Risky Business: A litigator’s perspective on insurance coverage gaps

Friday, July 17, 2015 - 12:46

MCC interviews Brett W. Schouest, a member in the Insurance Industry group of Dykema Gossett PLLC. A veteran insurance litigator, he talks about risk management across a range of issues and lays out some of the intricacies of insurance policies that can make a big difference for companies looking to preemptively close coverage gaps. He can be reached at bschouest@dykema.com.

MCC: In terms of risk management, what are some of the emerging issues that corporations are facing?

Schouest: Given the global economy and its dependence on technology, cyber risk is obviously one important issue on the risk management side. Utility services interruption is another big area, and companies need protection against power outages and surges. Terrorism is risk that multinational companies are facing as never before, so having those coverages and avoiding those exclusions with respect to foreign operations is important. Denial about climate change persists in politics, but if you ignore it as a risk manager, you do so at your peril. We have had a lot of bad weather here in Texas, so the catastrophic and flooding risks are big if you don’t have the proper coverages in place for those, including business interruption insurance.

MCC: What coverage gaps are you seeing?

Schouest: In the area of property coverage, one fairly common gap relates to having “scheduled” as opposed to “all property” coverage. It often happens that people think they're covered for all of their property when they’re really only covered for a certain portion of it. Another gap is the result of companies not understanding that when they have “additional insured” coverage, gaps can occur because they're not actually an additional insured – they think they are on the policy, but either the proper endorsement is not in place or the coverage provided by the additional insured endorsement is not as broad as they thought it would be. Another gap is in the area of indemnity coverage: there are exclusions for that on the grounds that it is “contractual coverage not covered by the policy,” or the contract providing for the indemnity may itself contain limitations on what the insurance coverage will be on the indemnity obligation. There have also been recent Texas Supreme Court rulings on the interplay between contractual indemnity obligations and the breadth of indemnity and additional insured coverage.

Another gap we’re seeing is in “products and completed operations” coverage. A subline of general liability coverage for manufacturers and contractors, this coverage protects insureds in the event of claims caused by products they have sold, distributed, produced or handled, or buildings or other improvements that have been constructed. It applies to products that have been sold and are no longer in the insured's possession or to operations that have been finished by the professional. It’s especially important if you have product defect or recall exposure or ongoing usage exposures.

Some coverage gaps – and this is a pet peeve of mine as it’s completely avoidable – result from the reliance on certificates of insurance. Not to put too fine a point on it, but those documents are not worth the paper they’re written on. You really have to get and read the policy or at least the endorsements. And just as important as identifying the coverage gaps is understanding why they are there; sometimes resolving these issues is a simple matter of making sure the necessary documentation is in place. To get there, you should rely upon counsel or your agent to guide you through the process and make sure you have the coverages you need.

MCC: What are some common issues that give rise to litigation?

Schouest: The straight-up litigation on coverage issues arises when the insureds think they have coverage but the policy itself doesn’t provide for it, or the certificate says that they have certain coverages but the policy doesn’t support that, which can be the basis for claims against brokers (or agents when a third party was responsible for preparing insurance) for not securing the policy coverages that were discussed. Here in Texas, another big area of litigation relates, again, to inclement weather – specifically, lawsuits by policyholders against insurers and adjusters for failing to thoroughly evaluate their claims of property damage caused by hurricanes, hail and windstorms. We also see a fair amount of litigation regarding indemnities and insurance coverages in the oil field arena, as the energy industry is large in Texas.

MCC: Taking a brief step back, give us an overview of your insurance litigation practice, and describe some of the risk management counseling you provide to your clients.

Schouest: My practice runs the gamut of industry players. I represent policyholders, insurers, agents, brokers and adjusters, including a fair amount of construction litigation, which dovetails with the insurance work in many ways. I handle coverage disputes on both sides of the policy and work substantially in the areas of counseling and litigation, which also overlap. The counseling piece often involves a litigation post-mortem designed to help clients understand both where their coverage fell short and how to rectify that. I also counsel our transactional lawyers regarding the drafting and negotiation of insurance and indemnity provisions, and I review contracts to make sure those issues are covered.

MCC: Please talk more on the counseling side.

Schouest: The counseling part of our practice is both post-mortem and preemptive. From a post-mortem perspective, we obviously have the benefit of hindsight in reviewing the litigation and seeing what issues remain. From there, we sit down with the client and the client’s insurer and/or its agents – both immediately and certainly at renewal time, if that’s coming up – to make sure the missing coverages are placed. At this stage, a company has just been through the mill, so our job is to make the client aware of where its policies fell short and, of course, take steps to make sure this doesn’t happen again.

On the preemptive side, our mandate is even broader. It involves thoroughly understanding the client’s business and all associated risks, working with them and their agents to review policies and see that coverages are placed before an issue arises, and making sure those coverages are air-tight. Everyone needs to be on the same page, so both the company and outside counsel should establish a good relationship with the broker or agent, as well as the insurer.

It’s also important for clients to actually review their policies, and not just the form policy but also the endorsements, and whether they are being named as an additional insured on another’s policy. If the client doesn’t know how to read these documents, I’ll either walk him through it or ensure that the information is forwarded to someone in the company who does know.

MCC: I understand you also do some work in the area of “premium audits.” What does that involve?

Schouest: As business operations change, insurance premiums will often follow suit. Carriers conduct premium audits to make sure that the premium being paid for coverage accurately reflects the insured’s business operations over the policy period. It doesn’t always mean a higher premium; it could also result in a reduction. Let me describe one confidential matter I handled in generic terms. The issue was between an insured (our client) and its worker’s compensation carrier. The premium was based upon the sales volume, and a dispute arose over whether it was gross sales or net sales, how you calculate those, and so on. There was a genuine dispute over how to interpret that provision of the policy and, after some period of litigation, we were able to get an agreed-to interpretation of the policy on a going-forward basis as a compromise to resolve the situation – again, another example of how understanding the policy terms up front may have avoided a dispute.

MCC: When we first sat down, you mentioned cybersecurity as an emerging risk. How does a company wrap its head around identifying what IT assets are vulnerable?

Schouest: Companies are challenged as to how best to mitigate, if not eliminate, the risk of data breach and how best to insure against the failure to do so, especially given that no one expects to see a drop in the number of attacks on computer information systems, infrastructures, computer networks, and/or personal computer devices anytime soon. And just as cybercrime is a relatively new development and constantly changing, so too is cyberinsurance, both as to the scope of coverage and exclusions, which vary widely, and the basis for claim denials that are highly subjective, ranging from not ensuring the proper protections against a cyberattack to not moving quickly enough in mitigating the damage.

There’s also an interesting and evolving line of cases that deal with coverage of intellectual property infringement claims within a general liability policy under the advertising and personal injury provisions. This hotly contested issue relates to whether there’s actually coverage for infringement-type claims under those provisions as opposed to under some other policy that specifically addresses the IT issues. Protection of intellectual property via insurance is also becoming more important as a large part of a company's assets are in many cases its IP.

MCC: Before wrapping up, can you talk a bit about Dykema’s recent expansion in Texas and particularly the insurance practice there?

Schouest: Dykema’s recent combination with Texas-based Cox Smith has certainly increased our footprint in the state. We now have more than 135 attorney across Texas. I’m in San Antonio, but we also have offices in Dallas, El Paso, McAllen and Austin, and we have insurance industry practices in all of them. In addition, lawyers in our Austin office are involved in the insurance regulation arena in the state’s capital. And in Dallas, we have strong insurance litigators and counselors with niche practices, for example, in environmental insurance. Taken as a whole, our insurance practice across the state is broad and deep, covering many different industries, types of coverage and issues.