Risk & Insurance Chalkboard

Cyber Risk-The New Product Darling of the P/C World

Steven Pahl — Tue, 10 May 2011 14:23:28 -0600

Quickly emerging as the new-product darling of the Property and Casualty insurance industry is Cyber Liability insurance. Although the Sony PlayStation Network (PSN) incident is the most notable recent hack of customer data, the Privacy Rights Clearinghouse (PRC) catalogs 2,451 data breaches made public since 2005 exposing 598,410,625 customer or employee records to unauthorized users.

The Clearinghouse is particularly useful for making available not just hacking information but a taxonomy of breach types that can help organizations identify the exposures their organizations need to pay particular attention to.

Insurance response to this taxonomy is varied, with some breach types covered by traditional insurance, e.g. credit card fraud (CARD) or the disclosure of information by someone with legitimate access to the information (INSIDER) while others are the subject of a relatively new and rapidly evolving insurance coverage type often lumped under the rubric of "Cyber Risk". The traditional insurance responses are certainly evolving as well, witness the Hartford Insurance Company Employee Data Privacy Liability Endorsement which can be made part of at least their Private Choice Encore! policy.

Insurance products appear to fall into two major "buckets", Network Security and Privacy that can provide first-party and third-party coverage. Also, critical to any Cyber Risk policy is the provision of crisis management services and generous limits of liability available to respond to violations of privacy regulations to include notification and credit monitoring.A summary of state security breach laws can be found here.

Network Security concerns itself with liability to a third-party for the destruction, deletion or corruption of their data caused by the failure of an organizations network security to protect such third-party data. This concerns not just third-party data that an organization might have on it servers but also (and more prominently) the potential introduction of a virus or other malicious code in the exchange of data between two organizations through the simple commercial internet access each has to the others data.

Privacy Liability gets the most press since it deals with the liability to third parties as a result of the organization's failure to properly safeguard personally identifiable information or to safeguard information that is protected under a nondisclosure agreement. It is in Privacy Liability type instances where the crisis management benefit of any policy comes into play. No matter how experienced an organizations in-house public relations staff is, they may never have had to deal with the media crush that attends any well-known organizations loss of customer or employee personal information. Crisis management provides not only money but also services for the purposes of, ultimately, safeguarding the reputation of the organization through public relations activities.

Mold Exclusions -- Is It A Growing Problem?

Robert Trompeter — Wed, 30 Mar 2011 14:26:57 -0600

The concern for the property damage and third party liability associated with mold or fungus has been the focus of new insurance policy exclusions in recent years. Damage related to Exterior Insulation and Finish Systems (EIFS) i.e. synthetic stucco is a standard exclusion in all liability policies today.The deterioration of this building product has resulted in structural damage from moisture infiltration and growth of mold. In addition to this restriction most liability policies will also have a separate mold and fungus exclusion.

First party property policies are all being issued with similar mold and fungus exclusions. It would appear that everywhere you turn the insurance industry is finding another way to restrict coverage for this loss exposure.

We often find the first generation of these type of "absolute exclusions" take away things that were never intended. Consider when the pollution exclusion in the general liability policy was introduced in the 1980's. The original version excluded injury as result of smoke from a hostile fire. A tenant in an apartment fire dies as result of smoke inhalation. The apartment owner has no insurance for the wrongful death lawsuit. This is a far cry from the underground tank leaking for several years, one of the primary causes for this exclusion. Now there is an exception for hostile fire, smoke, as well as the failure of heating, ventilating and cooling equipment.

We are finding that the same is true with the issue of mold. Let's assume you are a restaurant and patrons get ill alleging that food you served was spoiled. If you have the commonly used mold exclusion you will have no coverage for this type of an incident. Liability for the customer's illness is not covered by the general liability policy since it was the result of bacteria. There is a version of this exclusion put out by ISO form CG 21 67 which has an exception for products that contain fungi or bacteria intended for bodily consumption. Like the good customer discount you have to ask for it and it is available.

Now on to property. Let's assume your building sustains a fire and in the process of extinguishing it water infiltrates into the walls that you are unaware of at the time. You then learn weeks later that mold has grown in the walls and need to be remediated. A policy with the typical biological agents exclusion would provide no coverage for cleanup with my example. It is only logical if an insurer covers a loss due to an insured peril they should also cover all the resulting damage. Some property insurers are willing to extend coverage for mold damage that results from a covered peril often with a sublimit. Some coverage for mold is better than none at all.

Now one would think that if you purchased a separate pollution liability policy you would automatically have coverage for mold damage. This is not the case since most insurers attach a mold exclusion in their standard policy. Usually, a mold coverage extension can be negotiated with the insurer which will usually have a separate sublimit and deductible. Here again some coverage is better than none.

The message here is watch for mold limitations in your insurance policies. There are circumstances where coverage carve backs are available.

Not-for-Profit D&O Conduct Exclusions

Steven Pahl — Mon, 28 Mar 2011 10:58:38 -0600

In Directors and Officers insurance it is well accepted that the “final adjudication” standard for so-called conduct exclusions trumps the “in fact” standard every time. Given a recent court decision, that dogma may no longer carry the same weight but it is still, with some modification, the preferred policy language.

Conduct exclusions are typically of two types, criminal or fraudulent acts and personal profit, remuneration or advantage (and not always confined to financial advantage) to which the Insured is not entitled.

Most standard policies make an exception to these exclusions to the extent that such conduct is determined “in fact” to have occurred or that a “final adjudication” has determined that such conduct has taken place. Other policies will split the standard, applying “in fact” to personal profit and “final adjudication” to criminal acts. Still other policies (constructed in multiple sections covering Directors and Officers, Employment Practices and Fiduciary Liability) apply different standards to different coverage parts. It is important then to determine what’s what and where.

Dispensing with the quotations around these terms, the in fact standard was generally assumed to mean that the insurance company would evaluate the available evidence and make the determination of whether the conduct alleged in fact had taken place. If so, and at that point, all coverage (primarily but not exclusively defense) would be withdrawn. This made sense to the insurance company as they were then able to control the provision of coverage without relying on the more costly and time consuming process of a court's final adjudication on the merits of the underlying case.

In Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, Case No. 10-20069, decided on March 15, 2010, the Fifth Circuit declared that “absent language unambiguously pointing to the (insurance company) as the decision-maker, the policy language“ determined….”in fact” necessitates a “judicial act” before the insurance company can rely on the exclusion.

Although the case cited involved money-laundering allegations and either a public or private company D&O policy form, the same conduct exclusion language appears in not-for-profit D&O forms as well.

Of note is the fact that the Pendergest-Holt court did not conclude that this judicial determination would occur in the underlying (non coverage) action but in a separate contemporaneous coverage litigation.

All of that said, the policy language recommendation for conduct exclusions remains that the “in fact” standard is less useful (and more legally contentious) than the “final adjudication” standard. We would now add, as others have, that the final adjudication take place in the underlying action and that the adjudication be not merely final but final and non-appealable. This language should modify the conduct exclusions in separate D&O, EPL and Fiduciary polices or in all coverage parts of a management liability policy.

The Not-for-Profit D&O Hammer Clause

Steven Pahl — Thu, 24 Mar 2011 10:58:13 -0600

A February 14, 2011 article in Business Insurance discussed favorable changes in the market for public company Directors and Officers (“D&O”) liability insurance. What is even more pronounced, however, though less chronicled by main stream insurance publications, is availability of significant coverage enhancements for purchasers of Not-for-Profit (“NFP”) D&O insurance.

Because of the sheer number of such coverage enhancements, this is the first in a series of blog posts that will discuss what I consider to be the enhancements most useful to the typical buyer of NFP D&O. Along the way we will look at not only new coverages but also improvements to both existing coverages and other policy provisions. In the latter category, consider the so-called “hammer clause”.

Found typically in a Defense Costs, Settlements, Judgments (AIG) or Defense of Claims and Settlements (Starr) section of the policy, the hammer clause encourages the insured to agree to a settlement proposed by the insurer and acceptable to the claimant. In policy forms still being used, should the insured not agree to the settlement , the insured becomes responsible for 100% of all settlement amounts (often to include incremental defense costs) excess of the proposed settlement rejected by the insured.

Insurers, when challenged, lighten the hammer by agreeing to a 60/40 split; the insured assuming responsibility for only 40% of the amount excess of the proposed and rejected settlement. When still challenged, the hammer becomes just a bit lighter at 70/30 and, most prevalently, with 80/20 splits. All of these potential changes are, of course, subject to what an insurer is filed to offer in any jurisdiction.

Sometime around 18 months ago or so, insurers began removing the hammer clause altogether, although in policies with separate coverage parts for Employment Practices Liability (“EPL”) and Fiduciary Liability (“FL”), diligence is encouraged to ensure that the hammer does not apply to any coverage parts and not just the D&O.

For the buyer of Not-for-Profit D&O/EPL/FL policies, first determine if the current policy contains a hammer clause of some weight (chances are it does) and if it does, call your agent or broker and ask why.

Avoiding Chaos When Bidding Insurance

Robert Trompeter — Wed, 15 Dec 2010 11:10:21 -0600

There is a commonly held misconception that multiple insurance brokers can secure property and casualty insurance from the same insurance company. While this may be common practice in the life and health world of insurance, not so with property and casualty.

Property and casualty insurance companies will only recognize the insurance broker who first provides it the submission; the door for any subsequent broker submissions is summarily closed. It follows then that the fastest and first to enter the marketplace has the best shot at writing the business by blocking markets and restricting competitors. This is particularly true if the first out of the box is the incumbent broker who floods the marketplace with submissions. Right about now this is sounding more like the 1889 Oklahoma Land Rush.

There is a way to establish some sanity in this process so you get the best results from the competitive process. First off, more is not always better. If you allow too many brokers to compete the "marketplace pie" will be cut up into smaller pieces, thereby limiting the negotiating abilities of each broker. This is because there may be only a limited number of insurers who are truly interested in that class or type of business. The insured is best served by limiting the number of brokers to no more than three which will give each a reasonable selection of companies to choose from.

The next step is very important to avoid a marketplace “land rush”. Ask the chosen 2 or 3 brokers to submit a single list of desired markets they would like to approach by line of coverage and in order of preference listing their most preferred market first. You then assign in order of preference, resolving conflicts by who has the same insurer higher on their list. For instance, if Broker A has a very strong relationship with Travelers Insurance Co. and believes they will provide the best quote for your type of business.....it better be on the top or his or her list. The competing brokers will have no room to complain if they did not give Travelers the same relative importance. This process capitalizes on the strongest broker/company relationships and maintains that only one broker is approaching a given insurer.

It is important that this process start 90 days prior to the expiration of the insurance coverages being competed for. You should make certain that each broker is working with the same exposure information, such as property values, payroll, sales and list of automobile units (to name a few). You next require that all proposals be submitted no later than 2 weeks prior to expiration. This gives you adequate time to evaluate the quotes and request modifications where needed. Oftentimes, a broker will respond that the underwriters will not furnish the quote by your deadline of 2 weeks before expiration. In these cases you can tell the broker his quote will not be considered, which provides a strong incentive to meet the deadline. You can always consider quotes after the due date if it is to your advantage.

While the handling of insurance is no picnic for any business today, instituting the above process will make it less painful and will most certainly improve the results of any bid process.

Lost in (Cyber)Space or Losses from Cyberspace

Robert Trompeter — Tue, 28 Sep 2010 08:29:44 -0600

I am sure in the 1960's TV show Lost in Space, Will Robinson never envisioned that the Galaxy would suffer a greater threat from cyber hackers than asteroids. Most businesses today are not insured for the criminal risk of unauthorized access to their network systems. These uninvited guests no longer just cause a minor disruption or annoyance. According to the Ponemon Institute study of 2009, the average cost of a data breach globally is over $3 million. Some of the costs incurred are system damage, recovery costs and lost business due to business disruption, as well as negative publicity that results. The focus in this article is the necessary costs associated with notification and credit monitoring for those affected. There are insurance products in the marketplace designed to address cyber liability, but until recently there has been minimal interest.

What has been learned in recent years is that theft and fraudulent use of personal information is not always the major cost of a breach in security. If a corporate database is infiltrated by an outsider, there is the potential infection of personal data that is stored, financial and credit card information of customers and social security numbers of employees. When this occurs, there is a need for individual notification to anyone who may be exposed to the breach.There are over 40 states now that have legislated notification requirements for security breaches and more stringent federal guidelines are expected in the future.

According to the Ponemon study, the actual cost for individual notification and credit monitoring is in excess of $200. On an individual basis, this may not appear to be that catastrophic. However, consider the need to notify 10,000 customers of possible compromised access to credit/debit cards coupled with post-breach credit monitoring. We are now talking about costs in excess of $2 million. This is just the “damage control” expense side of the breach and does not begin to address any third party litigation that may follow.

These remediation costs, along with any regulatory fines or penalties, have been an area where most insurers offer minimal limits of coverage. Today, more insurers realize that these costs are the major focus and need for this insurance. Darwin Insurance and Allied World Insurance now extend this coverage up to full policy limits, which also includes regulatory fines or penalties. It is clear this coverage continues to evolve in line with legislative changes and a better understanding of the exposure to loss.

It would be wise for any business responsible for personal information -- credit information, social security numbers or medical data -- to evaluate the need for this insurance. In the words of the Robot, “Danger, danger Will Robinson!”. It is best to be aware of the dangers associated with cyber business risks even if you don’t buy the insurance.

When to Increase Deductibles?

Robert Trompeter — Wed, 07 Jul 2010 16:38:01 -0600

Continuing in the theme of Steve's recent Blog on deductibles prompts me to think "When should you increase them?" This is a question most insurance buyers will ask their insurance broker at some point and the answer should always be......"it depends".

You cannot begin to evaluate a deductible change (either up or down) without understanding the attendant cost/benefit relationship. Obviously, you would expect to get a reduction in premium if you raise the deductible, but with this benefit will come the potential cost of an increase in uninsured losses.

Let's consider an example. A large shopping center currently has a $1,000 deductible under its Commercial General Liability policy, due to the frequency of slip and fall claims that generate medical costs. With the ever-increasing cost of medical care, the shopping center is finding that many of these claims are creeping up to the level of $3,000 to $5,000.

The insurer is faced with the need to raise the premium for the coming year by 15% because they believe these claims will continue to escalate. The policyholder considers this an overreaction and does not agree claim costs will continue to rise. The insurance broker is suggesting that the deductible be raised to $10,000 for each loss occurrence or accident and believes that this will yield a measurable reduction in premium. Keep in mind that when discussing deductibles you will always want a per occurrence rather than a per claim deductible. If two people are injured in the same event you don't want to pay a double deductible.

Both the owner and the broker have analyzed the historical claims and project the additional self- insured claims would be approximately $20,000. This assumes 8 claims $1,000 and under along with 2 claims that exceed $1,000. The insurer considers this an aggressive approach by the owner and is willing to reduce next year premium by $30,000. This means that if the broker and owner are right in their loss estimates the owner will benefit by $10,000.

Next, if we assume the loss estimates are wrong in one of next three years there will be a cushion of $30,000 over this period to pay for the unanticipated large claim or an increase in frequency. It is not expected there will be a frequency of severe claims, so the owner will not be faced with paying multiple $10,000 claims in a given year. In this example the owner is justified in taking on the additional risk based upon the projected savings.

This same process can be used when evaluating change on programs like Workers Compensation that typically have larger deductibles. The difficulty here is that moving from a $100,000 to a $250,000 deductible will not often provide the needed premium savings to justify the additional risk assumed. Usually, we see the impetus for change in this area to be forced by the insurer due to loss penetration in the insured layer. Logically, there then should be some reasonable premium reduction since some of the expected losses will fall back into the self-insured layer. Retentions at this level put greater responsibility on the insured to prevent and control claims, because at a $250,000 deductible most if not all claims will be self paid. Unfortunately, the premium negotiations here are most productive after several years of additional experience where all claims are retained under the deductible. Here, the insurer will be forced to reduce the future premiums to reflect this favorable experience.

Finally, another important factor when considering deductibles or retention levels is management's attitude towards risk. Some businesses have an aggressive posture, while others are conservative and risk averse as a corporate personality. A business that is conservative by nature will be less likely to look at higher retentions, even when analytics supports the decision.

Whenever considering the cost benefit of changing retentions it is best to follow the tried and true insurance maxim of "Don't Risk a Lot for a Little".

Deductibles Are Not Created Equal

Steve Coombs — Tue, 27 Apr 2010 14:02:18 -0600

The term "deductible" in insurance circles is too often treated generically. It is widely considered to be the amount that an adjusted claim is reduced by to arrive at a net insurance recovery. In reality, deductibles can and do operate in many different ways.

Let's consider a Commercial General Liability ("CGL") policy. There are several different ways of structuring a deductible arrangement. The stated deductible may apply per "occurrence" or per "claim"; to damages only; to damages including allocated expenses; to damages plus allocated expenses; to damages plus a pro-rated share of "allocated expenses"; to bodily injury ("BI") alone; to property damage ("PD") alone; to BI and PD combined; and well, the list goes on and on.

An example may help illustrate the differences of how deductibles are applied. Walsh Industries manufactures fans for residential use and has a CGL policy with Stucker Insurance Co. One of its fans malfunctions and causes a fire at a residence. Two guests at the home suffer bodily injuries and the home is completely destroyed. Walsh Industries settles the first bodily injury claim at $100,000 and incurs $60,000 of legal expenses. It settles the remaining bodily injury claim at $250,000 and has $80,000 of legal expenses. It settles the home owner's claim at $500,000 and legal expenses amount to $40,000. Walsh Industries has a $50,000 deductible under its CGL policy. But the devil is in the details. Here is how it comes out for the policyholder:

If the deductible applies:	Then the deductible is:
Per claim for damages and allocated expenses combined	$ 150,000
Per claim for damages plus all allocated expenses	$ 330,000
Per claim for damages plus pro-rated allocated expenses	$ 181,765
Per occurrence for damages and allocated expenses combined	$ 50,000
Per occurrence for damages plus all allocated expenses	$ 230,000
Per occurrence for damages plus pro-rated allocated expenses	$ 60,588

Obviously there are other combinations if the deductibles apply to BI and PD claims separately or combined. However, the point is that the ultimate deductible amount varies considerably depending on how the deductible amount is applied.

It should also be kept in mind that insurers use differing wordings in deductible clauses and endorsements. So the next time an insurer or broker/agent says the deductible is "X", say "tell me more about that....."

Kidnap and Ransom: Evacuation and Relocation

Steven Pahl — Mon, 08 Feb 2010 11:32:21 -0600

Kidnap and Ransom (K&R) insurance policies typically indemnify the policyholder for the costs involved in the evacuation or relocation of insured persons in the event of:

The insured person being declared "persona non grata" by the recognized government of the host country;
The wholesale seizure, confiscation or expropriation of property of the named insured;
Political or military events involving a host country which causes appropriate authority to issue an advisory.

For non-political or medical evacuation, most Travel Accident and Foreign Workers' Compensation policies would respond.

But what happens when an insured person simply goes missing? Or when when one or more insured persons sense a threat to their personal safety although no specific threats (or advisories) have been made against such persons? In our experience, few K&R policies will respond.

Recently, though, we came across two K&R endorsements that offer insureds the prospect of at least conditional coverage in these instances. We also found an endorsement that fits between kidnapping and hijacking creating a new coverage, "Express Kidnapping".

We offer these not as ready-made endorsements but rather to provide endorsement language that a broker could take to a K&R underwriter in an effort to get such language adapted to that underwriter's K&R form.

Disappearance Expense Extension Endorsement pays for the cost of investigation and "other relevant expenses" resulting from the disappearance of an insured person, missing for at least 48 hours, with such expenses not to exceed 90 days. Here, $100,000 of such insurance limits are offered. Page 2 of the endorsement is a signature page and is omitted.
Evacuation or Repatriation Costs Endorsement appears to be a standard endorsement of this type. However, the definition of "Occurrence" holds the key to an unusual coverage. On the top of Page 2, item 4. "occurrence" is defined to include a request for evacuation based upon the contingencies cited at the top of this post, but without the issuance of an advisory. In other words, if an insured person feels exposed to any of these three contingencies and requests evacuation, such request can be granted by the insurer's K&R consultant. Here, the limits of insurance are modest, but at least the door is now open and limits negotiations can take place between the insured and the insurer.
Express Kidnap Extension Endorsement is a variation on both hijacking and kidnapping. The typical hijacking definition is triggered by a holding of an insured person under duress for a period of at least 6 hours while traveling on any aircraft, motor vehicle or waterborne vessel.

Kidnapping is defined to mean the seizing, detaining or carrying away by force or fraud for the purpose of demanding ransom monies.

This endorsement creates a new coverage term, Express Kidnapping, defined as the hijack of an insured person for a period of less than 4 hours while traveling in a motor vehicle. Page 2 of the endorsement is a signature page and it is omitted.

Extra Expense in Business Interruption -- Who Needs It?

Robert Trompeter — Fri, 15 Jan 2010 07:40:44 -0600

Most business interruption policy forms will include extra expense coverage to the degree it reduces the business interruption loss. One might think that with this built in coverage there is no need for additional extra expense coverage. Not so. Let's assume a retailer has a fire and incurs cost to temporarily lease another location and for additional advertising expenses. When it comes time to settle the business interruption loss with the insurance adjustor (read forensic accountant here), he will look at subsequent sales when the retailer is back in business. If sales increased by 10% due to an improved economy, the case will be made that the retailer made up the lost sales thereby disallowing the extra expense incurred because it did not reduce the loss of income.

Chip Merlin makes the point that the adjustment of these losses needs to be much more prompt. Many business interruption claims are not settled until well after the policyholder has returned to business. The accountants drag this out, often to be sure the lost income or sales was not made up in subsequent months. One measure to circumvent this delay is to purchase pure extra expense coverage that will apply whether or not the cost incurred reduces the business interruption loss. These expenses should be reimbursed by the insurer up front as they are incurred, because there is no need to validate that the costs help reduce the BI loss.

How much coverage to buy? Always a tough question. We have developed a user friendly worksheet to assist in determining the types of expenses that could be incurred after a loss. Since this is always a calculated estimate it is best to be conservative in establishing the limit. It is inexpensive insurance and it is always better to have too much rather than not enough. In recent years a new term, "demand surge" has evolved out of major catastrophes such as tornadoes, hurricanes and earthquakes. This relates to the increased cost of materials and supplies when a catastrophic event spikes the demand. Generators, temporary phone lines and computer equipment may cost well in excess of your estimate in these situations. I guess this is why it is best to buy a snow blower in July rather than January.

The moral of the story is be sure you have more than adequate Extra Expense coverage so you can get back in business in the most expeditious manner. The longer the delay the greater the chance that resumption will never occur.

Named Insureds: What's In a Name?

Steve Coombs — Tue, 12 Jan 2010 10:08:06 -0600

Nothing will result in a quicker denial of coverage by an insurance company than when an entity being sued is not listed as a named insured on a particular insurance policy. This is an area which often receives little attention by insurance agents and brokers (and their clients).

But why is this? The answers are numerous, but a common denominator is that whomever places the insurance either does not understand (a) how the "insured" provisions in insurance policies operate (there are differences) and/or (b) the organizational structure of their client. Organizations are often comprised of multiple entities that take different forms/structures and operate in multiple states or countries. For instance, an organization that owns a hotel may have a separate entity to own the hotel, another to hold the liquor license, another to hold the management contract, another to act as the employer, and well, you get the picture.

The lack of attention and understanding is illustrated very well by David White in a posting on his Law and Insurance Blog entitled "Policy Covering 'Any Subsidiary Corporation' Does Not Cover LLC's." The case discussed involves a utility company suing its insurer after the insurer denied coverage for a claim arising from employee theft. The theft was related to two LLC's acquired by the utility. The insurance policy in question covered the utility and "any subsidiary corporation now existing or hereafter created or acquired." The issue boiled down to whether or not LLC's are "subsidiaries". The court concluded that LLC's are not "subsidiaries" and therefore coverage did not apply. The court's reasoning focused on the fact that LLC's are not corporations (read the case (pdf) for the complete particulars and reasoning).

Situations where an entity is not insured under a policy because there was a failure to properly list it as an insured are entirely avoidable. Where possible an "omnibus named insured" provision or endorsement should be in incorporated into insurance policies. Such modifications generally do not result in any additional premium. Underwriters typically will agree to provide omnibus wording once they understand the structure of the organization. Ask and you shall receive.

An example of such omnibus wording is:

“[Insert parent entity name] and any divisions, subsidiaries, affiliated or associated companies, sole proprietorships, partnerships, corporations, trusts or joint ventures, previously, now or hereafter created, and any other entity which is owned, controlled or managed by any of the foregoing.”

Keep in mind that any such provision can and should be customized. The key is to craft wording which properly encompasses the various entities comprising an organization. As with many things having to do with insurance contracts, the devil is in the details.

Avoiding the Coinsurance Penalty in Property Insurance

Steve Coombs — Wed, 06 Jan 2010 17:19:22 -0600

Parks Chastain did a nice job in describing coinsurance penalties in his January 6, 2010, blog entry. This post is entitled "The Co-Insurance Penalty - Or Insufficient Insurance To Value - And Its Impact On An Insured." This appears in the Tennessee Insurance Litigation Blog. Mr. Chastain correctly describes the "insurance to value" concept and the coinsurance penalty calculation, which is imposed upon an insured in the event property is undervalued for insurance purposes.

I would like to to take this a step further by stating that coinsurance penalties, wherever they appear in commercial property, builders risk or other inland marine policies, should be avoided altogether. These provisions may apply to physical damage to buildings, contents and other property, as well as time element coverages such as loss of revenue.

While some policies do not have a coinsurance provision, the vast majority do. The way to accomplish removal of a coinsurance provision is to request and obtain an Agreed Value policy coverage extension or endorsement from the insurer. This is also sometimes referred to as an Agreed Amount endorsement. In either case the extension or endorsement will suspend or waive the coinsurance requirements altogether.

Insurance underwriters will not necessarily issue a coverage extension or endorsement automatically. The underwriter will often review internal or external property valuation guidelines to gain assurance that the insured amounts reflect the valuation method(s) set forth in the insurance policy. In some cases the underwriter may ask additional questions of the insured. Once satisfied the underwriter will proceed to issue the extension or endorsement. In some cases there is a modest additional charge made for the added coverage. In other cases it is issued at no additional cost.

Conclusions: Coinsurance provisions do not help insureds. On the contrary, these clauses are designed to financially punish insureds. The potential penalty can commonly be removed by following a few simple steps.

Litigation Gone Wild: Even Flipper is Disgusted

Steve Coombs — Tue, 05 Jan 2010 06:55:51 -0600

The U.S. Chamber Institute for Legal Reform announced the results of its1st Annual Most Ridiculous Lawsuit of the Year Poll. Nominees were drawn from FacesofLawsuitAbuse.org, a public awareness website that shows how frivolous lawsuits affect small businesses and average families.

The Top Five Most Ridiculous Lawsuits of 2009 are:

Neighbor sues woman for smoking in her own home;
Double-murderer sues to claim his victims’ classic Chevy pickup;
Holocaust denier sues Auschwitz survivor, alleging memoir contains “fantastical tales;”
Tourist sues hotel, claiming swimming pool got daughter pregnant;
Illegal immigrants sue rancher who stopped them on his property at gunpoint and turned them over to the Border Patrol.

But my favorite, which was the September 2009 finalist, did not make the cut. The case involves a woman who fell and was injured at the dolphin show at the Brookfield Zoo, a world class zoo that I have visited many times. The plaintiff alleges that the Zoo “recklessly and willfully trained and encouraged the dolphins to throw water at the spectators in the stands making the floor wet and slippery", "failed to provide warnings of the slippery floor" and “failed to provide mats … when the staff knew the floor would get wet and slippery,” among other negligent acts.

Everyone who attends a dolphin show knows there is going to be excitement, thrills, and yes, lots of water being splashed about. That is part of the experience. While being injured is unfortunate, to not take personal responsibility and then file suit against the Zoo is ridiculous. I wonder what Flipper would say. Probably that he was just doing his job.

The moral is that even with good risk management practices frivolous suits are part of life for American businesses. Unfortunately we all end up paying the added price.

Minimum Premiums: Surprises for Insureds

Steve Coombs — Tue, 22 Dec 2009 16:41:45 -0600

Insurance premiums are often based on established rates applied to an exposure basis, such as payroll for workers compensation or sales for commercial general liability insurance. The insurance premiums may be adjusted after policy expiration to reflect the actual exposure during the policy term.

For instance, a contractor has a commercial general liability policy for the period 12-1-08/09. The premium is $159,500, which is based on estimated sales of $110,000,000 and a $1.45 rate applied to each $1,000 of sales. This is reflected in the policy via a Premium Endorsement (PDF).

As it turns out, the contractor’s sales plummeted in 2009 due to the general economic downturn and a lack of construction work. The actual sales amounted to $30,000,000. The contractor thinks the adjusted premium will be $43,500 ($1.45 rate applied to $30,000,000 sales).

However, this is where the surprise comes in. The premium endorsement contains a “Minimum Premium” provision. This endorsement specifies that regardless of the actual sales, the minimum premium will not be less than 90% of $159,500 or $143,910. In essence, the contractor will be penalized $100,410 (the difference between the minimum premium and the adjusted premium, had no minimum premium provision applied).

In this case the contractor and the insurer have a long-term relationship. The contractor appealed to the insurer for some relief on the minimum premium penalty. While it was not obligated to do so, the insurer agreed to reduce the penalty by half.

The moral of the story for insurance buyers is to understand the ramifications of minimum premiums and to instruct their agent/broker to reduce minimum premiums where possible. Also, insurance buyers should be aware that some states, such as New York (PDF), have rules regarding the applicability of minimum premiums.

The Need for Separate Pollution Insurance

Randy DeLopst — Thu, 12 Nov 2009 14:08:52 -0600

Today's property and liability insurance policies provide very limited coverage for claims arising out of pollution. All organizations should conduct an analysis of the potential pollution/contamination loss exposures within their operations. They should review how their present insurance program provides coverage for claims arising out of pollution including mold, fungus and bacteria contamination.

Pollution claims not covered by your current insurance may arise from the following areas:

Use of any chemicals including solvents, degreasers, paints, cleaning products, fuels, pesticides, herbicides, etc. One of our clients recently had an incident where workmen mixed the wrong chemicals together creating dangerous fumes and the part of the building where they were working had to be evacuated for several weeks.
Waste disposal practices.
Mold, fungus and bacteria contamination.
Malfunction of heating or ventilation equipment, e.g. carbon monoxide poisoning.
Fire to old electrical equipment including transformers containing PCB's. One of our clients had this happen and PCB's were released into the ground. The clean up cost was over $300,000.
On site pollution clean up costs when there is a serious property loss, e.g. asbestos removal and disposal after a fire.
Transportation of hazardous materials within your operations.
Leakage of underground or above ground storage tanks.
Contamination of your products.

Consider obtaining a quotation for separate pollution insurance. Once a separate pollution insurance quotation has been obtained, you can evaluate the benefits of purchasing this coverage versus self insuring the potential pollution/contamination exposures not covered by your present property and liability insurance policies.

But I Caught Swine Flu at Work?

Robert Trompeter — Wed, 11 Nov 2009 15:34:51 -0600

Your shop superintendent calls in sick today and says he has the H1N1 flu virus. He indicates he caught it from the shop machinist or others who have been out several days with the virus, that he should be getting work comp benefits. Sounds logical, so what do you tell him?

According to Chris Boggs in his LexisNexis post, Is H1N1 Compensable Under Workers Compensation?, injury must arise out of an illness or disease that is peculiar to the work. Hearing loss as a result of years of working on a printing press or respiratory complications due to industrial chemical exposure are clearly occupational.

Since H1N1 can easily be contracted in a grocery store or simply at home it does not qualify as a disease that has exposure that is unique to a work environment. Now at this point, you might think this is contradictory to some work related accident injuries. You can injure your back while lifting a box as a warehouse employee as easily as you can taking out the garbage at home. Since it is not an injury that is unique to the workplace is it not covered by workers compensation?

The distinction here is that the injury occurred at a specific time and place (while working). It is normally the result of a specific event that can be attributed to the injury, lifting the box. In this example it may be difficult to disprove the injury is work related since the manifestation of the injury may not be immediate. All too often employers are forced to pay for soft tissue injuries that have no work related origin. How do you prove the back strain occurred lifting the garbage can on the weekend vs. last Friday in the warehouse?

This type of uncertainty as to the origin and the cause is one of the reasons industrial commissions and courts tread very cautiously in determining whether a disease is occupational. Over the years certain illnesses, such as Asbestosis, have been directly linked to the industries that use asbestos in their manufacturing process. The CDC records a doubling of the death rate from this over the past 20 years. Other areas, such as exposure to chemical fumes or dust that can exacerbate existing respiratory ailments, may not be as clear.

Healthcare workers can be exposed to communicable diseases through contact with a patient's blood. In most jurisdictions this would be considered occupational disease. An employee who alleges that a coworker who is HIV positive infected him where there is no evidence of work related blood contact would not be covered.

The arguments regarding the compensability of certain illnesses or diseases will continue on for years to come. Litigation often results and this can change the landscape as to what is covered as a work related illness. For the time being it is best to be cautious when informing employees as to what may be covered under workers compensation. If there is doubt submit it to the insurance company and let them decide.

As for the H1N1, stock up on hand sanitizers.

The Hidden Dangers of Uninsured Motorist Insurance

Robert Trompeter — Mon, 02 Nov 2009 13:46:47 -0600

Most states today require insurers to offer uninsured motorists insurance and documentation if rejected. As noted by Insurance.com:

Uninsured or underinsured motorist coverage can pay for injuries to you and your passengers, and in some locations damage to your property, when there is an accident and the other driver is both legally responsible for the accident and considered "uninsured" or "underinsured."

Mose states that prohibit outright rejection require minimum limits, typically around $25,000. For larger businesses limits are often set at policy limits of $1,000,000 with a minimal additional premium charge. The original intent of this insurance was to provide some financial remedy for the injured driver/passengers when the responsible party is uninsured.

There is a common misunderstanding as to who has access to this insurance. I have a client that several years back had U/M insurance at policy limits, simply because the insurer saw it as a "throw in" for an insured that had a large deductible. At the time the client had an employee involved in an automobile accident with another driver who was uninsured. The thinking at the time was that the employee would be covered by workers compensation for injuries suffered, since it was work related. The client thought the work comp benefits would be the sole remedy for the injured employee.

Since the other driver had no insurance the injured employee had the ablilty to make an uninsured motorists claim against his employer's automobile policy. At the time we thought "How can the employee access the employer's auto insurance without their permission"? The scope of uninsured motorists coverage extends "Insured" status to anyone occupying a covered auto, including an employee, as noted in the sample form (PDF).

Now one might think that if an employee recovered damages for bodily injury under uninsured motorists, it would set off or reduce the payments made by the workers compensation insurer. Often the damages that are claimed under uninsured motorists pertain to such things as pain and suffering that are not compensable under workers compensation. This allows the injured employee to "double dip" for sustained injuries. In my situation it was to the tune of several hundred thousand dollars.

What to do to prevent this? Always reject higher limits where offered. Accept only the minimum statutory limits required and reject the coverage outright in those states that permit it. If you don't have the coverage or have only minimal limits, it will prevent or limit this double recovery. It is essential to maintain the signed rejection document (PDF) to validate your intent.

The only exception to this rule might be where the business owners seek to include this broadened coverage feature for personal protection. In these situations the specific vehicles need to be identified as the ones where full uninsured motorist coverage is desired.