100 Insurance Myths (#5 of 8)

This is the fifth of an 8-part series dealing with insurance myths. We all know that insurance is one of the major risk management tools for any sport, fitness, or recreation business. For many of us, however, insurance is just a big mystery that we entrust to others. After this series, you will know many pitfalls and minefields to avoid. Thanks go to Daniel P. Hale for contributing this series to Sportwaiver.com. The first three segments of the series focused on property insurance. Part 4 and 5 will cover Liability Insurance.

LIABILITY INSURANCE

1.    If fumes escape from a defective furnace and injure people, this will be covered under my general liability form.
This is not necessarily the case inasmuch as many insurance companies attach absolute pollution exclusions which will exclude coverage for fumes from furnaces or smoke from a hostile fire.

2.    Employees of the neighboring building injured as a result of smoke from a fire at my building will be covered under my commercial liability form.
This is covered only if your insurance company provides an exception to the pollution exclusion for fumes or smoke from a hostile fire.  This is a common exclusion usually referenced to as an “absolute pollution exclusion.”

3.    I have products recall coverage under my commercial liability form.
No.  The general liability form will not provide any products recall even if the recall is for the purpose of preventing injury.  Do not confuse products liability coverage that covers bodily injury or property damage liability with products recall that covers the expense of recalling defective products.

4.    I never travel on business and don’t need foreign liability coverage.
Actually, if your business sells to someone in the United States and they, in turn, sell the product to Mexico or to some European country, there would be no coverage under your policy for those products claims.  Foreign liability coverage is needed.

5.    Claimants will only sue you for the amount of insurance that you have.
Actually, the claimant’s attorney is professionally obligated to seek a judgment for the actual amount of damages and after securing the judgment to look for all sources of recovery.  If an insured has assets above and beyond the amount of insurance that is carried, the attorney is professionally responsible for going after those assets and failure to do so can impose liability upon that attorney.

6.    I do not need high limits of liability insurance because I have a corporation or LLC that protects me.
While it’s true that having a corporate or limited liability company does provide some protection against shareholders of those entities, it does not shield individuals that are involved in the wrong doing.  For example, if a shareholder of a corporation is driving a corporate owned automobile and has a negligent accident, both the corporation and the individual driving the automobile will be sued.

If the corporation does not have adequate insurance, the plaintiff’s attorney can attach or garnish the corporate assets and, furthermore, the driver of the automobile, the corporate shareholder, will be independently liable and that person’s assets can also be seized.  The entity’s liability policy will protect the driver in most cases; however, there will the only one liability limit that can be used to protect both the corporation and the driver, and the driver’s personal assets may be at stake.

7.    Claims-made coverage is never acceptable.
Actually, claims-made coverage is very acceptable and, in fact, is typical for directors and officers liability, professional liability, and other types of coverage.  The initial cost on a claims-made policy is lower than on an occurrence policy where the insurance company has a greater ability to predict its losses because it covers claims that are made during the policy period whereas under an occurrence form the policy covers occurrences during the policy period regardless of when the claim is made.

8.    I can destroy my policies after they expire.
Property insurance policies, automobile policies and workers’ compensation policies probably can be discarded three years after expiration; however, liability policies should be maintained for at least 20 years. The reason for this is that under property insurance, workers’ compensation, and automobile insurance you know if you have a claim in most cases.  Furthermore, regarding workers’ compensation coverage, there is a centralized filing source in Michigan that can always prove that coverage was in effect as of a certain date. With liability insurance, the insurance companies may purge their files after several years.  In the event you have an occurrence policy and someone alleges in the year 2004 that they were injured in 1995 on your premises, you may not be able to establish that you had insurance and it would be your obligation to do so.

9.    If I am sued for mental injury or psychological injury with no bodily injury, I am covered.
Actually, the standard insurance form covers only bodily injury and property damage liability as well as personal injury. Bodily injury is defined as bodily injury, sickness or disease sustained by a person including death resulting from any of these at any time.  Bodily injury, therefore, does not cover any type of mental injuries.  Obviously property damage liability will not cover mental injuries as well.  There may be some coverage under the definition of personal injury.  Personal injury is defined to include false arrest, detention or imprisonment, malicious prosecution, wrongful eviction from wrongful entry into or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies committed by or on behalf of its owner, landlord or lessor, oral or written publication in any manner of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services, or oral or written publication in any manner of material that violates a person’s right of privacy.

Although the personal injury definition is fairly broad, it does not cover claims such as discrimination, mental anguish, mental injury, humiliation.  Furthermore, you will notice that while wrongful eviction coverage is provided, wrongful eviction from a restaurant, for example, or any other premises not occupied by that person would not be covered under personal injury.

10.    I don’t need professional liability because I have an iron-clad customer contract.
Actually, even if the contract that you have with a customer holds you harmless from any professional liability claims suffered by the parties to the contract, this does not prevent third parties from suing you for professional liability, which is most often the case.

11.    An employee manual will get us into trouble.
Actually, not having an employee manual could get you into serious difficulty.  An employee manual will set forth the standards for employee behavior and, in particular, procedures for sexual harassment and other matters.  An employee manual will prevent misunderstandings that can result in lawsuits.

12.    Employment practices liability insurance is too expensive.
Actually, the legal fees alone to defend an employment practices case for sexual harassment, discrimination, or wrongful discharge can run into the hundreds of thousands of dollars and in the event the employer loses in this litigation, the judgment could be enormous.  The cost of an employment practices liability policy can be as low as $1,500 per year and even for larger organizations, high deductibles can reduce the cost of this insurance so that it will cover catastrophic type claims.

13.    We are not trustees under our 401(k) plan and have no liability.
This is absolutely not true inasmuch as anyone that has discretion over a 401(k) plan or employee benefits will have personal liability under the ERISA law and this requires fiduciary liability insurance.

14.    I do not need fiduciary liability coverage because the individuals in my 401(k) plan make decisions as to where they want to invest the money.
Actually, the employees can sue the fiduciaries under the plan, personally, for not providing adequate investment opportunities and mismanagement of the plan as well as not providing appropriate information regarding other employee benefits.

“This Article was submitted by Daniel P. Hale, J.D., CPCU, CRM, ARM, CIC, AAI, LIC, AIC, AIS, API, AU.   Mr. Hale is vice president of Cambridge Property & Casualty and an attorney licensed to practice law in the State of Michigan.  He can be contacted at 734-525-2429,  dhale@cambridge-pc.com or via www.cambridge-pc.com” .
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