April 21, 2020 by Adam Malik
A company that makes sweaters can’t flip a switch the next day and start making hospital gowns for frontline healthcare workers before working through important insurance considerations, according to experts.
If you have a client looking to shift production — be it a craft beer company now making hand sanitizer, a hotel now providing lodging for healthcare workers, or a sports equipment company making face shields — a number of insurance questions need to be answered before proceeding.
One obvious one would be whether the change represents a material change in risk. This isn’t always the case, according to Aviva Canada.
“Normally, operations and/or services provided that are beyond what was originally declared on the new business application could be considered a material change in risk,” explained a spokesperson from Aviva Canada. “Although subject to unique circumstances of each insured, we have found that more often than not these operations and/or services being contemplated would be included in the insurance policy — i.e., we would accept the increase or change in risk, adjust the premium if needed, and continue on insuring the business.”
So how can the insurance industry help a client convert to products that would aid frontline medical health workers in the care of COVID-19 patients?
Brokers need to get answers from their clients on questions an underwriting team is going to ask, Aviva said. Common questions include:
It would be rare for an insurance organization not to help, the Aviva spokesperson noted. “Only in exceptional cases would we remove ourselves from a risk as a result of a material change in risk.”
Insurers want to help because their clients are looking to do something good, said Matthew Arbuckle, casualty underwriting specialist with Zurich in Oakville, Ont. “They’re not looking to open themselves up to lawsuits. They’re looking to be good samaritan manufacturers.”
Arbuckle said there are two ways to take the risk out of manufacturing a new product, and to transfer the liability somewhere else. The client can either purchase insurance, which comes at a price, or through contract language, which would require a lawyer.
The price of purchasing insurance will depend on the risk presented by the product being made. “Not all products present the same level of exposure,” Arbuckle said. “You could imagine manufacturing ventilators versus hand sanitizer. Anyone can determine that a product defect in a ventilator is going to be of a far more severe consequence and carry an increased insurance premium.”
Changing contract language can transfer the product liability from the manufacturer to the purchaser. “This is often done by a ‘hold harmless’ agreement,” Arbuckle said. “If you’re going down that road, you want to make sure your ‘hold harmless’ agreement is always crafted by a legal professional. This isn’t something you put together yourself.”
Brokers should remind their clients that their insurers need to know about any changes to their business. “The most important thing for [clients] to understand is that there may or may not be coverage on their current policy, and they really need to get in contact with their broker or their insurance company,” Arbuckle said.
An insurance contract is dependent on utmost good faith by all parties. The insurer is depending on the client to disclose an accurate scope of the business’ operations. “So when somebody switches to a new product or service that is out of scope, they need to get in contact with their insurance company right away. They’re going to have to ask to broaden the scope of what the insurance policy covers,” Arbuckle said.
There are a few ways to do that, including through endorsements, changes to sublimits, or deductibles. “The insurance company could elect to carve out the exposure and issue a completely new policy,” Arbuckle said. “Then they can design that policy with specific coverages to address the needs of the new venture. So there are different ways you can go about it.”