My law practice is devoted to helping policyholders assess theircoverage needs by carefully reviewing their current policies.

I often hear risk managers explain what they understand theircoverage to be — which sometimes doesn't match the wording ofthe actual policy.

An effective risk management strategy should include lookingclosely — perhaps with the aid of outside coverage counsel — at thepolicy wording to correct potential problems and avoid an expensivecoverage-litigation battle.

What follows are 4 common mistakes that I've seen when reviewingpolicies on the front end and in addressing problematic claims onthe back end:

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1. Fill coverage holes

Have you purchased the full spectrum of insurance policies foryour company's risks?

First-party property, third party, directors and officersliability, errors and omission, crime, cyber and others should beconsidered. If you have not purchased insurance to cover each ofthese relevant risks, you must recognize that you may beself-insuring against these risks.

For example, a recent potential hole in insurance coverage hasoccurred in “phishing scams,” in which an e-mail that appears tocome from a trusted source directs someone in accounting to sendmoney outside your company (this is also known as “socialengineering”). Sometimes the accounting person voluntarily compliesbefore learning that the request was a scam.

That type of claim — which happens more often than you think —most closely resembles something that might be insured under acrime policy; however, carriers often will deny these claimsbecause the funds were voluntarily given away by the insured andnot “stolen” in the more traditional definition of that term.

Given all of the litigation that these denials of coverage havecaused, the insurance market has come up with a new solution: theaddition of a “social engineering” endorsement to your crimepolicy, for an additional premium. Because this new endorsement hasbecome available on the market, the sublimits available for socialengineering coverage have climbed, with excess carriers sometimesnow willing to include it in their policies.

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2. Cover all entities

Do you have insurance for all of the entities you mean to insureunder your policy?

For complex corporate families, this is particularly important.I especially see mistakes following an acquisition or corporatereorganization when the policyholder does not promptly address thereorganization in their existing policies.

Policies must be immediately updated to reflect the new entitiesor when there is a break in the corporate subsidiary relationship,such as in cases in which the parent-named insured no longer owns50% of a subsidiary (or more likely a subsidiary of subsidiary),but still intends to insure that entity in its insur-anceprogram.

This can be even more problematic in a General Liability policythat does not have a broad form named-insured endorsement includedthat would automatically pick up all subsidiaries and newly formedentities, including limited liability companies, without the needto alert the insurer.

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3. Watch change of protocols

If your company has been involved in recent corporate deals,have you checked your change-of-control provisions in allmanagement liability policies? To the extent a change in controlhas occurred, often the policy automatically goes into run-off, andnew go-forward coverage must be bound at or within a short timeafter the time of the closing of the corporate transaction.

I've seen situations in which the policyholder did not realizethat the change-in-control provision automatically put the policyinto run-off, and no new go-forward coverage was secured. Eventhough a tail may have been placed at the end of the regular policyperiod, that doesn't provide the policyholder with go-forwardcoverage, such that the policyholder may be found to have a gap incoverage for the remainder of that policy period.

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4. Ensure all excess policies follow form

Does your entire tower of liability coverage follow form? Bigproblems arise when you have excess policies in your tower ofliability coverage that do not exactly follow form.

For example, do you have an excess liability policy with its owndispute resolution provision that requires a Bermuda arbitration(when such a provision does not exist in the rest of your tower)?Do you have a different “shaving of limits” provision in yourvarious excess liability policies requiring different thresholdsfor how coverage is triggered? Does your entire tower of liabilitycoverage contain either a duty to defend or an obligation toreimburse defense costs?

Make sure your insurance tower does not contain potential gapsin coverage in which your excess layers do not follow form closelyto the primary and umbrella coverages below it.

Angela R. Elbert is a partner with Neal, Gerber &Eisenberg LLP in Chicago. E-mail her at [email protected].