15 Sep 2016
Insurance fundamentals for in-house counsel, part 1
By Lucy Terracall, Claire Gomo
In-house counsel should develop a good relationship with a competent insurance broker to ensure that the best possible tailored policies are purchased to suit the organisation's needs.
Insurance continues to be an important part of risk management for most companies. It is, however, a legally complex area and the consequences of getting it wrong can be significant. In the first part of this article we outline, at a high level, some of the key features of common insurance policies purchased by organisations, and include some practical guidance on notifying and settling a Claim and renewing a policy.
What policies should a company have?
Many of the insurances commonly purchased cover the Insured’s liability to third parties and are underwritten on a claims-made basis. This means that the policy will respond where a Claim has been made by a third party against the insured alleging that the insured is legally liable.
In this article, references to “Claim” are to those claims made by a third party against the insured, while references to “claim” are to the insurance claim that an insured might submit under the policy.
There are a number of commonly held commercial insurance policies:
- Public liability — a public liability policy insures against legal liability to members of the public for personal injury or property damage arising out of the insured’s business or other specified activities. For example, a public liability policy would ordinarily indemnify a supermarket if a member of the public tripped and fell in the supermarket and then made a Claim for compensation against the supermarket. This type of policy ordinarily also covers the insured for defence costs. Public liability policies are often paired with product liability policies — it is standard practice for one insurance policy to cover both public and products liability.
- Product liability — this policy covers liability to a third party, such as a customer, for injury or damage caused by use of products which were manufactured, designed, grown, produced, processed or installed, among other things, by or on behalf of the insured. This type of policy often excludes Claims against the insured where damage to the insured’s products is caused by any defect therein or the unsuitability thereof. It is also worth noting that there are often restrictions on the extent of cover for liability arising, or expenses incurred, due to a product recall.
- Professional indemnity (PI) — this category of insurance provides coverage for liability arising from breach of professional duty. These policies are almost always claims-made policies which are triggered where the impetus of the Claim is an act, error or omission that occurred during the insured’s performance of professional services. The terms “professional duty”, “professional” and “professional services” are all subject to policy-specific definitions. This class of insurance has developed over the years such that it is now offered to anyone who is relied upon for their expertise.
- Directors and officers (D&O) — this type of insurance provides cover for liability incurred by directors and/or officers of an organisation. D&O is a claims-made insurance and provides coverage only once a Claim is made by a third party against a director or officer. It is usually a pre-condition to cover that the Claim must arise out of, or be connected to, a “wrongful act” that was committed while that person was acting in their capacity as a director or officer of the company. Most D&O policies include two limbs — one which entitles a director or officer to be directly indemnified by an insurer, and the other which entitles a company to be indemnified by the insurer where that company has first indemnified its director or officer in respect of the liability or has assumed responsibility for the defence. The latter limb is often triggered when there is a Deed of Indemnity between the director and the company which provides that the director is entitled to indemnity from the company where he/she is the subject of a Claim which arises from, or is connected to, his/her professional activities and role as a director. One of the most valued features of D&O policies is the cover for defence costs.
- Industrial Special Risks (ISR) — Section 1 of an ISR policy provides cover for material loss and damage to property, while s 2 of the policy provides cover for any business interruption losses that are a consequence of the material damage. For example, if a water pipe burst in a warehouse and stock in the warehouse is damaged, s 1 will cover the cost of repairing or replacing the damaged pipes, whereas s 2 of the policy will cover the business interruption costs incurred as a result of the damaged water pipe, such as the loss of stock and losses incurred if customer orders were not able to be filled.
- Cyber — cyber risk insurance policies are relatively new in the Australian market and coverage varies significantly from one insurer to the next. Most policies cover a company against liability to third parties arising from breach of privacy where, for example, personally sensitive information in the insured’s care, custody or control is publicly disseminated as a result of a privacy or security breach. Due to the new mandatory reporting of data breaches that was introduced by the Privacy Amendment (Privacy Alerts) Bill 2014 (Cth), purchasing a cyber policy is an effective risk transfer tool that may indemnify a company for the costs associated with the mandatory reporting of data breaches. Some cyber policies also cover first-party loss such as the cost incurred by a company in restoring or recreating data that was stolen, damaged or destroyed and the cost of engaging ancillary services such as public relations, legal or IT experts to assist with the immediate response to a cyber incident.
The type of policies held by a company will depend on the nature of its business activities. In-house counsel should develop a good relationship with a competent insurance broker to ensure that the best possible tailored policies are purchased to suit the needs of the organisation.
This article was first published in In-house Counsel, Vol 20 No 7, August 2016.