Feb 2024 CML Newsletter | coveragematters

CARILLION SCANDAL:

A Failure Of Governance

UK construction giant and FTSE 250 company Carillion collapsed in January 2018 with debts in region of £7bn. At the time of its collapse, it employed some 43,000 people including 18,000 in the UK. Six years on, let's take stock and reect on what lessons can be learned from the affair, and it is not even over yet.

Red Flags

With hindsight, there were many red ags about Carillion before it collapsed.

1. Carillion group was essentially cobbled together from mergers of other construction brands on highly leveraged deals, including Tarmac, Mowlem, McAlpine, and John Laing. An attempt to swallow Balfour Beatty in 2014 was rebuffed. Any business built on multiple leveraged deals is bound to carry instability risks: good for investment banks and lawyers but bad for constructing a coherent operation.

2. The business ran on services/facilities contracts, a vast number of them: all having their unique qualities and defects and problems, including accounting treatment: incredibly difficult to manage, let alone audit.

3. At least 38% of revenues were from government contracts, both UK and non-UK. It requires immense skill to manage government contracts efficiently and without getting screwed over by governments.

4. KPMG were Carillion’s auditors for all 19 years of the company’s existence from 1999. Such a long tenure calls into question whether they could provide the independence and objectivity crucial to high-quality audit. Legislation passed in 2014 requires listed companies to change their audit rm after a maximum of 20 years. Transitional arrangements, however, meant that Carillion would not have had to replace KPMG until 2024!

Other red flags? Yes, quite a few.

1. Share shorting: In 2017 over a quarter of Carillion's stock was owned by short sellers and Standard Life Investments, a major shareholder, began selling its shares from December 2015 onwards and had completely sold their 10.8% equity stake in the company by 2017, stating “concerns on a number of issues’’.

2. Aggressive accounting: Optimistic and early recognition of revenue was reflected in a huge goodwill item. In 2016 84% of the Carillion balance sheet was made up of goodwill, amounting to £1.57bn, which essentially disappeared when the contract problems came to light. In Carillion’s 2016 accounts it was stated that management decided no impairment to goodwill was necessary.

3. Pension deficit: In late 2017 Carillion’s contribution payments to the pension scheme were deferred, but a higher dividend and executive remuneration than the previous year were paid. The pension deficit in the year of liquidation was £990m.

4. Excessive executive pay and relaxation of clawback provisions: Executives received a total of £4m in bonuses during 2017, with media reports suggesting that the company changed its remuneration policy in 2016 to prevent these being clawed back in the event of nancial collapse. How could the remuneration committee have allowed this essentially ‘gaming the system’?

5. Excessive dividend pay outs: In the eight years from 2009 to 2016, Carillion paid out £554 million in dividends, three quarters of the cash it made from operations. In the five years from 2012 to 2016, Carillion paid out £63 million more in dividends than it generated in cash from its operations.

6. Trade creditors waiting too long for payment: The total owed within a year to trade creditors jumped from £212 million at the end of 2009 to £761 million at the end of 2016: surely a ‘red ag’ if ever there was one?

The Board

Was the board up to it?

Manifestly not: In the final report of the Parliamentary inquiry into the collapse of Carillion, published on 16 May 2018, the CEO, Richard Howson was severely criticised, described as "the figurehead for a business model that was doomed to fail". The report continued:

"... under him it careered progressively out of control. His misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, lacking any recognition that Carillion was a business crying out for challenge and reform. Right to the end, he remained confident that he could have saved the company had the board not finally decided to remove him. Instead, Mr Howson should accept that, as the longstanding leader who took Carillion to the brink, he was part of the problem rather than part of the solution."

Moreover, the chairman, Philip Green (not THE Philip Green) had no experience of facilities or construction management and was unable to challenge his CEO. In the final report of the Parliamentary inquiry Green was described as "delusional". The report concluded:

He interpreted his role as to be an unquestioning optimist, an outlook he maintained in a delusional, upbeat assessment of the company’s prospects only days before it began its public decline. While the company’s senior executives were red, Mr Green continued to insist that he was the man to lead a turnaround of the company as head of a "new leadership team". Mr Green told us he accepted responsibility for the consequences of Carillion’s collapse, but that it was not for him to assign culpability. As leader of the board he was both responsible and culpable’.

Andrew Dougal, the audit committee chair from 2011, did have experience in the construction industry but he was also chair of the audit committees of Taylor Woodrow (2002–2011) and Creston plc (2006–2015): chairing the audit committee in all three. Chairing the audit committee of Carillion would have needed all his energies. He should have either never been appointed or should have stepped down at once from the other appointments.

How could such a dysfunctional and inappropriate group of people end up running the board of a FTSE 250 company? Why didn’t shareholders intervene? Maybe everyone was making too much money to care.

Carillion Legacy

Carillion was a comprehensive and abject failure of corporate governance. Yet again the UK Corporate Governance Code proved utterly ineffective in the face of a board determined to ignore the fundamentals of good governance. But watch this space, as there may yet be a sting in the tail for the directors.

CARILLION FALL-OUT:

A Case-Study

What happened after the collapse? In this article, we look out the legal fall-out and speculate on the insurance coverage position.

Numerous investigations and proceedings ensued involving Carillion and its directors. I have no knowledge of the D&O insurance position and therefore comments about potential coverage are no more than educated guesswork on my part!

1. Parliamentary Inquiry

The company had been a household name, holding many government contracts. Straight after the collapse a joint parliamentary committee of the Work and Pensions Committee and the Business, Energy and Industrial Committee of the UK Parliament was formed to investigate the circumstances of the collapse before which former board members appeared.

Its report in May 2018 couldn’t have been much more damning:

Carillion’s rise and spectacular fall was a story of recklessness, hubris, and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.

Policy Check - The directors may have looked for coverage of their legal fees in preparing for the parliamentary hearings. Cover would have depended on the denfinitions of Official Body and Investigation being satisfied. Today parliamentary hearings would typically be covered.

2. Disqualifications

The Insolvency Service succeeded in June and October 2023 in disqualifying (by undertakings) former Carillion chief exec Richard Howson and ex-Carillion nance directors Zafar Khan and Richard Adam from boardrooms for between eight and twelve and a half years. These are long disqualification periods.

In an unprecedented move, the Insolvency Service also went after the non-executive directors. However, in October 2023 the disqualification claim was dropped at the door of the court. If the Insolvency Service had succeeded, it would have reshaped the role of non-execs in the UK. The Insolvency Service’s case was said, in terms, to be that Carillion’s NEDs had breached what amounted to a new duty on directors, namely, a “strict duty to know the true financial position of the company”. The defence team let it be known that it would have submitted that such a duty was inconsistent with directors’ duties under UK company law and in particular s 174 of the Companies Act 2006 (a director must exercise reasonable care, skill and diligence). It was said that the proceedings against the NEDs were dropped because the cost and time of arguing what was a highly novel approach would have been prohibitive for the public purse to justify.

Policy Check – Disqualification is a Claim for a Wrongful Act and so the directors would have been confident of coverage for their reasonable Defence Costs, subject to the possible application of the conduct exclusion and/or Insurance Act 2015 remedies for the insurers (see below).

3. FRC Investigation

After an investigation and enforcement proceedings by the Financial Reporting Council, KPMG was hit with a record £21m fine in 2023, following multiple serious breaches in the audit of Carillion. Policy Check - KPMG’s E&O insurance would have been through a captive, reinsured in the commercial insurance markets. Civil fines are generally covered under these policies unless against public policy. Given the findings of egregious conduct on the part of KPMG partners and audit staff, including incompetence and deliberate wrongdoing, it seems unlikely the fine would have been covered.

4. FCA Sanctions

In July 2022 the FCA published provisional decision notices against Carillion plc and the executive directors. Mr Howson, Mr Khan and Mr Adam were ned, respectively, £397,800, £154,400, and £318,000. The FCA found that many market announcements in the 2016 and 2017 period were “misleading and did not accurately or fully disclose” the true financial performance of Carillion. The individuals had been knowingly concerned in the breach by

Carillion of the UK listing rules and the Market Abuse Regulation.

On its website that same day the FCA stated:

The FCA … considers that Mr Howson, Mr Adam and Mr Khan acted recklessly and were knowingly concerned in Carillion’s contraventions. In the FCA’s view, Mr Howson, Mr Adam and Mr Khan were each aware of the deteriorating expected financial performance within Carillion’s UK construction business and the increasing financial risks associated with it. They failed to ensure that those Carillion announcements for which they were responsible accurately and fully reflected these matters.

Mark Steward, Executive Director of Enforcement and Market Oversight, said:

'Carillion failed to take reasonable steps to establish and maintain adequate procedures, systems, and controls to enable it to comply with its obligations under the Listing Rules. As a result, its true financial position remained hidden over many months and the effects of its collapse were aggravated, causing substantial harm to shareholders and creditors. This is market abuse, and as damaging to market integrity as insider dealing and manipulation, though not often described in this way. It should be.'

These are extremely damning findings of deliberate misconduct. The former directors have appealed the decision notices to the FCA Upper Tribunal. The outcome of the appeal will be posted on the FCA website. In the meantime, the penalties will not be enforced.

Policy Check – Carillion would not have been covered in respect of its co-operating with the FCA’s investigation as this would not have counted as a Securities Claim. However, the directors could have been confident of coverage for their Investigation Costs in the early days when there might have been no allegations of wrongdoing. As soon as the FCA made allegations this would have been a Claim for a Wrongful Act, so also covered. Whilst the Defence Costs, including the costs of appealing to the Upper Tribunal should be covered, it must be very doubtful whether the fines will be with the final outcome yet to be decided. If the egregious findings of the FCA are upheld the directors will have to fund the fines themselves. Some would say this is the least they should do given how their conduct directly led to the collapse.

5. Criminal and/or Civil Proceedings?

Given the extremely damning findings so far, it is striking that as yet it appears there have been no criminal proceedings, and no civil proceedings for breach of duty by the Official Receiver.Without inside knowledge we can only speculate as to the reasons, but it is possible the outcome of the FCA Upper Tribunal appeal is awaited before final decisions are made about further proceedings.

Also, in respect of civil proceedings, it may be that the amount or availability of Carillion’s D&O insurance may be in doubt given (1) the considerable legal activity so far (with the racking up of Defence Costs and Investigation Costs ) and (2) the potential for triggering the Conduct Exclusion in respect of certain individuals.

Policy Check – Would any future criminal or civil proceedings be covered? They would be Claims for Wrongful Acts so in principle yes. However, as stated above, the Upper Tribunal’s findings will be scrutinised carefully by those advising the D&O insurers to assess whether there has been a final adjudication of deliberate misconduct or fraud, entitling the insurers to assert the Conduct Exclusion in respect of any proceedings based on the same facts.

Most D&O policies waive all Insurance Act 2015 remedies for a breach of the duty of fair presentation, so long as not deliberate. In this case, there might be grounds for considering that there had been a deliberate breach of the duty by certain individuals entitling the insurers to avoid the policy against them (only).

TECHNICAL (BUT PRACTICAL)

Global Programmes: A General Insurance Issue

(+ D&O Nuances)

The issue of global programme coverage has been with us ever since insurance programmes covered more than just domestic risks. In the D&O world this was when the policy started covering more than just the main board. In property and casualty insurance the market has been dealing with global programmes for years. In D&O, initially no one thought through all the consequences of adding “subsidiaries” cover. Policies were giving cover to

subsidiaries in places where the insurers were not licensed and might not be able to provide cover on a “non-admitted” basis.

In all insurance classes, cover is commonly provided to global risks on a “non-admitted” basis which means no special effort is needed because the insurer can cover the overseas risk from its own country. But this is not allowed in many places, so this is where the solutions came in.

Policyholders have been expanding into more countries as globalisation has taken hold, so there are more countries to think about – potentially a bigger headache, although the discipline is exactly the same.

Why is all this important?

The insurer might be providing cover in a country where it is not allowed to. This is a regulatory issue, which could lead to fines for the insurer, broker and possibly insured (depending on the local rules).

Tax follows coverage – the Insurance Premium Tax needs to be allocated to the places where there is cover being lawfully provided. The tax allocation may be inconsistent with where cover actually can be provided which will be a red flag for regulatory authorities.

An insurer may decline to cover a claim in a place where it is not allowed to provide cover to prevent it being sanctioned by a regulator - this could lead to a civil dispute because it had contracted to pay. It could also be an E&O for the broker if the Insured thought it was covered.

One reason why D&O may have been late to the party is that the exposures vary wildly across the globe. Some countries such as the US, Canada, Australia, and many European countries have well established and often severe exposures for directors. On the other hand, there are many countries in the world that have seldom ever seen a D&O claim, so it’s easy for cover there to be an afterthought. It is however a developing picture with exposures

increasing all the time. Property and Casualty has generally not had such uncertainty, with the location of exposures and their severity, relatively easy to establish.

Workflow

Getting global programmes 100% right is a challenge and with D&O there are some unique issues to consider along the way. Some judgments are required which is why the client needs to be involved. However, it needn’t be as complicated as it might seem. The issues can be shrunk by process of elimination using a workflow, such as the one that follows (this has necessarily been simplified for the Newsletter):

Establish where the Risk Locations (“Risk Locs”) are. You have to do this rst otherwise you will pretty quickly get into a muddle. In property this is where there are tangible assets; in casualty or professional liability it is usually where activities or services are performed. In some classes such as moveable property there are special considerations. In D&O it’s where there are registered companies because that’s where there will be boards, and it may also be locations where there isn’t a registered company but there are senior employees or anyone else under the definition of “Insured Person” ofcially based. In commercial insurance it generally isn’t where the exposures may be or where a person lives.

2. Once you have a list of Risk Locations you need to see whether the proposed insurers are licensed in those places. This is the same no matter the class of business. An insurer will be licensed in its country of registration; or it may be a country where the insurer, although based somewhere else, still has a licence eg Lloyd’s; or the insurer may be registered in a country that has a trade agreement allowing it to be treated as being licensed in others (eg the EU).

3. This should help you to reduce the number of Risk Locs for which you still need to find a solution. To this remaining list you ascertain whether any of those Risk Loc countries allow non-admitted cover. Again, this is the same no matter the class of business. This is cover from an insurer that is not licensed in the Risk Loc. Many countries do not permit non-admitted cover, but some do – the UK being an example. In some countries the rules are nuanced around classes of business or just not very clear. Use available internal resources to help you with this. AXCO is an external resource that also provides information about whether non-admitted insurance is permitted: . https://www.axcoinfo.com

4. This is likely to further shrink the list of Risk Locs to ones where non-admitted cover is definitely not permitted, or it is just not clear enough to be sure. Hopefully though it is now a manageable list. It is here that you will need to start making some decisions about exposures and solutions. In D&O, Risk Locs where there is an established track record of civil damages exposures for directors can be treated differently from countries with little experience of D&O claims, or countries where there are only senior employees or one individual, not boards. Remember, for public companies, the exposure isn’t determined by where a listing is, it is where the directors with that listing exposure are based. For a UK company with a US listing the Risk Loc and attendant public company exposure are in the UK, but the size of that exposure is materially influenced by the US listing. Use internal resources and also public ones such as the D&O Diary to help you with exposures. Often law rms publish handy territory guides from time to time. And there’s always my book: “Directors’ Liability and Indemnification: A Global Guide”. Finally, the client is likely to have views on this.

5. Risk Locs where the risk appears to be minimal, or obscure, or temporary, may be a candidate for the Financial Interest (“FINC”) clause (see the April 2023 Newsletter for an analysis of that). FINCs are common in many classes of business. Remember a FINC will only cover the policyholder for its financial interest in a local loss and so regardless of the class of business is not an ideal solution. In D&O, its relevance also relies on the local subsidiary being able to indemnify its directors, which it may not be able to. Many countries have undeveloped laws on indemnification so the picture can be at best unclear. Again, this can be checked via the methods recommended in (4). The clause will not directly help the end user: the overseas director. The FINC approach has not been widely tested and has its limitations, hence it should be used selectively and not indiscriminately.

6. What's left? Once you have removed countries from the Risk Loc list that the client is happy to address via a FINC clause (or even not being covered under the master programme at all), you are left with (probably) a small number of countries where there is little alternative but to arrange a local policy or, if the exposure is significant, a parallel insurance tower.

7. International Programme. As you will likely be using a combination of non-admitted cover, FINC and local policies you will need an international programme clause that addresses how these all t together. Remember a DIC/DIL clause is only likely to work on a FINC basis.

8. Don't forget the tax. Once you have every Risk Loc spoken for, allocate the tax according to where the cover is being provided. This will not include Risk Locs being dealt with via a FINC or local policy because no cover is being provided in those places by the master programme.

I hope the above is helpful. It is just a rough guide to shrinking the problem via decision making. If you are an insurance practitioner (insurer or broker) I have a workflow template which you may find is a handy prompt to save on your desktop – email me if you’d like one.

PRODUCT 101: FOCUS ON...

Investment Management Insurance ("IMI")

While most people were on holiday I spent the Summer of 2023 working on several IMI products. They are blended products offered by the FI market to the asset management industry, comprising E&O and D&O coverage, often Crime, and sometimes Cyber. They cover the asset Manager, the investment funds being managed, and the senior management individuals of both.

The product is used as a base for insuring a variety of different investment structures in the asset management industry and therefore will need to be tailored to the specific one involved - whether for example a hedge fund, investment trust, private equity, or mutual fund. What follows are some generic points relating to the base IMI product.

It sounds simple – IMI is effectively E&O, D&O and Crime policies bolted together. However, once you get into an IMI you realise there are quite a lot of things you need to think about before you can be confident your product works as intended. In fact, IMI policies probably have considerable scope for unintended consequences.

I’m not going to plod through the product (I have a training module for that if anyone’s interested); here are a few things that most helped me understand how to do IMI insurance!

1. Both the Manager and the Fund are covered. The product is likely to split the cover between the Manager and the Fund. The Manager is responsible for management of the Fund including investment decisions, pursuant to an Investment Management Agreement. The Manager may delegate some specialist tasks to others. The investment funds are the vehicles that hold the money deposited by investor clients. There may be one fund or more commonly a hierarchy of funds. Usually, the Manager will be named as the “Company” and any “Subsidiary”. The investment funds will be defined as “Fund”. They are not Companies nor Subsidiaries. Even where the basic cover for the Manager and the Fund is the same (and it is not always – see below) they are treated differently in certain situations, eg with regard to new acquisitions, creations, or disposals.

2. Why are both the Manager and Fund covered? Mostly for convenience given both are likely to get caught up in the same litigation and to prevent gaps in cover - they are both concerned with the same subject matter, and may have overlapping personnel and roles/responsibilities, so it's safer to insure both together. It will be cheaper to buy a combined product than separate policies. That said, conflicts can occur between the Manager and the Fund in claims which will need to be managed carefully by insurers and brokers with information barriers, and the risk of potential exhaustion of a combined limit is greater when both are covered (also see below).

3. The Directors & Officers of both the Manager and Fund are also covered. The Manager is likely to be in a regulated jurisdiction so its directors and officers will need coverage for regulatory issues and investigations as well as usual D&O civil/criminal liability. Depending on the type of fund, there may be a corporate structure with directors and officers. Whilst funds are usually offshore for tax reasons and may not be so heavily regulated, fund directors potentially carry a significant civil liability exposure to the fund companies themselves for breach of fiduciary duty, and to individual investors in respect of offerings when they are capital raising (securities claims). There will also be cover for "outside board" directors, which in the case of private equity risks is a significant element of the cover.

4. What about Employees – are they covered? This may be nuanced. Employees are usually covered in E&O policies even though it is their employer who is more likely to be sued for a failure of professional services. So, for the E&O coverage one would expect all employees to be covered. By contrast, D&O policies tend to restrict the cover to directors, officers, and senior management individuals, unless an employee is sued/investigated alongside those people. So, the D&O coverage for employees may be more restricted.

5. How are the different D&O exposures between the Manager and Fund dealt with? Both the Manager and the Fund will need the coverage but not necessarily for the exact same things as mentioned above. If the Manager is a public company it will need Side C coverage, as will the Fund if it is involved directly in capital raising activities or its securities are publicly traded.

6. Are both the Manager and Fund covered for E&O? This can be where there’s an important difference between the coverage for the Manager and the Fund. The Manager carries a potentially significant E&O exposure in that it is performing an investment management service to its clients, the investors in the Fund. Consequently, there will always need to be E&O cover for the Manager. However, the Fund doesn’t really do anything except sit on the money – everything significant (other than duties performed by its directors/senior individuals) is done for them by the Manager. So, there may be no distinct E&O exposure here, sometimes reflected in the fact that the IMI does not always cover the Fund for E&O. That said, due to the fact responsibilities between the Manager and the Fund may in any given case be nuanced, in today’s soft market it is often lumped in anyway.

7. Check the Investigations coverage. In D&O, investigations cover is generally only given for individuals and not the entities. So, investigations of a managerial nature insofar as they involve individuals are covered under an IMI. What happens when an investigation is in respect of professional services, such as investment advice? This would normally be excluded under the D&O. E&O investigations – where the focus is the performance of

a service as opposed to a management issue (if indeed they can be separated), are common and individuals would always expect to be covered for them. Whilst the entity definitely has a need for E&O investigations cover too it hasn’t always been able to secure it due to the potential exposures. However, in the IMI policies of today I am seeing entity coverage for E&O investigations as standard, maybe with a sublimit. Also, as stated above, the treatment of coverage for employees may also vary between the D&O and E&O. So, the policy may treat entity investigations differently depending on whether it can be categorised as a D&O or E&O investigation. This needs careful drafting as in claims situations it may be difficult to decide which it is.

8. How does the Crime t in? Many IMIs routinely include Crime cover (see the last Newsletter in September 2023 for a heads up on Crime coverage) because there is a tangible crime risk in asset management, particularly in respect of social engineering and electronic fraud. The Manager is generally regarded as the main Crime risk because it manages the assets on behalf of the Fund. It is possible therefore that Crime is only given for the Manager. However, because the question of which entity has suffered a direct financial loss may be nuanced, in the current soft market, I am seeing crime cover given for both as standard. As with other crime policies, the pension fund or plan may also be a covered party. Crime is a first party cover and so it will

have a different trigger to the liability sections and this, and the fact it also has some unique exclusions and conditions, needs to be fully addressed in the wording – you can’t just add it on and hope for the best.

9. Are the usual Extensions included? Because it’s a combined product you don’t always see the full list of bells and whistles you’d get on the standalone products. This should be checked. Some are more significant than others, and again the distinction between the D&O and the E&O may be important. For example, whilst D&O mitigation is a given, E&O mitigation cover for entities is a more significant undertaking. In D&O, Pre-Investigation Costs cover is given in standard, but not in E&O. In addition, for European based Managers the E&O cover will likely have an AIFMD extension which reinstates the E&O limit so as to accord with the Alternative Investment Fund Managers Directive, and its related regulations.

10. There are common and also different exclusions for different heads of cover. You will usually see the exclusions section split between exclusions common to all covers, and then exclusions only relevant to each of the D&O, E&O, and Crime covers (with their attendant extensions). Careful consideration needs to be given to the Insured V Insured exclusion, given that it is possible in some structures for the Fund to bring a claim against the Manager.

11. Treatment of Limits. In a hard market one can expect an aggregate policy limit so E&O, D&O and Crime losses all erode the limit. Aggregate limits are still an option but increasingly there are separate limits for the different sections. Often the wordings will cater for both options, so no amendment is needed to the wording whether it has Agg or per Section limits – this is controlled by the schedule. I have not seen an AOC option in IMI policies (yet!). The wording also needs language that explains what happens when a single underlying event leads to claims under multiple cover sections – do the section limits aggregate or are they combined in that scenario? (Usually the latter!).

12. The Key Takeaway. If you don’t remember anything else, make sure you have decided which insureds (Manager, Fund, D&Os/senior individuals and Employees) are covered for which exposures – E&O, D&O, Investigations, Crime, Mitigation and other extensions, and check these off against the final product.

WORDING CHAT

Top 10 Common Drafting Issues in 2023

Experience has told me it’s impossible to draft the perfect wording. This is because it is catering for events and situations that by their nature are unexpected and uncertain, and the market is constantly shifting. You don’t really know how well your wording works until you have claims. This is when you realise there may be an issue.

There are some things you can do to reduce this factor, and avoiding some of these basic errors will help. I have chosen more obvious / easily corrected issues explainable in this format, not some of the more complex ones. Tempting though it is to give examples of the funniest/worst wording errors I have seen, I have stuck to themes which may be more instructive. The following are not in order of severity!

1. Insuring Agreements/Extensions

Triggers - the policy can only respond to things that happen during the policy period, so make sure this is stated explicitly in the insuring clauses (and extensions unless parasitic on the insuring clauses). You’d be surprised how often this is missed.
Basis clauses - in English policies weed out language in the preamble that makes representations in the placement process the “basis” of the contract – these were outlawed by the Insurance Act 2015. Apart from anything else seeing them in there will make the reader think the wording hasn’t been updated for years.
A word on cover extensions – check they aren’t already covered, and if they are, and you still want to include them, add language that recognises this.

2. Definitions

Policies often have many definitions then don’t use them consistently. Do a word check. That said, watch out for those occasional situations where a word should not be used in its defined sense eg a claim under the policy is not a Claim (I have corrected this a million times!).
Try and avoid making a definition circular – this is when a definition includes its own defined term.
Some definitions are only used once (so not needed) or sometimes aren’t used at all. You can do a word check to sort this out. If your definitions clause goes through the alphabet twice you are in trouble!

3. Exclusions

Sometimes exclusions only refer to one type of insured event (eg a Claim), and there are other insured events (eg a Crisis Loss) that just aren’t mentioned.
Check the exclusion clauses t the exclusions preamble by reading each one in conjunction with it. This way you will help avoid disputes about their breadth.
Think about what is being excluded and apply appropriate causation language depending on how narrow or broad the exclusion needs to be, rather than taking a “one size fits all” approach, which may lead to accusations of “illusory cover”.
Excluding things that are not covered in the first place is common in policies but can lead to interpretational issues. It’s a particular issue when market boilerplate clauses are added to comply with regulatory requirements.
Carve-backs to carve-backs – just plain confusing!
Are you sure you know the difference between a Retroactive Date, a Continuity Date, and a Prior & Pending clause? Whilst used interchangeably they are not the same thing (in my view). Not enough room here to explain!

4. Claims Conditions

Distinguish the conditions that must be complied with in order for the cover to be in place, from the ones that don’t. A “one size fits all” approach won’t go down well in court.
Where you have a mix of first party and third party covers make sure the conditions work for both. I see this issue a lot, with some first party conditions simply left out.
Sometimes conditions only refer to one type of insured event (eg a Claim), and there are other insured events that just aren’t mentioned.

5. General Conditions

Some policies are silent on what happens to changes in risk eg takeovers, insolvency, acquisitions, and disposals during the policy period. Some that do mention them terminate the policy when run-off is intended and vice versa.
There are policies out there that have not been amended since the Insurance Act 2015 came in! If the policy is governed by English law check the Insurance Act 2015 has been taken into account in the clauses dealing with misrepresentation /non-disclosure.
Check the disputes clause to ensure it still reflects the parties’ intentions as to how disputes may be resolved. The Insured’s GC will have a view on this.
Specify the proper law in the schedule rather than drafting it into the wording (this allows the proper law to vary deal to deal without changing the wording).

6. Endorsements

It’s best to tailor these to the wording so that consistent definitions and other expressions are used. I appreciate this isn’t always practical particularly where market boilerplate clauses are being added. In this situation choose the one that best fits the wording.
Changing one clause by endorsement often has knock-on effects on others but this is frequently not addressed. Read the whole wording to see where else you may need to make a change.
Not being clear what an endorsement overrides. Where it is intended an endorsement overrides things in the wording without deleting them, add “Notwithstanding any provision to the contrary” language.
Often an endorsement has been absorbed into the wording (usually a good thing) with all the additional endorsement language still included (not so good).

7. Excesses, Retentions and Deductibles

These are often used interchangeably but they are not the same. Which one is intended? The most important difference is a deductible is part of the limit of liability, and commonly deducted from a payment made by the insurer, the others are not and operate as a “primary uninsured” layer which the insured must pay before the insurance attaches. I would generally say it’s OK to use “excess” and “retention” interchangeably but others may say differently.
Does one of these apply to each claim or each collection of related claims? The wording needs to get this right and also be consistent with the schedule. Fertile source of litigation over the years.

8. Limits and Sub-limits

Inconsistencies between the schedule and the wording are common. Make sure they are clear, and consistent with each other, on whether they are “any one claim” or “in the aggregate”.
Where different people/entities are covered for different things and separate limits apply, make clear what happens when more than one limit is impacted by a single event or multiple related events.

9. More Generally:

Try to avoid using any variable values in the wording – keep them all in the schedule so you don’t have to fiddle with the wording each time you do a deal. It also avoids inconsistent values between the schedule and the wording which is a fertile area for disputes.
Where two clauses may appear to overlap or contradict each other (which frequently happens) make sure that one expressly takes the other into account, so it is clear how they are meant to operate together or which overrides which.

10. Remember – in wordings Less is usually More! Keep verbiage to a minimum. This cuts down inconsistencies between clauses and makes the policy easier to read. We all want that, right?