Suppose one day a coworker is cleaning out a file cabinet and comes across a dusty folder that hasn't been opened since Richard Nixon was in the White House. He looks inside and finds a faded general liability insurance policy issued to your company in the 1970s. Examining the document, the employee's common sense might tell him that since no one has even looked at that policy in years, and because it covers a period that has long since passed, no one should ever need it again. That employee, unschooled in the intricacies of insurance law, might do something entirely reasonable with that document: he might throw it in the nearest "circular file" without a second thought. Unfortunately, it is possible that the insurance policy this employee sent off to decay in a landfill could have saved thousands or perhaps even millions of dollars if your company is faced with an insurance claim someday.
The good news is that this scenario can be avoided. Thanks to information technology, businesses today have the capability to store and index documents cheaply and permanently.
Please click on the links to the right to find out why it is important to maintain your company's old insurance policies and to discover suggestions for how to do so.
By taking these steps, you will dramatically increase the chance that, in the event of an unanticipated claim, your company will receive the benefit of the financial investment it made in its insurance policies.
It is best to initiate these procedures sooner rather than later. As time goes by, documents are more likely to go missing or be inadvertently destroyed. You can never know if a policy accidentally thrown away next week is one that could have saved your company from a lawsuit next year. Making an investment of time and effort to create a permanent record will greatly reduce your chances of running into problems down the road.
The Risks of a Lost Policy
What Type of Insurance Policy Does Your Company Need to Keep?
In general, most businesses use two basic types of insurance policies: 1) a "claims-made" policy, and 2) an "occurrence" policy.
A "claims-made" policy applies to any claims or lawsuits asserted against the insured during the policy period. For instance, a policy with a period of January 1, 2006, to January 1, 2007, would apply to suits filed against your company during that period, even if the events giving rise to the suit took place in an earlier year. Since this type of policy applies only to claims made during the policy period, there is somewhat less risk associated with losing a policy after the period has passed. However, this type of policy is relatively rare and is typically used to cover professional liability, such as malpractice claims against doctors or lawyers.
An "occurrence" policy is much more common in the business world. These policies apply to any occurrence that takes place during the policy period. For example, if someone slipped and fell on your property three years ago and sued your company this year, the policy in effect at the time of the fall would apply to the suit. Because an occurrence policy might not be triggered until many years after the policy period has passed, it is this type of policy that businesses must work hardest to protect.
Why Do You Need to Keep Your Policies?
A company needs to keep its insurance policies (including primary, excess and umbrella policies) because in virtually every jurisdiction, including Michigan, the policyholder must prove both the existence and terms of the insurance policy in order to be entitled to coverage.
At first glance, this may not seem like a difficult burden because you might assume that either your company, the insurance company or your agent would have a file copy of the relevant insurance policies. But while that may be true for a slip and fall that happened three years ago, companies have run into serious trouble when they are sued for conduct that happened many years--even decades--earlier.
An example from the news illustrates the danger of current claims arising from old conduct. In Star Steel Supply Co. v. United States Fid. and Guar. Co., 186 Mich. App. 475 (1990), Star Steel sought coverage from its insurers for asbestos-related claims but could not locate the policies it purchased to cover the period between 1938 and 1963. Based on the lack of evidence of these policies, the court ruled that the insurer had no duty to defend or pay Star Steel's claims. The lost policies cost Star Steel over twenty years of insurance coverage worth potentially millions of dollars.
The lesson here is that it is impossible to know if something your business did fifty years ago will result in a claim tomorrow or thirty years from now. As a result, insurance policies should never be discarded on the theory that they are no longer needed. It is much safer to assume that your company will need every policy it has ever purchased and to protect those policies accordingly.
Steps Your Company Can Take to Reduce the Risk of a Lost Policy
There are several steps that your business can take to protect insurance information and reduce the chances of a coverage dispute related to a missing policy:
Do Not Throw Away Any Insurance Policies or Related Documentation.
Inform all employees that insurance policies and materials are important documents never to be discarded.
If found, they should be given to the employee in charge of maintaining your company's insurance coverage.
Create a Catalog of Your Company's Insurance Information.
- Perform a search of business records, back to the initial formation of your business if possible, to locate every insurance policy and related document possible, including correspondence, certificates of insurance, ledgers/logs, records of premium payments and records of prior claims filed under a policy.
- Create files for these documents by policy period and policy type. For example, all of the documents related to a 1982 primary general liability policy should be in one file, while the documents related to a 1984 umbrella policy should be maintained in another file.
- Scan the files onto CD-ROMs, DVDs or other electronic devices. Label the materials conspicuously so they will not be misplaced or destroyed.
- Maintain the original files and backup materials in a secure location.
- Create an index for the files to allow you to identify and locate relevant documents.
Create a Procedure to Update Your Insurance Catalog.
- File and scan each new policy or renewal policy that your company purchases, along with the related documents, and add them to your permanent insurance catalog and files.
- Ideally, the employee responsible for maintaining your company's insurance coverage should also be responsible for maintaining and updating the catalog.
For more information, please contact Joe Kuiper, Chair, at 616.752.2481 or firstname.lastname@example.org.