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A friend who is CEO of a small medical services firm recently shared with me one of those “horrible insurance company” stories that we all seem to fear. A financial audit discovered that the firm’s CFO had embezzled close to $3 million dollars from the company over a five year period. My friend submitted the claim to his insurance broker who in turn forwarded it to the insurance company for action.

The carrier reported back there was no coverage for embezzlement since the medical firm had not purchased an employee dishonesty liability policy. Fortunately for my friend- however- 50% of his firm was owned by a much larger company that did have employee dishonesty coverage. Their broker had taken the time to properly structure the Named Insured clause to cover not only the parent company- but subsidiary companies as well. Coverage was subsequently granted under the parent company’s insurance policy.

SPECIFY THE NAMED INSURED

Let’s look at what you can do to attack this weakness in the insurance defense system. The first thing you need to do is specify the Named Insured. There always seems to be confusion over the difference between a Named Insured and an Additional Insured.

Without going into a great amount of detail- in layman’s terms the Named Insured is the owner of the policy- and as such is entitled to all coverage as well as the right to cancel- add or change coverage. The policy owner also has the right - and responsibility - to coordinate with the insurer on any claim as well as receive claim checks- return-premium checks and cancellation notices.

An Additional Insured- on the other hand- simply shares certain parts of your liability coverage- and does not have any other rights under the policy. Many owners make the mistake of simply listing the registered owner (often a sole-asset LLC) as the only 'Named Insured' and possibly listing the true operating company or principal owner as additional insureds.

PROPERLY STRUCTURE YOUR NAMED INSURED

If your policy does not already have it- add the broad form Named Insured clause. A sample clause might read: N123SH LLC- Maxwell Smith Manufacturing Inc.- Maxwell M. Smith- and any wholly owned subsidiary company- including subsidiaries thereof- of the Named Insured and any other company coming under the Named Insured’s control and of which it assumes active management or has a financial interest. Subsidiary and affiliated companies appearing above means any company or entity of which at least fifty percent (50%) of the stock or- if a partnership- fifty percent (50%) interest in the partnership- is owned by the Named Insured or for which the Named Insured has assumed active management control.

Properly structuring the Named Insured is crucial because the entities or persons who truly need the protection may not have it if the policy isn't written properly. Why? Because many of the ancillary coverages (including the use of non-owned aircraft) apply only to the Named Insured. For example- let’s imagine the owner's aircraft is on a flight and another executive of the company must therefore use charter. If the flight is chartered under the actual operating company's name- the coverage for use of non-owned aircraft would not apply- leaving the operating company exposed to a lawsuit in the event of an accident.

You might think you need not worry about that situation and that your company could not be sued if all you did was charter an aircraft. As a matter of fact- if an accident occurs typically everyone involved in the loop of commerce for that flight will be brought into a lawsuit. Keep in mind that one of the great benefits of your liability policy is that it provides an attorney to defend you- even against a suit that is groundless.

Examine the following clause from an insurance policy granting liability coverage for damage to a non-owned aircraft. Coverage D – Liability for Damage to Aircraft that are not owned - Notwithstanding the provisions of Exclusion (d) (APPLICABLE TO ALL PART I COVERAGES)- the insurance afforded by Coverages B- C and G is extended to apply to property damage to any aircraft while in the care- custody or control of the Named Insured.

Notice the coverage only applies for the benefit of the Named Insured. If the entity being sued is not a Named Insured- that party has no coverage under the policy. I trust you get it.

Because the wording of aviation insurance policies is unique from one aviation insurance company to the next- it is critical you review your unique risk profile in depth with your aviation insurance broker so that he or she can help you properly structure your policy’s Named Insured clause before the event of a loss. The penalty for failing to do so could be your financial ruin. Take action now.

 

Read more about: Business Aviation Insurance

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