By Ken Kukral
In my 26 years in the business, I can say there is nothing worse than having a claim denied. From a few different angles:
– The client will not be happy that they have an uncovered loss, the value of their asset will be diminished or eliminated and their financial net worth may be compromised. In the event it is a liability loss their full net worth may be subject to the loss.
– The agent will be unhappy that the loss is not covered and will very likely be sued by the soon to be ex-client.
– The carriers (or wholesale brokers) relationship with the agent may be damaged or severed by the trauma of having an uncovered loss.
One of the areas that come into play on uncovered losses are “warranty statements”. Definition of an insurance policy warranty: The insured’s guarantee that the facts are as stated in reference to an insurance risk or that specified conditions will be fulfilled to keep the contract effective. Warranty statements come in few different shapes and sizes. Some of these are:
– Warranty Applications – You may not realize it but many applications contain warranty statements. So when your client signs the application, they are agreeing to the warranty statements in the application. An example can be found at the following link: http://ourinfoshare.com/apps/files/kvyFfM2n5KH750U5.pdf A warranty statement in and of itself is not necessarily a bad thing but a client must
– Warranty letter- A separate letter that the insured signs that the answers to statements are the basis for the willingness of the carrier to provide coverage. If the statements they warranted are found to NOT be true, coverage can be voided. An example of a warranty letter can be found at the following link: http://www.naplia.com/Accountants/PDF/Phly/Phly%20warranty%20statement.pdf
– Warranty endorsement – Many or even most policies contain these. The most common is the “Protective safeguards Endorsement”. The client is warranting that they have the listed protective devices and that they are operational. In the event they do not have the listed protective device (such as a sprinkler system) the claim can be denied. The carrier agreed to provide coverage if they had specific fire protection devices and if they don’t they would not have provided the coverage. An example of this endorsement can be found at:
So what should you do to protect yourself and your clients?
1. Have a discussion about coverage warranties with your clients. Let them know that at the time of loss the carrier will be looking at the warranty statements and will take them into consideration when settling the loss. You may want to give them a written definition of a policy warranty so that this “condition” is clear to them.
2. Go over the application with them. When they sign the application they are attesting that the information is true and accurate. This relates to the “fraud warning” as much as it does to the warranty statements in the application. This is not something to be taken lightly and they must make sure ALL information is correct. Any material misrepresentations can also potentially void a policy. Not all applications are warranty applications so make sure you know which company specific applications are and which ones are not.
3. Go through any warranty letters they sign and make sure they know their answers are a condition of the carrier being willing to provide coverage. This is not a common practice but some professional liability carriers use these.
4. Go through the policy warranties. Policy warranties such as subcontractor warranties may bring up issues that change how the contractor does business going forward. They may have to get certificates or additional insured endorsements from their subcontractors, prior to letting them on the jobsite. Technical jargon in the protective safeguard endorsement could become an issue at claim time. If the client is not sure if they have the specific fire protective device, then they need to confirm that they do and not wait till the time of a loss. I have had one agent who writes a number of Chinese restaurants, go as far as translating the protective endorsement into Chinese and have the clients sign off that they have read and understand the endorsement and have the protective safeguards required.
As you can see, policy warranty statements can lead to potential E&O claims. By being proactive and discussing these statements at the time of quoting or writing a policy you can make sure you clients know the ”conditions” they are operating under and they can run their operation with those conditions in mind. This is not much different than the warning labels on products or packaging, warning the client so they make responsible decisions in how they handle their insurance or run their business.