Save those policies!
Michelle Ashton, director of corporate insurance for Questar Corp., Glenn MacCorkle, former risk manager with NCR Corp. and Rick Hamilton, president of CSX Insurance Co. share at least one trait in common: They saved most of their old insurance policies and called upon them to pay for exposures that occurred many years ago.
In Ashton's case, her company was faced with a number of environmental claims stemming from discontinued operations in the mid-1980s. After more than a year of hunting down the old policies, the insurers were put on notice for claims costs of more than $25 million, she recalls. In her view the cost of storing the old policies was well worth it.
In MacCorkle's case, NCR was liable for the cleanup costs linked to a Superfund site. A search of the file storage produced old insurance policies, some going back to the 1940s. From those policies that were issued by insurers that were still solvent, NCR recovered millions of dollars, he says.
In Hamilton's ease, a catastrophe liability and property policy dating back to 1964 supported a claim for building a water system for a small town, a victim of a long-forgotten hazardous materials release. Full policy limits (seven figures) were paid on this 30-year-old claim, he says.
They were lucky. Too often, risk managers don't have a formal insurance policy retention plan and are unable to locate evidence of an insurance contract to respond to a long-ago occurrence. And they are likely to pay the price.
"As the North American legal system evolves, we will likely continue to see erosion of insurers' defenses and a continuation of the trend for claimants to receive recoveries for events not previously believed to be insured," says Hamilton, whose company is based in Burlington, Vt.
As courts decide that claims are legitimate for exposures that were never considered valid a decade, let alone 50 years ago, insureds are being hit with monetary, demands for these ancient occurrences. But providentially, these unforeseen events are often covered by long-forgotten insurance policies that were written with fewer exclusions than most have today.
The policyholder, however, has the burden of establishing the existence of a policy and its essential terms, according to William Scott Patterson, partner, Jiranek, Jennings & Patterson, LLP, Baltimore, Md. "This comes as a surprise to many of my clients," he continued. "Lost policy litigation can be expensive. The potential for these costs far outweigh policy retention costs."
By establishing a retention scheme for insurance policies, risk managers confronted with years-ago claims won't find the insurance policy drawer empty, or filled with worthless policies and records. Patterson says that keeping insurance policies is especially important because of "all of the mergers and acquisitions, downsizing, office closures and relocations, technology advances that have occurred in the past decades." As the acquiring company goes about assimilating the acquired company, there is usually a wholesale cleaning and discarding of old records and files. Too often, this "garbage" includes key insurance policies that could have become extremely valuable in years to come.
THE BURDEN OF PROOF
In "lost policy" cases, the universal rule is that the policyholder has the burden of proving the existence of a policy and the material terms of that policy, Patterson says. If the policy can't be found, or there is only the declaration page, persuading the insurance company that such a policy once existed can be difficult. "The burden varies among jurisdictions from preponderance of the evidence to clear and convincing." He says he was not aware of any jurisdiction that requires the policyholder to produce the actual policy, much less the original policy. "Every jurisdiction allows secondary evidence to establish the contents of a lost or destroyed document," he says.
Arthur Bostwick, a retired risk manager and former president of RIMS, argues that original documents support claims for coverage, but "copies can be challenged by resisting insurers."
While brokers and agents sometimes retain their clients' policies, most only retain policies and supporting documents for seven years after a client discontinues using the broker or agent.
There are many different ways the policyholder can establish both the existence of a policy and the terms of that policy. If the policyholder, before discarding the policy, created a digital copy from which can be produced a hard copy to introduce as evidence as needed, along with appropriate authentication and identification testimony, the insurer would have an extremely difficult time establishing the non-existence of the policy. "When my clients ask about retaining policies, I explain the benefits of retaining both the hard copy along with a digital copy of the policy," Paterson says.
WHAT TO KEEP
There is no universally accepted rule as to which insurance policies should be retained or for how long. Hamilton of CSX has a simple rule: "Retain all insurance policies forever. You never know." A good adage to remember is that an insurance policy is a promise by the insurer to pay, subject to the conditions and limitations of the policy, forever. Increasingly, today's courts have been more liberal in their interpretation of claims that relate to old policies than was originally intended.
To guarantee that the policy is there when it is needed, risk managers need to establish a formal retention system of the company's insurance policies. Now policies can be stored conveniently and inexpensively by scanning them onto digital media, where they can be saved on a CD. The cost of preserving these policies is low compared to the potential benefits that may be realized in the future by being able to produce the exact policy to cover that years-old exposure.
But if you don't want to keep all your polices, consider retaining forever all liability policies--general liability, commercial auto liability, errors & omissions, officers and directors, workers compensation, excess and umbrella, and others. Throw away the correspondence related to them at normal intervals per a general retention policy, but keep the vital parts of the policies.
Most of the time property policies can be discarded after the expiration of the policy, but should be kept if there are any claims outstanding, such as a business interruption claim. Once in a great while, an old claim on a property policy may come up involving structural failures, for instance, of a building that developed after the expiration of the policy. The policy may offer coverage for that claim.
"Forever is a long time," Bostwick says, "But at trial original documents will have greater believability than copies regardless of form. Document retention including insurance policies should consider the possibility of unforeseen allegations in the future that would require response."
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|Author:||Mullins, Ronald Gift|
|Publication:||Risk & Insurance|
|Date:||Sep 15, 2004|
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