Master Insurance Program has Conflict of Interest Issues
What Is A Master Insurance Program and Why Should the Insurance Broker Be Alert To Danger?
A Master Insurance Program (MIP) can be many things and generally has no specific definition in the insurance industry; however, in a generic sense, it is a risk-allocation program designed to customize coverage and risk to fit the operation of a business enterprise(s). Mostly, it is used for a group of like properties that have common exposure to similar risks. For example, it can be a Master Insurance policy covering several commercial or rental buildings, or businesses, or covering the units and properties contained in a Homeowners Association. It may cover multiple properties owned by the same or different entities. However, a Master Insurance Program has conflict of interest issues, when the properties are owned by different entities or in different proportions. The program must continuously be evaluated and analyzed before, during, and after the issuance of the coverage. That analysis and evaluation should be done by the insurance broker as well as the insured and its counsel.
How Does An MIP Differ From Captive Insurance, OCIP, And/ Or CCIP?
This is a topic for later development; however, simply said, a Captive traditionally involves the insured designing and managing the insurance policies and program and risking its own capital. An OCIP (Owner controlled Insurance Policy) and a CCIP (Contractor Controlled Insurance Policy) are typically used in construction projects to control risks and litigation costs and minimize the need for indemnity agreements between contractors on the project.
Where Do Dangers Arise In An MIP?
A Master Insurance Program has conflict of interest issues that usually arise out of the design and development of the program, such as: (1) What properties are included/excluded in the program; and, (2) Who owns the properties?
What Are Some Of The Potential Problems In A Master Insurance Program That Have Conflict Of Interest Issues?
a. When separate ownership issues exist, there is a problem. The broker may have had the program bid in a way that the premium cost reported back by the insurance carrier is not broken out on a per property basis; how is the premium quote divided or allocated between the properties? All properties are not created equal. As above they may be in different states, subject to different hazards and different laws. Who makes the allocation of premium? Are all owners brought to the table to negotiate among themselves? Are they all adequately informed about the risk profiles? The Property Manager, who also may be the First Named Insured, has a fiduciary duty to the Owners to make sure all allocations are fair. How does the Broker fit into that duty of care relationship?
b. What if there is an SIR? If there are unrelated owners, does a separate SIR apply to each property group? (With the same ownership, it should not make any difference except for cost accuracy in accounting for profit/loss; if not, then all owners are owed a fiduciary duty by the property manager of accurate allocation and accounting). How does the insurance broker fit into this equation as he usually may be the entity performing the allocations?
c. When does an SIR exhaust as between Properties that have different ownership? If the SIR payments on a claim all come out of the same prepaid pool of funds, what happens if Property A has a large claim or number of claims that exhaust the SIR funds. What happens when Properties B, C, and D have claims and no funds are left for the pool? Do the different owners of the different properties have to contribute again to the SIR? This situation clearly requires a careful drafting of the SIR language and program details when there are multiple owners involved in multiple properties.
d. To whom does the insurance broker owe a duty of full disclosure? Is it to the First Named Insured? Who is the First Named Insured? If that is the Property Manager how does the Broker make sure the information concerning bidding, and allocation is properly communicated to the other owners, so he doesn’t become complicit in an unfair allocation scheme. Is there a duty owed to the other named insureds on the policy?
e. What happens if the Property Manager includes the SIR costs in the Premium calculation when the allocation is made, and it is sent out to the Property Owners (named insureds) for payment? Is the SIR portion clearly disclosed as an SIR and not lumped in with the Premium? Such activity that does not disclose the true nature of the premium charge may violate insurance laws in some states, or at a minimum be a non-disclosure that disregards ordinary duties of care.
f. What happens when one property has a major loss that exhausts the MIP limits? Do the other properties (with different owners) have to fund new or extended limits? If named insureds have separate primary and excess coverage under a different policy outside the MIP, is that coverage exposed, or will it answer to new claims suffered by the properties that were left bare? If the Property Manager goes out and buys new extended coverage, must the property owners who had no claims, contribute?
There are many more issues that arise because a Master Insurance Program has Conflict of Interest issues. These issues can arise during the insurance bidding process, after the premium quotation is issued to the insureds, during the allocation process, or during the claims process. The entire program needs to be monitored and evaluated constantly for changing fact patterns that may create conflicts of interest. As an insurance professional, how many times a year does the broker conference with its client to see if any facts have occurred that might create a conflict?