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Insurance 102
 

Insurance 102

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Insurance for Lawyers

Insurance for Lawyers
Third Party Coverage
Surety Bonds

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  • Insurance companies thought that the difficulties of proving lost income would make this product unsaleable unless there were a fixed per diem indemnity.
  • Bacteria, fungiprotista O MY lead, asbestos, fumes,
  • P. 3-36 of Lewis &Insua
  • P. 3-36 of Lewis &Insua
  • This is a true gold mine for recovery. There are so many permutations that BI promises to implement the Lawyers’ Full Employment Act for the foreseeable future.
  • During the late stages of the Inland Marine War, a truce broke out whereby commercial property insurance could be written on installation or builders risks but only with Basic or Broad Form causes of loss
  • The Commercial Property form of builders risk insurance CP 00 20 EXCLUDES COLLAPSE AS A COVERED CAUSE OF LOSS. Most inland marine forms cover collapse, and the CP 00 20 can be endorsed with CP 11 20, which actually provides BETTER collapse coverage than can be found under the CP 10 30 Special Causes of Loss form. (The 11 20 covers defective materials and workmanship expressly.)
  • BR has the added twist of terminating upon or shortly after “completion” of the work, and you can be surprised how easily a project is deemed complete. CF Circular Letter 22.
  • We all know Bi-Economy, right?
  • The etc is critical and must be coordinated with the bid documents, especially the INSTRUCTIONS TO BIDDERS. ETC should include payment and performance bonds, proofs of insurance, and other pre-construction deliveries
  • Surety may assert any defenses available to contractor Surety can raise bond conditions Surety has rights vs principal

Insurance 102 Insurance 102 Presentation Transcript

  • Insurance for Lawyers 102 Business Interruption Inland Marine Surety 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 Insurance The 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 Authority
    • We 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-18 th 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 Definition IM 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
  • INCOTERMS Govern 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
  • INCOTERMS Uniform 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
  • INCOTERMS Uniform 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
  • INCOTERMS Uniform 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, Principal
    • s/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