This is the second article in a two-article series addressing church insurance. An article in last month’s Church Treasurer Alert addressed the following questions:
(1) Do we need insurance?
(2) What kinds of insurance should we have?
(3) What amounts of coverage should we have?
In this issue, we will be addressing these additional questions:
(4) Claims made or occurrence coverage?
(5) What are exclusions?
(6) How should we obtain insurance?
(7) What is a church’s duty to notify and cooperate?
(8) What is subrogation?
(9) Is insurance a substitute for risk management?
Many forms of liability insurance come in two varieties: (1) occurrence policies, and (2) claims made policies. It is critical for church leaders to understand the difference. Occurrence policies only cover injuries that occur during the policy period, regardless of when a claim is made. A “claims made” policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured with claims made policies with the same insurer since the injury occurred. Some insurers who offer claims made policies may agree to cover claims made during the current policy period for injuries occurring in the past when the insured carried insurance with another insurer. This is often referred to as “prior acts coverage.”
A table summarizes the advantages and disadvantages of both forms of coverage.
Claims Made and Occurrence Coverage
|claims made||•covers any lawsuit filed during the policy period, regardless of when the injury occurred
•coverage limits are the current limits, not the limits in effect when the injury occurred
•insurance premiums often are lower than for an occurrence policy
|regardless of when the injury occurred
• must have carried “claims made” insurance continuously with the same insurer from the date of the injury to the date of the claim, or have purchased “prior acts coverage”
• “prior acts” coverage can be costly
• a brief lapse in insurance coverage for any reason can result in no “claims made” coverage
• coverage for prior claims is lost if a church switches from a claims made to an occurrence policy
• when a policy expires or is terminated, for any reason, coverage ceases (even for claims that are later made for injuries occurring during the policy period)
• claims for injuries occurring in more than one year may be filed during the same year, meaning that the policy’s “aggregate” coverage limit is more quickly reached (the aggregate limit is the total amount the insurer will pay out during that year for all covered claims)
• claims must not only be made during the policy period to be covered–they also must be reported to the insurer (a technicality that is sometimes overlooked)
|occurrence||• covers any injury that occurs during the policy period regardless of when a lawsuit is filed
• no “prior acts” coverage needed if a church maintains a succession of “occurrence” policies
|• does not cover lawsuits filed during the policy period for injuries occurring prior to the policy period
• insurance premiums usually higher than for a “claims made” policy
Example. A church purchases “claims made” counseling insurance from Company A each year from 1998 through 2001. It switches to an “occurrence policy” with Company B on January 1, 2002. A lawsuit is brought against the church in 2002 for an alleged act of counseling malpractice that occurred in 2000. The church’s policy with Company A will not cover this claim, since the claim was not “made” during the policy period (even though it occurred during the policy period). Had the church not switched insurers in 2002, the claim would have been covered. Does the policy with Company B cover the claim? No, since the injury did not “occur” during the policy period (2002). As a result, there is no coverage for this claim. Note that the result would have been the same had the church purchased a claims made policy from Company B, unless it also purchased “prior acts” coverage. This example illustrates an important point. Churches should not switch from a claims made to an occurrence policy (with the same or a different insurer), or switch claims made insurers, without legal counsel.
An exclusion is a loss that is not covered under an insurance policy. In some cases, excluded losses can be covered by a separate “endorsement” or “rider” by paying an additional premium. Church leaders should be familiar with exclusions under the church’s insurance policies, and obtain all desired endorsements.
The selection of an insurance company, and specific coverages, should be an intentional and rational process. Here are some suggestions that my help:
- Appoint an insurance committee that includes individuals who are capable of evaluating the church’s insurance needs (such as an attorney, or insurance agent). The committee makes its recommendations to the group (board, congregation, etc.) having the final authority to make decisions.
- Using an insurance company that is dedicated to the church market is generally preferable. These companies have acquired specialized knowledge of church risks, and can be of invaluable assistance in risk management, responding to claims, and in selecting appropriate coverages.
- Do not base decisions solely on price. Be wary of companies that do not specialize in the church market that offer lower premiums to attract business.
- Check out the A.M. Best Company ratings for insurers. Each insurance company receives a “General Policyholder’s Rating” and a “Financial Size Rating.” The “General Policyholder’s Rating” provides the key information that will be of interest to church leaders. Five separate factors are evaluated and then companies are assigned one of fifteen ratings that range from Superior (A++) to “In liquidation” (F). One factor that should be taken into account in evaluating a company is the trend with respect to the Best rating over a period of several years.
Church insurance policies generally require that the church notify the insurance company in writing and within a specified period of time concerning any property damage or personal injury that occurs. Failure to do so can relieve the insurance company of any duty to defend the church in a lawsuit or pay a settlement or jury verdict as a result of the damage or injury. The duty to notify your insurance company of an injury or loss arises when the injury or loss occurs, and not when a lawsuit is filed. The purpose of the notice requirement is to give the insurance company sufficient time to investigate the incident and provide a defense.
Church treasurers should be familiar with the notification requirements in all of the church’s insurance policies. If you change insurance companies, be sure to review the new insurance policy. Do not assume that it will contain the same “notice” provisions as the previous policy.
Liability insurance policies require churches to cooperate with any investigations conducted by the insurance company into losses or injuries. A failure to cooperate may result in the denial of insurance coverage. Churches should never decline an insurance company’s request for information without the advice of an attorney.
Example. A church member was injured when he fell on church property during a funeral. At the time of the injury the church had a general liability insurance policy that required the church to give the insurance company written notice of any accident “as soon as practicable.” Immediately following the accident the pastor instructed the chairman of the board of trustees to notify the church’s insurance broker about the accident. The chairman did so by calling the insurance broker’s office. An employee of the broker assured the chairman that the insurance company would be duly notified. In fact, the insurance company was not notified. Nine months later the church received a letter from an attorney for the injured member threatening to sue the church unless it paid the member a large amount of money. The church immediately turned this letter over to its insurance broker, who in turn forwarded it to the church’s insurance company. The insurance company refused to provide the church with a defense of the lawsuit or pay any amount of money based on the accident since the church had failed to provide it with written notice of the accident “as soon as practicable” as required by the insurance policy. A court ruled that the insurance company had no legal duty to defend the church or pay for any jury verdict since the church had failed to notify it of the accident “as soon as practicable.” Shaw Temple v. Mount Vernon Fire Insurance Company, 605 N.Y.S.2d 370 (A.D. 2 Dept. 1994).
Church treasurers should be familiar with the principle of subrogation since it may expose church members to unexpected liability. Church members whose negligence causes a loss (injury or property damage) that the church’s insurer pays under the church insurance policy may be sued by the insurer to recover the full amount of the loss that it paid. Insurance companies cannot subrogate against persons who are “insureds” under a church insurance policy. Church members and volunteers are specifically listed as insureds under some church insurance policies with respect to actions they perform on behalf of the church, but this is not always true. Review your church insurance policy to see if members and volunteers are insureds. If they are not, talk with your insurance agent about including them.
Insurance companies generally can subrogate against volunteers or church members who perform criminal acts, even if the perpetrator is otherwise an “insured” under the church insurance policy. Church staff members or volunteers who engage in criminal acts for which the church insurance company pays a loss should understand that they may be sued personally by the insurance company for the full amount of the loss. For example, church members and volunteers who engage in sexual misconduct, embezzlement, or reckless driving of a vehicle may be sued personally by the church insurer to recover any amounts paid out under the church insurance policy as a result of such acts.
Absolutely not! Every church should practice risk management in order to reduce the risks of property damage and personal injuries. We have produced a number of materials that will help, including the following. All are described more fully on our website, www.iclonline.com (go to the “bookstore”).
- Safety and Inspection Checklists for Churches and Schools, by James Cobble and Richard Hammar. The premier risk-assessment tool for churches. Contains easy-to-follow checklists that quickly identify areas of concern. Effective risk management begins with this important resource.
- Risk Management Handbook for Churches and Schools, by James Cobble and Richard Hammar. This 500-page reference book addresses 34 risks, and provides a wealth of information on how to reduce these risks.
- Reducing the Risk of Child Sexual Abuse in Your Church, by James Cobble and Richard Hammar. The definitive resource on this timely and important topic. Kit includes a DVD training video, Leader’s Guide, and Volunteer Workbook.
- Selection and Screening of Church Workers, by James Cobble and Richard Hammar. All the forms you need to screen ministers, lay employees, and volunteers. Includes a 100-page booklet that makes the case for screening, and explains fully each of the forms contained in this significant package.
This article first appeared in Church Treasurer Alert, August 2002.