Construction Bonds
• Bid Bond: used with sealed public bidding– Expensive Process– Secures against the
successful bidder failing to execute the contract, etc.
• Payment & Performance Bonds– Usually required together– Always underwritten
together
• Bear in mind that this discussion is limited to the bonds themselves. We are not getting under the hood with respect to the principal-surety relationship.
• This may be a topic for a 300-level Insurance course
Performance Bond• Conditioned for the
performance of an identified construction contract– Do not conflate
‘substantial performance’ with ‘substantial completion’
– Substantial performance is a breach of contract that partially excuses the Owner’s obligation to pay
– Failure of substantial completion is a breach of the entire contract
Performance Bond• “Owner Default” is a
condition of defeasance of the bond
• Absent owner default, the owner enforces the bond by suing the contractor for breach of contract and joining the surety as a defendant
• Liability of surety is coterminous with liability of principal
Payment Bond
• Conditioned for the payment of subcontractors, laborers and material suppliers contracted for the project
• Does not require the establishment of a mechanic’s lien, but mechanics’ lienors are almost always protected
Completion Bond
• Like a performance bond on steroids
• ‘Owner default’ does not exonerate the bond: it triggers the bond
• Most often seen in motion picture financing but now becoming popular in ‘Platform Financing’
Litigation Bonds
• Provisional Remedies– Preliminary Injunction– Order of Seizure– Vacate Notice of
Pendency
• Supersedeas (Appeal) Bonds
• Governed by Article 25 of the CPLR
Financial Institution Bonds
• Triggered by misconduct of employee entrusted with property of beneficiary
• Fills important gap in D&O coverage, which excludes unlawful acts of named insured parties