When Insurance Fails To Meet Expectations
When insurance fails to meet expectations the parties are often surprised by the failure… failure should be expected.
The nature of insurance is somewhat of an anomaly. Insurance is one of most widely used, yet least understood, contracts. It is the lynch pin of the modern economy facilitating and underlying most modern economic transactions as a critical tool to make these transactions work in the face of ever expanding risks. Insurance coverage provides businesspeople with a mechanism to transfer risk; it increases investor confidence in a business, a decision, a project, a product or a service.
While a business will purchase insurance consistent with its philosophy on managing risk, most contracted services and sub-contracted work specify the insurance necessary for the performance of the project; these requirements are established to address minimum expectations for risks that insurance is ‘intended’ to address.
Supporting these insurance requirements is indemnification and hold harmless language; this is often broader than the scope of the necessary insurance as it incorporates business and un-insurable risk in addition to insurable risk.
When traditional insurance requirements are written into a contract, emerging insurable risk may not be contemplated leaving the contract with a broad indemnification and without the support of available insurance.
Requirements for insurance are often worded in a manner inconsistent with insurance policy structure and language making it difficult to understand the intentions of the contract’s drafter.
When insurance fails to meet expectations the parties are often surprised by the failure having believed that the contract dictating the terms of the insurance was sound and adhered to. In reality, failure should be expected as many requirements are inadequately drafted and evidence of coverage is accepted without the use of tools sufficient for the verification of the coverage quality and scope.
Insurance requirements and verification are often the last piece of the transaction puzzle, generally occurring just prior to commencement of a project; this leaves little time for review, verification and the amendment of faulty provisions leading to project delays or an inadequate risk transfer.
How do we better address risk transfers through insurance in order to meet expectations and improve business transactions?
Business people need to understand the fallacy of believing that insurance is a commodity and take the time to understand insurable risks and how more effective transfer of these risks can improve transactions, projects and profit.
Qualified insurance professionals should have more involvement with the drafting of insurance requirements and the protocols for verification.
Parties to the transaction need to take insurance from an afterthought to forethought proactively judging proposals based upon insurance coverage.
Broad based insurance requirement verification processes should be established, implemented and consistently used.
Insurance programs must be structured to be consistent with a business’s most complex contractual relationship and in anticipation of emerging risk.
An insurance program is asset, treat it as an asset and it will more effectively work to support business development and strategy.
This is the value of experience; this is the advantage that you get when you work with James Venezia.