Let’s start with a little background. Since the McCarran-Ferguson Act was passed by Congress in 1945, the insurance industry largely has been exempt from federal regulation. That includes (with some limited exceptions) federal antitrust law. So things that most companies cannot do (for example, all major banks agreeing to offer the same paltry interest rates on their checking accounts — probably zero in this example), the insurance industry can do without fear of hearing from the antitrust division of the Department of Justice.
In 1971, the insurance industry got together and created an organization called the Insurance Services Office (ISO) to do such things as collect and share loss data, prepare suggested rate formulae, and develop standard insurance policy forms. Whether or not this type of insurer coordination is good for consumers is a topic for another post. Today we are discussing ISO’s impact on standard policy forms, and those areas where negotiation is possible.
With certain types of insurance, such as homeowners and auto insurance, ISO forms are prevalent and negotiation beyond the basics of limits, deductibles, and the like are all but impossible. Comprehensive General Liability (CGL) policies are also typically written on standard ISO forms, but there is much greater variation among forms. For one thing, ISO makes revisions to its forms every few years. Some insurance companies immediately adopt the new revisions whereas others stick with the old versions.
Insurers typically will write coverage by pulling different ISO forms “off of the shelf”, depending on the forms the insurer currently has in use and, if asked, what is requested by the policyholder. In particular, when an ISO revision is recent, underwriters are more likely to accept either the newer or older form. With respect to CGL coverage, the older form is almost always better for policyholders, since in recent years ISO revisions to the standard CGL form have focused on narrowing coverage for emerging liabilities and plugging holes punched into the forms by coverage lawyers like yours truly.
The endorsements are where most negotiations take place. Policy endorsements are where you will find the cutting-edge liability issues, and variations in the available endorsements can make or break coverage for a future liability claim. Examples of important endorsements with multiple forms that can vary substantially include: additional insured coverage, the pollution exclusion, contractual liability exclusion, professional liability exclusion, and “your work” exclusion.
Moving beyond the CGL policy, many types of more specialized liability insurance are negotiable. In general, the more specialized the insurance, the more likely the underwriter will negotiate the terms — and even manuscript large portions of the policy — to win a policyholder’s business. That is because underwriters know that CGL coverage is practically mandatory for most companies, whereas companies may decide to pass on other types of insurance if they are unhappy with their options. Newer coverage forms like data breach and privacy liability coverage (often confusingly referred to as “cyberliablity” insurance – more on that in a future blog post) are highly flexible because they are still in the development stages and insurers have not yet settled on standard language.
The area where policy negotiation can make the biggest difference is directors and officers (D&O) insurance. Since the 1970s, when the D&O insurance market took off due to changes in the law regarding indemnification of corporate directors and officers, the D&O policy form remains wide open from an underwriting standpoint. Unlike many other forms of liability insurance, there are no standard policy forms for D&O insurance. Although the forms of market leaders like Chartis and Chubb are particularly influential in the D&O marketplace, fierce competition in the market for D&O insurance, combined with an extended soft market, has given policyholders enormous leverage to pick and choose the best D&O provisions each insurer has to offer. Sophisticated policyholders and their brokers can play insurers off of each other, and can compile a “greatest hits” policy that brings together the best coverage provisions offered by different insurers in the market.
Key D&O insurance provisions that are frequently negotiated include: defense cost advancement, insured v. insured exclusion, “final adjudication” language, coverage for punitive damages, notices of circumstances language, and coverage for pre-“claim” costs, such as derivative investigation costs and costs related to government investigations and subpoenas. Underwriters typically have the greatest flexibility to accommodate requests to broaden Side A coverage, which protects directors and officers in the event of the company’s insolvency, and frequently modification requests that are denied as to Side B and C are granted on Side A. In addition, it is important for policyholders to negotiate for coverage for the latest in emerging corporate liabilities. More recently that has meant costs and liabilities created by clawback claims under Section 304 of the Sarbanes-Oxley Act and Dodd-Frank Section 954.
The coming years undoubtedly will bring new areas of emerging corporate liability, which in turn will spawn new D&O policy language to negotiate. Companies that wish to keep their D&O insurance on the cutting edge need a broker and legal counsel who understand the liabilities they face, and can help negotiate the best possible D&O coverage for the company and the directors and officers who serve it.