RISK PROBLEMS/SOLUTIONS
Agents should ask about prior forms of ownership, underground pipes and wiring
By LeRoy H. Utschig, CPCU, ARM
Sometimes clients have loss exposures that appear to be so slight that they do not insure them. However, if one of these losses occurs, the client probably will have forgotten that he or she declined to buy the coverage. This article will address several of these kinds of exposures. While some insureds will buy the coverages, most will not. Your normal protection against an errors and omissions claim in these situations is to have a coverage checklist showing what coverages the client declined. There is no coverage suggested in this article that this author has not written. In some of the cases, the coverage was written nearly 35 years ago. None of the suggested coverages is new.
Former entities
When a business shifts from one form of ownership to another--going from a sole proprietorship to a corporation, for example--it may have latent exposures resulting from its former form of ownership. Here's a fictitious example to illustrate the point.
A business that eventually became known as Pete and Al's Hardware, LLC, had been in business for nearly 50 years. When Pete, the original owner, started the business, it operated as Pete's Hardware, a sole proprietorship. Its insurance was written to cover the individual proprietorship.
Several years later, Al joined the firm. Al and Pete formed a partnership. Their partnership was named Pete & Al's Hardware. Insurance for the partnership was written in that name. On the declarations page it was shown to be a partnership.
Subsequently, Pete & Al formed a limited liability company. The name of the firm became Pete & Al's Hardware, LLC.
At the time when a store could legally sell lead-based paint, Pete & Al's Hardware, a partnership, did so.
While operating as Pete & Al's Hardware, LLC, they received lawsuit papers from someone who was alleging injury resulting from the use of lead-based paint sold by Pete and Al's Hardware, LLC. The papers gave a date for when the paint was purchased. This date was about 10 years prior to the forming of Pete and Al's Hardware, LLC.
Pete & Al's insurer denied the claim based on the fact that the incident occurred prior to the forming of Pete and Al's Hardware, LLC. Therefore, this claim was not valid.
The alleged injured party then changed the lawsuit, naming Pete & Al's Hardware, a partnership. Pete and Al were also named as individuals in this revised lawsuit. While the store was being operated as a partnership, they did sell the paint involved in this claim.
The current general liability policy for Pete & Al's Hardware, LLC, did not name the partnership as a covered entity. Pete and Al were not listed as covered for their involvement in the partnership. Because of this, the insurer for Pete and Al's Hardware, LLC, did not provide any coverage for the revised lawsuit. Pete and Al had no coverage for the claim.
My recommendation is to add the prior entities and insureds under the current policy. Utilizing this idea, the named insured would be as follows:
* Pete and Al's Hardware, LLC
* Pete and Al's Hardware, a partnership
* Pete's Hardware, an individual proprietorship
Coverage for the old legal entities can be written on a blanket basis. In this case, words similar to the following would be added to the contract, "Coverage is provided for all prior legal entities."
Make no mistake--this coverage extension must be carefully underwritten. I was writing this coverage in the late 1960s, and I can remember the extensive file documentation that was required whenever a general liability policy was to provide coverage for prior legal entities.
There will be clients who do not see coverage for prior entities as any kind of a loss exposure. In those cases, simply mark the client's coverage checklist to show that the coverage was refused and move on.
Outdoor equipment
A couple of actual losses occurred during the late 1960s that illustrate the need for coverage on outdoor equipment. A wood working business that we'll call Wood Working Factory, Inc. (WWFI), was located on the outskirts of a small town that had minimal public fire protection. The owners of WWFI decided to take steps to reduce its likelihood of fire and burning to the ground. WWFI installed an automatic sprinkler system. To operate properly, the system needed an adequate supply of water along with sufficient pressure and volume. There was a fire hydrant near the plant. However, it was on a 1,500-foot long, 6-inch, dead-end main. This meant that the town was not furnishing enough water to WWFI.
To solve this problem, the owners of WWFI had a pond dug on the top of a hill about a quarter of a mile away. When it was filled, the pond held about two million gallons of water. A large water pipe was laid from the pond to WWFI. This was a 20-inch pipe that would carry enough water to supply the automatic sprinkler system and any fire trucks that would be used to fight a fire.
There was no pump on this pipe. Gravity provided the force needed to make the water flow. The pipe came on a straight slant from the water pond to the bottom of the hill where it then flowed horizontally to the plant. Of some interest is the fact that a specially designed valve was needed at the end of the downward slope of the pipe. There was a lot of water in the pipe and the water would flow quite fast inside the pipe. If the valve on the pipe at the bottom of the slope were turned off too quickly, water pressure would blow up the entire pipe. Hence, a special valve was designed that would turn the water flow off very slowly. As it came down the hill and on the horizontal run, the water pipe was underground.
The top end of the pipe was much higher than the surrounding terrain. Everything worked fine until lightning hit the high end of the pipe and blew up much of the pipe.
WWFI's insurer denied the claim. Their claim denial was based on the fact that their policy did not cover underground piping.
Coverage for the underground piping could have been added to their insurance policy. Had WWFI not wanted the coverage, noting the refusal on a coverage checklist would have aided the insurance agent in defending an errors and omissions claim resulting from the transaction.
The other loss involved a private utility that provided sewage treatment facilities. Part of the utility included many miles of pipes for moving the sewage. This particular sewage unit used a gravity flow system to move the effluent. Their pipes were all slanted downhill so that the sewage would flow. At certain intervals, this sewage system had lift stations. The terrain made it impossible for the effluent to flow downhill for long distances. The lift stations worked in this way: Pipe number one went as far as it could. A lift station was at its end. The lift station lifted the waste to the top of pipe number two. Waste traveled downhill in pipe number two until it could go no farther. A lift station at the end of pipe number two raised the effluent to the high end of pipe number three. This system was used until the effluent got to the disposal site. At the disposal site, the effluent was treated the same as it would be treated in a regular municipal sewage disposal plant.
Some of the lift stations were completely below ground level; others were almost completely out of the ground. Essentially, each lift station consisted of a concrete building, an electrical circuit box, and a source of electricity coming from the electric power company and the pumps. The pumps, with their large electric motors, were the most expensive part of a lift station. These lift stations varied in value from a low of $20,000 to in excess of $100,000.
Lightning hit one of the lift stations and completely destroyed the motors and pumps that were part of that station.
There was no insurance coverage for the damaged lift station. Had the agent asked for coverage, this loss would have been insured. Again we share the idea that if the client is not interested in underground coverage, be sure to mark the insured's coverage checklist to show that he or she declined the coverage.
Underground wiring for signs
Small Shopping Center, Inc. (SSCI), had a large sign close to a well-traveled street. This sign included the logos of each business operating in the shopping center. Lights from inside the sign showed through the plastic faces of each business's logo.
A speeding car hit the sign hard enough to move it halfway across the parking lot. The underground wiring for the sign was torn out. The accident caused the wiring from the main building to the sign to be stretched. Because Small Shopping Center could not take a chance on using the damaged wiring, it replaced all of it from the building out to the sign.
Small Shopping Center had coverage for the sign but no coverage for the loss of the wire. For the agent's sake, one hopes that he or she discussed the coverage and obtained evidence that the client had refused it.
A common problem with underground exposures is that because business owners usually cannot see them, they usually will not think about them. Yet, if the underground values are damaged and not insured, the client will expect the agent to cover the loss. To protect against an errors and omissions claim, I recommend asking every client if they have any underground exposures that they wish to insure. The question does not take long and the answer can be easily noted on a coverage checklist.
Summary
* When a client declines to insure a recommended coverage, make some kind of written note. This declination might be noted on the agent's copy of quotation or on a coverage checklist.
* Over many years, your clients' businesses may have operated under various names and forms of ownership. If the client has had a consistent money interest in those various firms, consider naming all of the various entities on the client's general liability contract.
* Underground property can be damaged. It can also be insured. Should the client deny having any underground exposures or decline to insure them, be sure to make a written note of this in the file. *
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.