The way in-house legal departments interact with the companies they support is transforming. These days, corporate counsel work closely with C-suite executives to advise on wide-ranging issues, particularly those related to risk. Although corporate risk management and the legal department often overlap—40 percent of GCs oversee risk, according to one study—final decisions about the insurance portfolio as a hedge against risk are often made by executives who do not always consult with in-house counsel.
“Companies sometimes make decisions about purchasing insurance without being able to read the full policy or understand what they have purchased. This can lead to disastrous results,” he says Carrie M. Raverpartner in Barnes & Thornburg and co-chairman of its insurance recovery group. “I find that most often GCs are the best decision makers on what type of insurance to provide.”
The implications are real: Commercial premiums are projected to increase 10% across the board in 2023, with jumps of 25% or more in cyber insurance alone, according to the Risk Management Association. This is extremely important to remember when the GC is responsible for risk management, but the CFO, CIO, or COO makes decisions about insurance coverage.
Corporate counsel must play a significant role in influencing executive-level decision-making in underwriting and pursuing claims, Raver adds. In either case, understanding policy provisions and developing best practices for executives who make final decisions on these complex contracts helps mitigate additional risk.
Understanding problematic provisions
There are several problematic provisions in commercial policies that in-house counsel should make sure C-suite executives know about before making insurance policy decisions. The first revolves around choice of law favoring New York, which is an extremely difficult state for policyholders. “New York is not known for being insured-friendly,” Raver says. “Insurance companies choose this state even when neither party has any ties to New York.”
Similarly, insurance companies try to control the method of dispute resolution by writing arbitration clauses into their policies. Such policies should be carefully considered, Raver says. Other issues include subliminal reimbursement amounts – especially for cyber coverage.
“Policyholders should get one limit of liability in their policy,” Raver adds. “In an ideal world, the GC and executives would have time to work together to really read the policy to catch issues like these before coverage is tied up.”
Raver points to a provision that bluntly states that ambiguities in a contract must be construed “equally” and not against the drafter. “It turns basic insurance law on its head,” she says. “Brokers sell standard policies to companies that cannot negotiate terms. If there is an ambiguity, it should be construed against the insurance company.
Development of best practices
GCs should also work with the C-suite and create a “state of the company” discussion before renewal. “What does the company look like today? Have some recent changes created a new risk exposure?” Raver says. Discussions like these keep insurance top of mind.
GCs should quickly address coverage issues or claims that their industry commonly faces and discuss with outside counsel how – and when – to report them.
For Raver, it all comes down to viewing insurance as an investment that can work when GCs understand policy provisions and create best practices that sync with the needs of the C-suite. “Be prepared to spend money on insurance,” she says. “But it’s also worth putting together a strong team to face any problem that arises.”
Barnes & Thornburg’s Insurance recovery and consulting the practice has additional information for in-house counsel on insurance and risk.
Johanna Marmon is an upstate New York writer who has been reporting on trends affecting the legal industry for more than 15 years.