July 7, 2012

Don’t Just Rubber Stamp Your Insurance Renewal; It’s More Complicated Than You Think

Reprinted with permission from the June/July 2012 edition of Bicycle Dealer Magazine

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By Steven W. Hansen, esq.

I’m currently defending two cases, one involving a retailer and another a non-profit bike association where there was insurance in place at the time of the accident but no coverage due to exclusions or lack of “optional” coverages. Both of the situations are very costly mistakes as neither the defense costs in the suit nor the indemnity payment to the plaintiff will be covered and must be borne by the insured.

Most retailers never think much about their coverage once they secure it, other then trying to find a lower price each year. They treat insurance as a “commodity” (something they would never do with bikes) and only shop based on price, not coverages. This problem is often due to a lack of understanding about what insurance policies cover and do not cover and some brokers’ lack of understanding of the bicycle business and the coverages that are most needed by those in the business. As this magazine is read primarily by IBDs, the focus of this article will be on insurance for retailers, not manufacturers.

Many retailers are unaware that one of their biggest liability exposures is product liability. Some assume they cannot be sued for that, as the manufacturer made the product. Even if they never touched the product (just sold it), in most states, the retailer can be on the hook for the entire loss. In cases where the retailer installed the product, allegations are often made that make the retailer the target of the products liability case. Some retailers actually lack the “products completed operations” coverage on their policy, as they don’t understand the insurance terminology, which is foreign to most people.

Lots of retailers and manufacturers ask me what limits of liability coverage they should carry. This is a very hard question to answer and, in the end, comes down to the size of your business (its value), your actual exposures and your tolerance for risk. This is something that really has to be customized for each client.

There are two main types of policies offered for retailers. One is referred to as a “BOP” (or Business Owner’s Policy) and the other is CGL (Commercial General Liability). BOP is generally very price competitive and generally non-auditable, meaning that unlike CGL policies, the insurer cannot come back after the policy ends and seek more premium as your sales exceeded estimates. CGL policies are priced using different methods and are almost always more costly than the BOP’s. BOP’s are far more common for retailers. Again, which type you get depends on the type of operation you run and the coverages you want added in. BOP’s are often very limited with very few options.

For example, if your store carries a product which it helped to design there could be an argument that your store is the designer of the product and the BOP policy may not have the coverage needed to deal with that exposure.

Another area often overlooked are certificates of insurance. Most retailers know (or assume) that their upstream suppliers or manufacturers carry insurance that covers product liability claims. But some retailers wrongly assume that if they become involved in a suit, the upstream supplier’s insurer will defend and indemnify them. This often is not the case, as the retailer has not been added to the manufacturers policy via a certificate of insurance. The problem is that certificates can be worded in such a way as to not offer any coverage to the retailer. In addition, there are parts of the policy that are not provided to the retailer that discuss the scope of what the retailer can be indemnified for by the manufacturers policy. As most retailers don’t understand this area, it’s rarely discussed with brokers or suppliers in an intelligent fashion, if at all.

The certificate issue can become more complicated by indemnity contracts between upstream and downstream parties in the supply chain. These contracts are often poorly drafted, not well thought out and often fail to take into account insurance issues that may arise due to these contacts. For example, in many cases the party required to indemnify may not have any insurance coverage for any contractual obligation or just for the contract drafted in that specific instance. That can cause hardship to the indemnifying party and also make it less likely that the party that was to be indemnified under the agreement will not get what it bargained for. I often tell clients that if there is no insurance coverage for an indemnification agreement, they are likely not worth the paper they are written on.

Other areas overlooked by retailers are all the scenarios where problems or injuries are likely to occur. Examples are sponsorship of riders or events, rentals of bikes and related equipment, used bikes, repairs, thefts, contractual obligations, recalls, employee matters, data issues, loss of business or revenue, importing/exporting -- the list goes on.

For example, most retailers know that workers compensation coverage is required by law for employees, but fail to obtain any type of “employment practices” liability coverage that can cover wrongful discharge or discrimination claims, hiring claims etc. I tell people that often your own employees can become your worst nightmare if they turn against you -- much worse than a former customer. But again employment practice coverage varies widely from insurer to insurer so you have to be very careful about what you are paying for. In some instances, such coverage will only provide a defense to the claim but no indemnity if there is a settlement or a verdict against you.

Thefts are a complicated area as they can occur in many different ways and some types of theft are not covered by policies or are excluded. Thefts can be categorized as thefts by third parties or thefts by employees. Burglary-type thefts (by force) and thefts by some sort of deception (like giving a bogus credit card or promising to come back from a test ride and never doing so). They are also segregated by types of things stolen: money, data, identities, products etc. Policies can differ greatly on what is and is not covered, so you have to ask very pointed and specific questions of your broker (preferably in writing) as to what is and is not covered.

Data loss has become a huge marketing area lately in the insurance market, both in terms of data (incoming or outgoing) damaging your business or causing harm to third parties (such as in loss or leakage of personal information on the Internet or credit card information). The broadest types of coverage are almost always sold separately. Some “basic” coverages might get included in the primary policy. These coverages can get quite complicated and quite costly. Often, they cover more than smaller businesses need, especially if they are not processing lots of online orders and have good data management practices in place or outsource that function to the third party. But again, it really depends on your unique exposures.

Given the complexities involved in insurance, the jargon used by brokers that retailers clearly don’t understand and some brokers who are not at all familiar with the risk that retailers face in the recreational arena, I often am asked to do “insurance audits” or broader “liability audits” for clients. Some of this work should be done by the brokers, but often, it’s not, or it’s incomplete or its done using insurance jargon that leaves the insured not quite sure what’s covered and what’s not. Another problem is that some brokers that sell these policies are not very familiar with types of coverages or more importantly what types of “likely retailer scenarios” are covered and which ones are not under a particular policy.

To make matters worse, what’s covered or not covered can change from year to year or insurer to insurer. Typically, the changes are less from year to year than they are when you change insurers. You have to make sure that coverage has not been changed or restricted when the new policy issues. A broker may also be told that a policy will cover a certain act or loss, but then when the policy is actually issued by the insurer months later, it turns out the forms attached were changed or the form asked for was not included and you end up with a costly coverage problem.

Insurance can be daunting. It’s better to find out what you are paying for well before you need it.

Steven W. Hansen is an attorney who defends recreational product manufacturers, distributors and retailers in product liability matters and provides consultation regarding product recalls, owners manuals and warnings, insurance coverage questions, risk management and product compliance and development.

The information in this column is subject to change and may not be applicable in your state. It is intended as a thought provoking discussion of general legal principles and does not constitute legal advice. Any opinions expressed herein are solely those of the author.

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