Courting a new business partner and relying on your counterparty’s insurance coverage to respond to a loss?
For a risk manager, it’s a good idea to engage in a form of insurance “prenup” conversation with the potential business partner, says Pamela D. Hans of Anderson Kill, a full-service business law firm based in New York. Also, this is a perfect time for risk managers to work closely with their commercial insurance brokers to figure out their counterparty’s insurance program.
Hans is speaking on a panel at the 2018 Rims Canada Conference to be held in St. John’s, N.L. from Sept. 23 to 26, 2018. The title of her presentation is Riding Someone Else’s Wave: Maximizing Coverage from Other People’s Insurance.
At a time when your firm is optimistically expecting the best of a potential business partnership, it’s hard to get into conversations about everything that could go wrong. But not having those conversations could prove to be a serious mistake if the collaboration goes sideways.
‘If you are relying on someone’s else’s insurance to respond when there is a loss, there are questions to ask at the beginning of the marriage, the pre-nuptial agreement – as opposed to during the divorce agreement – to protect yourself,” says Hans.
Companies often stop short after asking the basics: How much insurance does my counterparty have? What are the policy limits? And do they have the right kind of insurance?
But one thing they should be asking is: What happens if the counterparty’s insurance company denies coverage?
“Who’s problem is that?” Hans asks. “By contract, is it going to be your responsibility to fund coverage litigation, or will your counterparty do that? It’s good to ask that question beforehand. You assume nothing is going to go wrong – and that the insurance company will pay if it does – but if that doesn’t happen, what’s your game plan? Talk about that and document that.”
Also, try and get behind the curtain: who is the counterparty’s insurer?
Sometimes companies will have the same insurance company for years. Maybe they’ve never had a loss, or maybe they’ve had lots of losses with their insurance company, Hans notes. “But if I’m talking to a counterparty and they say, ‘I’ve always been with company X,’ I would like to know: ‘What’s your relationship been with them?’ How has it gone? Have you had claims paid? What were they like to deal with?”
And here’s where bringing the insurance broker into the negotiations is invaluable. “The more you use your own insurance broker to help you figure out your counterparty’s insurance, the better off you are,” Hans said.
“I think sometimes people go to their broker when it’s time to buy coverage and then they never talk to them again before renewal time. That’s a lost opportunity, in my experience. Because brokers have so much information about your own insurance program, they are a tremendous resource that is often untapped. What’s my own broker’s experience with that [counterparty’s] insurance company?”