Mechelsen, Inc. Risk Management Forum

Red Flag: Not-For-Profit Volunteering/Boards

Red Flag:  Clients who volunteer their time for community service organizations

Generosity in the service of not-for-profit organizations is a wonderful thing.  But doing so can present a serious liability issue and expose your client to many unintended risks of uncovered loss.

Many standard home insurance policies provide liability defense and indemnity coverage for non-remunerative services provided to community service organizations.  But beware! Many of the coverages provided by standard home insurance policies are limited only to bodily injury and property damage exposures!  Some policies may provide endorsed coverage for libel and slander (personal injury), but there are still many more liability exposures that can't been defined as bodily injury, property damage, or personal injury.

Many organziations are actively involved in economic development (Chambers of Commerce, perhaps), management and employee oversight (School Boards, for example) and various other elements where allegations of negligence can lead to financial-loss claims worth millions of dollars.  Most standard home and umbrella policies will not cover losses that don't involve allegations of negligence resulting in bodily injury, property damage, or personal injury.

Many organizations carry Director & Officer policies, but how many of those policies extend coverage for the defense and indemnity of individual members, what exposures are covered, and what are the limits of coverage on those policies?  If you don't know who will be defending your client if they are personally sued in their service of a not-for-profit organization, then this is an immediate red flag 

For any client that volunteers their time, make sure that this is known to their insurance expert and make sure that the exposure-analysis includes a review of the service organization's D&O policy.  Perhaps the organization's D&O policy will cover your client's exposure.  But also know that a certain high-quality personal insurance company now provides expanded "D&O" coverage as an endorsement to their personal umbrella policy!  These expanded D&O options on a personal excess policy are extremely valuable for your clients who may otherwise have serious gaps in financial protection in their service with not-for-profit organizations. 

Mechelsen, Inc.           Darren McGraw, MBA, CIC            mechelseninc.com

Red Flag: Home & Condo Associations

Red Flag:  Clients in Home or Condo Associations

It has been reported that about one is six American households belong to some form of home or condo association.  Here in the Seattle area I'm betting that ratio is higher.  What many property owners fail to understand is that most associations have bylaws that allow for association losses to be assessed to all owners, or even one owner!

Most home and condo insurance policies automatically provide some level of coverage for certain assessments levied against an insured, but it's usually limited to just $1,000.  In addition, the intrepretation of what is covered under the loss assessment provision of any particular policy can be extremely complex (specific claim horror stories can be provided upon request). 

Fortunately, most insurance companies provide optional increases to the limits provided for loss assessments, but your client needs to ask for them.  If you have clients that live in a development or unit with an association be sure that they take steps to understand the scope of their exposure to loss assessments and the options for getting loss assessments covered by their home/condo insurance policy.

Mechelsen, Inc.                   Darren McGraw, MBA, CIC                 mechelseninc.com

Red Flag: Vacant Land

Red Flag:  Do we all agree on the definition of "vacant"?

Most all home insurance policies automatically include coverage for additional plots of vacant land owned by a client.  But what constitutes "vacant land"?

Cases heard around the country have at various times ruled that things like water pumps, abandoned foundations, roads, fences, mailboxes, mine shafts, a length of chain rope, deer stands, rockways, and flag poles have all been sufficient "improvements" as to void the automatic extention of coverage to plots of vacant land.  All of these court cases stemmed from very serious injuries where coverage was denied because of these improvements!

The lesson is simple.  If there's even a hint of a question as to whether the land is "vacant", be sure the plot is added as an "additional location" to the home insurance (and don't forget the Umbrella) policy.  The cost should only be about $25! 

Mechelsen, Inc.             Darren McGraw, MBA, CIC             mechelseninc.com

Insuring the Nanny Exposure

Red Flag:  Insuring the Nanny Exposure

If your clients have a nanny (regardless of whether or not the nanny is a "live-in" or "live-out"), your clients are automatically exposed to greater liability and a more complicated insurance position.  One of the reasons that the insurance position becomes more complicated after employing a nanny is because there's not a "right" way to do things.

The most obvious added exposure of having a nanny is the effect on the auto policy coverages should the nanny either drive or ride as a passenger in an insured auto.  Depending on the factual scenario, coverage under your client's policy for losses can run the gamut from "covered" to "denied".  Pretty specific, huh?

Adding to the complexity of the added auto exposure is the varied underwriting positions taken by different insurance companies on what can be done to address the exposure before the loss to try and mitigate the "denied" possibilities.  No two companies seem to agree on exactly what should be done, but most all have an opinion and a course of action to follow (i.e. - it MUST be addressed specifically for each client).

What's often not as understood or addressed by most people is the added exposure to your clients' home insurance, personal liability, and/or excess liability policies.  Again, there are too many issues to discuss here, but when completing your client's insurance review be sure that the nanny issue is addressed on the home insurance policy, too! 

Finally, having a nanny is one of the most common example of one of our core philosophies:  Risk management is NOT the same thing as insurance management.  Both are important, but good risk management in employing a nanny is absolutely critical regardless of the insurance policy management issues.  Incorporate this more holistic philosophy when addressing your clients' nanny issues.

Mechelsen, Inc.               Darren McGraw, MBA, CIC             mechelseninc.com

Red Flag: Kids At Home With Their Own Auto Insurance

Red Flag:  Kids At Home With Their Own Auto Insurance

Many clients come to us trying to justify their decision to put a car and separate insurance policy in the name of their living-at-home child saying, "this way we won't be responsible if a bad car accident happens."  Actually...

If you have any client that has a child living at home with their own insurance policy, make fixing this potentially monumental problem a top priority!  I won't bore you with a full dissertation on the reasons why, but it's sufficient to say here that many, many gaps in insurance coverage can exist under a situation like this.  In addition, many more opportunities exist to "lose control" over keeping limits of liability high enough, paying the premium, controlling the underwriting, etc. when a policy is written in the name of a child. 

If you have any clients with multiple auto insurance policies in one household that should be the tip-off to talk to an insurance expert asap to make sure that if there are existing gaps in coverage, they are filled right away.  And if you do want to bored with the full dissertation on all the reasons there are problems with this scenario, I'll be happy to comply with your request. 

Mechelsen, Inc.               Darren McGraw, MBA, CIC                mechelseninc.com

Red Flag: Remodelling

Red Flag:  Report $5K to get 25%

Many home insurance policies grant a "cushion" of insurance over-and-above the Dwelling limit.  This extra amount is usually defined as a percentage of the Dwelling limit, like 25%.  So if your client has a Dwelling limit on their home insurance policy of $100, the extra cushion might actually provide up to $125 after a loss even though the stated limit is $100.

It's really hard to pinpoint what the post-loss reconstruction cost of a house might be without actually having a loss, so the added cushion is a blessed "fudge factor" in the event that construction costs creep over the limit on the policy.  These common endorsements are called different things by different insurance companies, but most do not charge any premium for them if the client and their home qualify.

But like with most insurance-policy coverages there are conditions and exclusions.  One of the least-known conditions of these extended dwelling cost "cushions" is a requirement that the client notify their insurance company before they begin any project which adds $5,000 or more to the projected reconstruction cost of the home.  If the project is not reported, the entire "cushion" may be voided after a loss and then your client better hope that they picked the right Dwelling limit on their home or they will be underinsured!

Each insurance company has different coverages and conditions, but keep "Report $5K to Get 25%" in mind whenever your client talks to you about a remodeling project and involve their insurance agent right away.

Mechelsen, Inc.               Darren McGraw, MBA, CIC               mechelseninc.com

Red Flag: Company cars

Red Flag:  Company cars & gaps in auto liability coverage.

If your client is a custodian (i.e. regular operator) of a company-owned car, there's a chance they  face the possibility of having no insurance coverage for certain auto accidents.  If a company owns the vehicle it's likely that they also have a business-auto insurance policy covering the business, employees, etc.  But what isn't always as common is that same business-auto insurance policy extending coverage to anyone in the employee's family driving the company car.

Imagine if your client's spouse drives to the grocery store some night and causes an accident.  There are many business auto insurance policies out there that will not provide insurance for a non-employee operating the car.  If your client's company has that kind of business-auto insurance policy...oops!  No coverage from the business policy!

And unfortunately, your client's personal auto policy will probably deny coverage for the regular use of any vehicle not insured under the personal policy!  So under this scenario there'd be no coverage under the business-auto insurance policy and no coverage under the personal-auto insurance policy! Any judgment or settlement to the injured parties will have to come from your client's personal assets.

Besides the obvious to-do-list item of always checking with the employer to learn about the scope of insurance provided by the business-auto insurance policy, we recommend adding a "Drive Other Car" endorsement to your client's personal auto policy.  This endorsement usually extends personal auto policy coverage to all family members who may drive the company car.  And with most insurers usually costs about $40/yr!  No brainer.

Mechelsen, Inc.             Darren McGraw, MBA, CIC             mechelseninc.com

Red Flag Alert - Old Homes

Red Flag:  Clients with old homes.

Most standard home insurance policies limit the amount of recovery provided to bring a home up to current building codes after a loss.  Suppose one of your clients suffered a big loss to their old home.  If their home happened to have 2x4 studs, lead-painted sills, an unbolted foundation, steep stairwells, and R10 insulation there's a good chance that before the home can be rebuilt changes will need to be made to the design and materials because they won't be able to get a permit or pass inspection otherwise!  And since 2x6s, foundation re-working, stairwell redesigning, and better insulation all cost more than what the home had before the loss, bringing the home up to current building code standards is going to cost more to rebuild that what it would cost to build the home exactly how it was. 

This incremental cost for bringing the home up to code is often limited by most home insurance policies to just a small portion of the Dwelling limit.  There have been cases where a client's policy had enough insurance to pay for the reconstruction, but not enough to pay for the building code upgrade costs.  This meant that the client was underinsured (i.e. they had to pay out of their own pockets). 

Fortunately, the remedy for this is very inexpensive!  If you have a client with an older home, quickly look at their limit for "Ordinance & Law", which should be listed on their home insurance declarations page.  Does it say "10%"?  Call us.  Good insurance and risk management is not about spending more, it's about knowing more.

Mechelsen, Inc.                     Darren McGraw, MBA, CIC          mechelseninc.com