Avoid Falling into the “Check-the-Box” Trap When Working On or Planning For a Reorganization

There are so many involved details and items turnaround professionals have to deal with when they are brought in to help reorganize a company. It is very tempting to fall into a false sense of security when you can just check off the “got it” box without delving into a detailed analysis of complicated issues. Insurance is one of those deeply involved areas where professionals should not take the easy way out.

Many business and turnaround professionals accept a Certificate of Insurance as evidence that commercial insurance is in place. As a matter of fact, the standard Certificate of Insurance is commonly called “evidence of insurance.”

However, the below disclaimer is standard language that is printed on just about every Certificate of Insurance, but is largely ignored:

Does any Certificate of Insurance with a disclaimer such as the one above offer any real comfort or security? This is a shining example of “The big print giveth and the small print taketh away.”

Before a turnaround professional is brought in, management will normally do what it can to reduce costs. This is good business sense. But how can management lower the company’s commercial insurance premiums? It can shop for insurance with several carriers, but unfortunately, too many insurance brokers will also allow the underwriter to reduce coverage to effect a premium savings. Penny-wise and pound-foolish is more often the result, and the Certificate of Insurance might not evidence the reduction in important coverage.

Similarly, a Certificate of Insurance does not have to list any or all of the endorsements on the actual policy. Endorsements can add or increase coverage, but more often they can and will limit or remove coverage in an effort to reduce premiums.

Give the Insurance Policies a Full Review; Do Not Just Kick the Tires by Reviewing the Certificate of Insurance Only

Would you ever purchase a used car from a stranger without bringing it to a trusted mechanic first? You would want to know the condition of the brakes and tires. Will the engine and transmission hold up? Has the car been in an accident? In other words, is the car dependable, will it protect me and my family, and is it worth the money being asked for it?

Just as someone considering buying a used car would hire a trusted mechanic to inspect the vehicle (money well spent), turnaround professionals would be wise to partner with a trusted independent insurance consultant to look under the hood at the guts of the insurance policy to see whether the terms and conditions are proper. A true independent insurance professional will not look to make a sale or take over an account, but rather will determine whether the coverage is appropriate and the company is properly covered.

Independent insurance professionals should always be brought in by turnaround professionals and lenders to review the insurance policies themselves, and not just the Certificates of Insurance. The insurance policy is the controlling contract and the document used by the insurance carrier to determine whether coverage is in place in the event of a claim, be it first party (property) or third party (liability).

So, which paper is worth more: a piece of soft, comfortable toilet paper, or the worthless Certificate of Insurance? The answer is that the disclaimer makes the Certificate of Insurance all but a waste of paper. The lender would be better off with toilet paper.

We were recently retained by turnaround professionals to review the insurance policies of a national food manufacturer, which was preparing for a possible reorganization. Since the manufacturer did more than $135 million in sales each year, this illustrates the need for review of insurance policies by an independent insurance professional. The manufacturer had two property polices, one covering the inventory and the second covering the hard assets — the buildings, machinery and equipment. The inventory policy showed limits for “food spoilage,” but deep in the fine print was an endorsement that deleted food spoilage coverage. Once this was pointed out, the broker had the carrier amend the policy to include spoilage coverage.

The same national company did not have a separate cyberliability policy. There was simply a one-page add-on coverage endorsement. This was a throw-in endorsement with the sort of limits one would get as a freebie on a policy for the local bagel store. Based on the recommendation of the independent insurance professionals, the company purchased a proper cyberinsurance policy. A review of the Certificates of Insurance only would not have brought to light the inadequacies of the insurance policies. A fulsome review of the insurance policies actually saved the company money and better prepared it to emerge from reorganization with the appropriate insurance coverage.

A fulsome review of insurance policies is just as important for smaller companies. We recently reviewed the coverage of a local company that was in the business of purchasing gasoline in bulk, then contracting with individual fuel transporters to fill up their tanker trucks and deliver the product to independent retail gas stations in the Tri-State area. The primary company, the borrower, did not have pollution coverage, nor did three of their independent transporters have coverage to protect them in the event of a fuel oil spill. An accident on the road can easily cause 20,000 gallons of toxic fluid to spill onto the highway and into the sewer system, an EPA nightmare and a massive cleanup cost. Once this was pointed out, the company updated its coverage, and the transporters either purchased the proper coverage or lost their contract to deliver on behalf of the company. All of the company’s independent haulers are now required to have this coverage and need to be approved by the company’s commercial insurance partner. Again, the lack of crucially important coverage would not have been detected from a review of the Certificate of Insurance alone and could have prevented a successful reorganization if the company became faced with large uncovered liabilities.

Remember, Certificates of Insurance are worthless. Do not rely on a document that is not as valuable as toilet paper. Be sure you have an insurance professional review the policy and “kick the tires.”