Insurance is not only a risk transfer tool, but also a valuable asset. Certain coverages, however, are not purchased or pursued by multinational companies transacting business in the United States because there are nuanced differences between international and U.S. insurance programs and law. These companies, often with global offices, will be best served by having counsel experienced in such nuances conduct a diagnostic review of their insurance policies. Not only may potential coverage gaps be identified, but a company will be better able to plan ahead and negotiate more favorable coverage terms before a loss arises.
1. What risks does your business face, and are you insured for such losses? At the most basic level, a company must consider not only the risks it potentially faces, but also the assets that it must protect, and then optimize the structure of its insurance program accordingly. Different types of policies cover different types of risk (e.g., general liability, property damage, directors and officers liability). It is imperative to understand how your insurance program will operate in the event of a loss. Consider whether any assets remain unprotected.
Think broadly—not all assets are tangible. For example, companies have recognized the exposure they face when it comes to network and data security breaches. The cyber insurance market has skyrocketed, but cyber policies are far from uniform. There is room for negotiation. Know what you need and what you don’t, so that you’re able to negotiate effectively for what you want. (See our earlier 10 Tips for Negotiating Your Cyber Insurance Policy posts.)
2. Will your policies’ limits of liability protect your business? Consider whether your insurance policies’ limits of liability adequately cover your specific business, and plan for the worst. Pay attention to sublimits. For example, a first-party property policy may have much smaller limits for certain events, such as floods or storms. If a loss were to occur, would your business have adequate property, liability, and business interruption coverage and limits?
Depending on the size of the organization, companies may have many different layers of insurance, e.g., primary, umbrella and excess policies. The umbrella and excess policies supplement the dollar amount of coverage afforded by primary policies by providing coverage above the limits of the primary coverage. Once your primary policy is exhausted, these umbrella or excess layers of insurance should provide additional coverage. Umbrella and excess policies sometimes allow insurers to offer coverage at lower premiums by permitting insurers to diversify their risks, thereby limiting their exposure.
Operating in the United States can be challenging because the liability landscape can be vastly different than in other countries. Knowing your business, the liability risks it faces, the states in which it operates, as well as the various regulatory schemes governing its operations and markets can help you identify the correct types and limits of insurance you need. Speak with your broker and qualified counsel to help you identify these risks and how to both mitigate and transfer them.
3. Have you complied with state-specific insurance mandates? Some businesses are statutorily required to purchase certain types of insurance. For example workers’ compensation and automobile liability insurance usually are mandatory, and these types of policies are intended to benefit third parties, rather than the company directly. Unlike most other forms of insurance, a company’s insurance needs may vary state-by-state. A company that fails to abide by the applicable statutory framework may face steep fines and penalties. Not only must a company consider what risks it seeks to protect, but it must also understand the state-specific differences in insurance law.
When considering your insurance program and negotiating a policy renewal, understanding how relevant insurance policies have been interpreted is essential. Understanding your company’s policies’ terms can save time and money in the event of a loss. Work closely with your insurance broker and a coverage lawyer to ensure that your risk transfer mechanisms will work efficiently and effectively when you need them.