The pitfalls of insurance coverage and additional insured certificates issued by Asian based non US admitted insurers

This re-titled article is reprinted with permission from Bicycle Retailer and Industry News

Editor's note: Steven W. Hansen an attorney who defends product manufacturers, distributors and retailers in product liability lawsuits and provides consultation on all matters related to the manufacture and distribution of consumer products. For further questions visit swhlaw.com.

How the problem arises
We receive lots of inquiries each year from both clients and their insurance brokers about how handle additional insured certificates issued to U.S.-based companies from their key Asian based manufacturing suppliers, who almost without exception, use policies issued by  Asian based non U.S. admitted/regulated insurers. If you are not closely monitoring and vetting all your suppliers additional insured certificates each year then you better go back to square one, read our article on audits, then read this article. This article does not address EU (European) or Japan based non-U.S. insurers. That is a separate future article.

This article is an attempt to outline some of the many issues with coverage provided by Asian based insurers ("AI's" for purposes of this article) and how to begin to spot these issues and develop strategies to overcome them. This article has been assembled from our first hand experience in claims with Asian based insurers and dealing directly with our client's coverage problems arising therefrom. Your first hand experience and opinion may vary, but we feel that these issues at least need to be identified and addressed by those companies least familiar with them.

Why the coverage exists 
You need to understand there is a reason for insurance issued by AIs. First of all there is a need as Asian based manufacturers are usually asked about this coverage by the U.S. companies they supply (or it is required to close the deal). Secondly, AI's are utilized as their coverage is usually much cheaper than U.S.-based coverage, even for the same limits of coverage. There is a good reason for this; in most cases the AI coverage is more limited in scope than most U.S. policies issued to the U.S. companies buying products from Asia and also because the AI's "loss ratio" tends to be lower. This means that the ratio of dollars paid out on claims to dollars of premiums collected is better than comparable U.S. insurers loss ratios. This may be partly due to the fact that the AI's can freely deny so many U.S. claims using their restrictive policies and their is no recourse by U.S. additional insureds in U.S. courts against the AI's directly.

Questions that have to be asked when vetting such coverage
The first question of course is the experience of your insurance broker and in house attorney in dealing with such AI's and their claims process. If you/they don't know the right questions to ask then seek outside expertise.

Unknown Ratings
One problem with AI's is they tend to not be rated by U.S. insurer rating agencies with respect to their financial strength. The reasons for this are varied but can be due to the fact that the AI's will not submit to regular audits by the U.S. rating agencies. The lack of a U.S.-based rating can seriously limit the use of AI's coverage when your company is trying to sell items to large companies like Walmart or Amazon.

Restrictive policies
AI's also tend to issue very restrictive policies when compared to U.S. policies. One way they do this is by only offering "claims made" (versus "occurrence") coverage which creates a whole host of issues as to how claims need to be timely handled. If you have never heard these phrases, again go back to square one. AI's also tend to use manuscripted or non standard policy provisions unlike those issued by most U.S. insurers. This unique policy terminology becomes a bigger problem as U.S. courts never get the opportunity to interpret it as they do U.S.- based policies. U.S. policies also tend to use very standard (copyrighted) policy language not used by their Asian counterparts. The reason this language is used by U.S. insurers of course is so that there is some degree of predictability when courts interpret the language.

Inexperienced claims staff
Not only are the policies a problem but the claims staff (internal and third party) can be inexperienced (or in some cases untrained) and are usually totally unfamiliar with the U.S. legal process and case law as it respects the claim process, coverage and liability. Or sometimes what knowledge they do have is used against the U.S. additional insureds. In our experience most AI staff routinely confuse coverage and liability. In some instances claims are never even opened as legitimate claims are "denied" (or more likely "ignored") before they ever reach the AI, or are denied for reasons that would receive much higher scrutiny in the U.S.

Limited policies
The AI policies are usually financially restrictive as well when compared to U.S.- issued policies. There are often large self insured retention amounts (SIR's) on these policies, in addition to low per claim and aggregate limits as well as limits on total defense costs that erode the available limits of the policy even further (so called "burning limits" policies). The Asian suppliers (with the blessing of the AI and the AI broker) also tend to issue too many additional insured certificates to too many U.S. companies which further erodes the viability of the policies. This creates a very murky situation should multiple claims later arise.

Limited usefulness
Due to these issues above many U.S.-based insurers will not give U.S.-based certificate holders any "credit" for these AI issued certificates. What this means is that these AI certificates are not worth the paper they are written on (at least insofar as U.S. insurers are concerned). Thus U.S. insureds won't get any rate reductions on their own U.S. coverage due to the fact that U.S. insurers are betting on the AI's not coming through for the U.S. additional insureds when needed.

Risky strategy
At the end of the day what this really means is that whether or not your U.S.-based company gets a defense and indemnification in a U.S. suit (or other country other than the AI's home country) from an AI comes down to how much pressure can be applied by your company to the Asian supplier, to its Asian based broker and ultimately the AI. That's a very risky strategy which can drastically change from one year to the next as players in the game change, let alone the viability of your long term business relationship with the Asian supplier.

Looking Forward
Again this all comes down to due diligence, experience in the AI market, timing and relative bargaining power. If your company is not getting the right advice from the insurance brokers and attorneys consulting with it, asking the right questions and offering solutions at the right time in the process, you will not get anywhere and may end up being counterproductive. Trying to retroactively work around or safeguard against these issues/pitfalls can be frustrating as you are not negotiating directly with the AI, nor are you on equal footing with them as compared to your Asian supplier. Many "contractual workarounds" attempted with the Asian insured supplier will not yield results for the simple reason that the AI is not a party to the contract and its insured has no power to bind it. The biggest problem with insurance is that you don't know you have a problem usually until years after the coverage was placed. At that point its too late to try to "fix" it.

Evolving picture
There are a lot more legal and underwriting issues and strategies involved than just the few mentioned in this article. Its never too late to start fixing these potential gaps in coverage. But they generally take a few policy renewals to iron out. And even then its an ongoing yearly battle as the players and policies in the shell game often change.

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.


Law Offices of Steven W. Hansen | www.swhlaw.com | 562 866 6228 © Copyright 1996-2013 Conditions of Use

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.

Law Offices of Steven W. Hansen | www.swhlaw.com | 562 866 6228 © Copyright 1996-2008 Conditions of Use