Understanding Liability Coverage: The Significance of Conditions and Assignment of Benefits

Liability coverage agreements can be complex, especially if you’re new to navigating them or have never had the opportunity to dive deep on what is covered in your own policy. LHA Liability Trust Fund coverage agreements, like other liability insurance policies, contain several key parts:

1. Declaration Page/Certificate of Coverage
2. Insuring Agreement
3. Exclusions
4. Definitions
5. Conditions

Often, consumers are primarily interested in items 1 through 4, asking questions such as:

• Who/What is covered and When?
• What exactly am I getting in return for the payment of my insurance premiums?
• What is not going to be covered?
• How are all the terms actually defined in the Agreement?

These are all great questions to ask, but we must not forget about a policy’s conditions. This important section plays a significant role in the overall function of your benefits, so understanding them in depth before choosing a policy is critical. Let’s take a closer look.

What exactly Are Insurance Policy Conditions?

Liability insurance policy conditions are specific terms and provisions outlined in your policy that determine how coverage is provided, how claims are handled, and the responsibilities of both the insured (you as the policyholder) and the insurer. These conditions are crucial to understand because they outline how your policy will be enforced and they can affect whether a claim will be accepted or denied.

Typically, consumers do not base their decision to obtain a particular policy or coverage on the Policy Conditions for a particular insurance. However, considering that policy conditions identify the general requirements of an insured and insurer on matters such as loss reporting and settlement, property valuation, other insurance, subrogation rights, and cancellation and nonrenewal, they are vital to factor into any final policy selection.

Understanding the Function of Policy Conditions

Although this section is often overlooked, each condition plays a big role in determining how the policy works in a variety of situations. These both protect the insurer from responsibilities that fall outside the scope of their coverage while clearly illustrating how the policy will assess claims and provide compensation for the insured. Overall, these conditions help:

• Clarify Coverage: They define what is covered and the responsibilities of all parties involved so there is a mutual understanding of how the policy works.
  
• Manage Risk: They help the insurer manage risk by setting boundaries on when and how claims will be paid.
  
• Ensure Fairness: They ensure that you, as the insured, act in good faith and cooperate fully with the insurer to allow for a fair handling of your claims.
  
• Protect Against Fraud: They safeguard against fraudulent claims or misrepresentations, which help protect the insurer from financial harm.

What Types of Conditions Can You Expect in a Liability Policy?

Legal language in a policy’s conditions section can often make it difficult for consumers to understand what parameters actually exist within their policies. Thankfully, there are several types of conditions that are frequently found across professional liability policies. While not all policies include these specific conditions, many do—so becoming familiar with their functions can help you better identify policies that work for you.

• Notice of Claims: The insured must notify the insurer promptly after an incident that could lead to a new claim. Timely reporting is critical for insurers to investigate the claim and assess your liability. Failure to provide timely notice could result in the denial of coverage in some policies.
• Cooperation with Insurer: This condition means that you are required to cooperate with the insurer during the claims investigation process, such as providing documents, giving statements, or attending court hearings as needed. Cooperation helps insurers effectively evaluate the claim. Lack of cooperation on your part can lead to delays or denial of your claim altogether.
• Defense and Settlement: The insurer has the right to defend claims brought against the insured and to settle those claims as they see fit. This gives the insurer control over the legal process, including the selection and hiring of defense attorneys and negotiating settlements. This can limit your ability to influence the outcome of any legal process.
• No Voluntary Payments: This condition stipulates that you, as the insured, should not make any voluntary payments, assume any liability, or incur any expenses without the insurer’s consent. If you make voluntary payments or settlements without your insurer’s approval, the insurer may refuse to reimburse those costs.
• Policy Limits and Deductibles: This condition states that coverage is subject to the policy’s stated limits (maximum payout amounts) and deductibles (the amount the insured must pay out of pocket before coverage applies). Knowing the policy limits and deductibles is critical to understanding how much coverage is available and how much you will be responsible for in the event of a claim.
• Subrogation: After paying a claim, the insurer has the right to pursue recovery from a third party that may have been responsible for the loss. This allows the insurer to seek reimbursement for the claim amount from other responsible parties. As the insured, you are expected to not interfere with the insurer’s right to subrogation.
• Territorial Limits: Your policy may specify the geographical area where coverage is valid (e.g., within the U.S. or globally). This condition ensures that the policyholder is aware of where the coverage applies. Incidents that happen outside of the territorial limits may void coverage.
• Other Insurance: If you hold other insurance policies that also cover the same loss, this condition explains how the liability is shared between the policies (e.g., primary and excess coverage). This prevents the insured from recovering more than the loss amount and ensures that the right policy pays first.
• Cancellation and Non-Renewal: This outlines the circumstances under which either party can cancel or choose not to renew the policy, including required notice periods. By understanding these terms, you’ll know how long coverage is in effect and what to expect in case either you or the insurer chooses to terminate the policy.
• Fraud or Misrepresentation: This condition stipulates that coverage may be void if you provide false or misleading information on your policy application or during a claim. Misrepresentation can lead to denial of claims or cancellation of your policy completely.
• Compliance with Laws and Regulations: The insured must comply with all applicable laws, regulations, and safety standards in their operations. Non-compliance with laws or regulations could result in a loss of coverage or a denied claim if it leads to the incident.

Ok,What About the Assignment of Insurance Benefits?

One policy condition that seldom comes into play deals with the assignment of insurance benefits (AOB). This refers to the transfer of legal rights under, or interest in, an insurance policy to another party. In most instances, such rights can only be assigned with the insurer’s written consent.

In fact, the “assignment” clause in our own Trust Fund agreement is short and sweet:

“Assignment of interest under this Coverage Agreement will not bind us unless our consent is endorsed hereon.”

Usually, the AOB in a liability coverage policy is an arrangement where the policyholder (that would be you) transfers their rights to receive insurance benefits to a third party (typically a service provider), such as a contractor, different healthcare provider, or utilities company. By signing an assignment of benefits, the third party can directly bill your insurer and receive payment for services rendered, rather than you paying upfront and seeking reimbursement afterwards.

Important Features of Assignment of Benefits in Liability Coverage

Transfer of Rights: Through a formalized process, the insured gives their right to collect benefits from the insurer to a third-party service provider. During this time, all parties must consent to this transfer and what it entails.

Direct Payment: After the AOB is signed, the service provider can bill the insurer directly. This allows the insurer to pay the service provider instead of the insured, helping expedite services with prompt payment.

Simplifies the Process: By cutting out the middle man, so to speak, an AOB simplifies the claims process for the insured. Not only do you not have to cover costs up front, but you don’t have to coordinate with the insurer on the backend for reimbursement. Everything is completely managed between the insurer and third-party.

Are There Risks with an Assignment of Benefits?

The main draw of an AOB is obviously convenience. As the insured, you don’t have to deal with payments or wait for reimbursement, streamlining the claims process. However, that doesn’t mean there aren’t risks involved.

In some cases, signing an AOB can lead to disputes between your insurer and the third-party service provider. These disputes could be over inflated charges or unauthorized services—often due to hiccups in communication over coverage limits or consent on the front end. Because of this, many insurers restrict or carefully monitor their AOB agreements to prevent fraud or abuse like this from happening.

Let’s take a look at a situation involving a real-life AOB dispute that occurred with LHA Trust Funds and the underlying issue involved.

Claim Study: Assignment of Benefits in Action

To illustrate how this rarely used provision can have significant implications for both the Trust Fund and the Participant, we were recently involved in a situation where the Participant settled a claim under the coverage of its prior liability insurance carrier with a Release that included the following language:

“The parties expressly agree that the undersigned plaintiffs may continue their claim against (hospital) as a nominal defendant only, and that if a judgment is obtained against (hospital) said judgment may only be executed against the Trust Fund up to its available limits of coverage. Furthermore, if a judgment is rendered in the future against (hospital) as a nominal defendant, (hospital) hereby contractually assigns whatever rights or protections it may have under other coverages that may be available to it, so that plaintiffs may bring suit directly under (hospital’s) contractual agreement with the Trust Fund to collect any and all available coverage to satisfy said judgment.”

The Participant entered into the Release agreement and the assignment of benefits without any notice to the Trust Fund, protecting itself by exposing the Trust Fund to—at the very least—significant legal defense costs along with possible indemnity damages. Since consent was not obtained, the Trust Fund had the legal right to deny coverage.

In this particular case, several other coverage issues and unique factual circumstances also existed. All was finally resolved by a pre-trial compromise settlement after protracted and costly pre-trial discovery/litigation.

Addressing Assignment of Benefits in Litigation

The bottom line is this—it is possible that your facility could become involved in litigation where you may receive legal advice to assign the benefits of Trust Fund coverage (or other potential coverages) to another party to be fully released from any further financial exposure.

While this is not illegal or even unethical, it could very well be a breach of contract that nullifies the assignment of benefits. Rest assured, if you do not confer with the Trust Fund beforehand and request consent to assign benefits—and there is no guarantee that consent will be given—then the Trust Fund will definitely explore its right to deny coverage to the fullest.

Questions about Your Insurance’s Assignment of Benefits?

Contact Director of Claims Mike Walsh for more information. Interested in general liability risk management tips? Our consultants share some of their top findings.