Making the most of insurance.

The purpose of insurance is to manage risk. This article focuses on the ways in which a club can optimize risk management through the purchase of insurance.

Using a Good Insurance Agent

Clubs often have special insurance needs due to the unique risks associated with their activities and operations. The complexity of identifying those risks and selecting proper insurance requires specialized skills and knowledge. A good agent or broker, particularly one who has experience with club operations, can be an excellent source of considerable risk management expertise.

To find the right agent, a club manager should get referrals from trusted individuals at other clubs. The manager should review agents' websites and promotional materials, and keep copies of those materials. Once the search has been narrowed to a few candidates, each should be interviewed.

Once an agent has been selected, the club should take the time to make sure the agent understands its operations. The agent should review key business contracts, including staff leasing or temporary help services agreements. This will enable the agent to accurately identify the risks to be insured.

If an insurance agent represents that he or she is a risk management expert, a club who relies on that expertise to its detriment may have legal recourse. Usually an insurance agent who merely takes orders for insurance has only a limited duty to procure the requested insurance with a solvent carrier, or promptly inform the purchaser if the agent cannot procure the requested insurance. But when an agent agrees to perform functions other than that of a mere order-taker, the agent must perform as agreed.

Reviewing the Policy

Insurance policies are contracts. They impose rights and obligations on both the policyholder and the insurance company. It is therefore important for clubs to take the time to review their policies. Conducting such a review benefits the policyholder in several ways. It allows the club to discover exclusions and limitations which, in turn, enables the club to address critical gaps in coverage before a loss occurs. It also enables the club to become aware of and thus take advantage of unanticipated additional coverage. A careful review of the policy will also educate the club as to its duties in the event of a loss.

Timely Submitting of Claims

If and when a claim arises, the policyholder should take prompt action. Most insurance policies contain provisions that require the policyholder to timely report claims to the insurance company. These provisions exist in part for the insurance company's benefit, in that they enable the insurance company to timely investigate and often settle claims at an early stage. The provisions also benefit policyholders, by facilitating prompt investigation, and sometimes resolution, of the claims. However, if the policyholder does not perform its duties with respect to timely notice, the insurance company may have no liability for the claim.

The extent to which notice must be given usually depends upon the type of insurance claim involved. Insurance policies affording coverage for first party property damage claims typically require the policyholder to give the insurance company prompt notice of a loss or damage, including a description of the property involved. The policyholder must often follow-up with a more detailed description of how, when, and where the loss or damage occurred, and usually must timely submit a signed, sworn proof of loss. Other duties typically include taking all reasonable steps to protect the covered property from further damage, giving the insurance company complete inventories of damaged and undamaged property when requested, and permitting an inspection of the property and an examination of the club's books and records.

Insurance policies affording coverage for third party liability claims have similar provisions requiring timely submission. General liability insurance policies typically fall into two categories: "claims made" policies and "occurrence" policies. Typically, in order for coverage to be afforded under a "claims made" policy, the liability claim must have been made against the policyholder while the policy was in force. Most "claims made" policies also require that the claim be reported to the insurance company during the policy period. A club's failure to timely report a claim during the policy period (or any extended reporting period afforded by the policy) can result in a forfeiture of coverage.

If an "occurrence" liability policy is purchased, the club policyholder must also be even more careful to ensure that the timely notice and reporting requirements are met. "Occurrence" policies typically require the policyholder to notify the insurance company "as soon as practicable" of an occurrence or accident that might result in a claim. They also typically require the policyholder to "immediately" forward any suit papers to the insurance company. Timing is of the essence.

The importance of timely notifying the insurance company of a claim, or even a potential claim, cannot be overemphasized. A club's failure to timely submit a claim or report an accident can result in the claim being denied--even if the claim would otherwise be covered by the terms of the insurance policy. It is critical that the insurance company be placed on notice of an existing or potential claim as soon as possible. In this connection, a prudent club manager should not assume that a particular accident is too trivial to report or that it will not result in a claim. If such an assumption is made, or if the club decides to "self-handle" a claim while at the same time keeping the insurance company in the dark, it runs the risk that insurance coverage will not be afforded for the claim.

Responding to Reservation of Rights or Claim Denials

After an insurance company receives notice of a liability claim, it ordinarily will conduct an investigation and then make a preliminary determination as to whether the policy affords coverage for the claim. Depending on the decision it reaches, the insurance company will then likely choose one of several options. First, it can accept coverage for the claim and hire an attorney to defend the policyholder in connection with the claim or lawsuit. Another option the insurer might choose is to deny coverage for the claim (which may require the club to hire its own attorney to defend the claim or lawsuit). Finally, if there is a question as to whether the claim is covered by the policy, the insurance company may adopt a middle ground approach. In this situation, the insurance company may hire an attorney to defend the policyholder against the claim, but at the same time reserve its rights to ultimately deny payment of the claim.

If the insurance company denies coverage for a liability claim outright, a prudent club manager will seldom want to "take the insurance company's word" that coverage is not afforded. Insurance companies are in business to make money, and they do that by taking in more money in premiums (and from the investments earned on those premiums) than they pay out in claims. Some insurance companies err on the side of denying coverage for claims where coverage is questionable. Even if the insurance company agrees to defend the club while at the same time reserving its rights, the policyholder may not be well-served by consenting to such an arrangement, depending upon the circumstances. In either event, a prudent club manager should consider consulting with qualified insurance coverage counsel to consider the club's options, and respond to any reservation of rights or claim denials.

Alex Beard is an insurance coverage attorney and shareholder with Bishop & Hummert, P.C. in Dallas, TX. He is a member of the Global Alliance of Hospitality Attorneys and can be reached at [e-mail] or 214-987-8181. Linda Dedman, a partner with Dedman & Handschuch in Dallas, TX, is a commercial litigator with an emphasis on representing policyholders against carriers. She can be reached at [e-mail].

The information provided is general and educational and not legal advice. For additional information go to www.hospitalitylawyer.com.