Anne Freedman

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | August 3, 2015 • 5 min read
You Be the Judge

Florida Workers’ Comp Law Upheld

In 2010, Julio Cortes sued his employer Velda Farms after being injured while operating equipment. He alleged the company was negligent and should not be permitted to claim immunity under the Workers’ Compensation Law because the injury claim had been denied by Velda Farms and its insurer.

CombineThe Cortes lawsuit was amended in 2012 to argue the state’s workers’ comp law was unconstitutional, although the State of Florida was never added as an additional defendant to the lawsuit.

Several months later, Florida Workers’ Advocates (FWA) and the Workers’ Injury Law and Advocacy Group (WILG) intervened in the lawsuit. In 2013, Velda Farms voluntarily dismissed its defense of immunity — later being removed from the case — and sought to dismiss the claims.

A trial court concluded that WILG and FWA “lacked standing” to pursue claims of unconstitutionality.

Later, however, Elsa Padgett, who had been injured in 2012 while working for Miami-Dade County, sought and received permission to intervene in the case, seeking a judicial ruling on whether the state’s workers’ comp law was her “exclusive remedy.”

The state advised the court, upon its request, that it was not a party to the action, and stated the court lacked jurisdiction to rule the law unconstitutional. After the court struck the law down, the state appealed to the state’s Third District Court of Appeal, which reversed the decision.


On June 24, the appeals court ruled the constitutionality question became moot when Velda Farms left the proceedings, that the state was never a party to the lawsuit and that FWA and WILG had no standing to pursue the case “based exclusively on a predecessor plaintiff’s subsequently dismissed claim.”

Scorecard: Employers are immunized from lawsuits related to covered, work-related injuries.

Takeaway: The Florida Workers’ Compensation Law remains the exclusive remedy for injured workers.

Insurer Has No Duty to Defend

Global Fitness operated a regional chain of fitness centers, and contracted with data company Federal Recovery Acceptance Inc. (FRA) to process member accounts and transfer members’ monthly fees to Global.

08012015_legal_spotlight_workoutGlobal obtained credit card and other information from its members and uploaded the data to FRA’s encrypted website for FRA to manage the electronic billing. For security purposes, only FRA retained the billing data.

After Global entered into an asset purchase agreement (APA) with LA Fitness, it requested the return of member account data. It was agreed that FRA would retain members’ banking and credit card information until the LA Fitness deal was near closing.

But later, FRA refused to return the data. FRA issued several “vague demands for significant compensation” above and beyond the terms agreed to in its contract with Global, according to the legal documents. FRA also refused to transfer some member fees until the matter was resolved.

Global claimed FRA’s position was unjustified, and that the delay threatened its ability to comply with its obligations under the APA with LA Fitness, causing a decreased purchase price.

Global sued FRA for tortious interference, promissory estoppel, conversion, breach of contract, and breach of the implied covenant of good faith and fair dealing.
FRA, which had a cyber policy with Travelers, sought a defense under that policy, which included liability for any “error, omission or negligent act relating to the holding, transferring or storing of data.”

Travelers provided a defense under a reservation of rights, while seeking a judicial declaration on its duty to defend FRA.

The U.S. District Court for the District of Utah determined on May 11 that there was no duty to defend.

It held that Global’s complaint did not allege that FRA withheld the data as the result of an error, omission, or negligence. On the contrary, it ruled, “Global alleges that Defendants knowingly withheld this information and refused to turn it over until Global met certain demands.”

Scorecard: Travelers had no duty to defend Federal Recovery Acceptance Inc.

Takeaway: Although the insurer prevailed in this case, other jurisdictions have ruled that an error need not be negligent for coverage to be available.

Policy Did Not Cover Settlement Negotiations

In 2007, computer tapes containing personal information of current and former employees of International Business Machines (IBM) fell off an Executive Logistics Services LLC (ExLog) truck.

08012015_legal_spotlight_tapeExLog had been contracted to provide transportation services for Recall Total Information Management Inc., which had a contract with IBM to transport and store such tapes.

Although the information on the tapes, which were retrieved by an unknown individual, has never been used, IBM had more than $6 million in losses resulting from the event, including providing identity theft services to employees.
In “informal negotiations,” IBM sought reimbursement from Recall and ExLog.

Federal Insurance Co. had issued ExLog a commercial general liability policy, and Scottsdale Insurance Co. had issued ExLog an umbrella liability policy. Both policies named Recall as an additional insured.

Both insurers declined to participate in the negotiations or provide coverage to the companies, who then sued the insurers claiming breach of duty to defend as well as seeking coverage for claims made by a third party.


Both a trial court and appellate court ruled in favor of the insurers. On May 26, the Connecticut Supreme Court agreed with the lower courts, which had found that the loss of the computer tapes was not a “personal injury,” which was defined in the policies as electronic, oral, written or “other publication of material that … violates a person’s right of privacy” — because there was no publication of the information.

In addition, the court ruled there was no breach of duty to defend because the settlement negotiations did not involve a lawsuit or “other dispute resolution proceeding.”

Scorecard: The insurance companies did not need to provide more than $6 million in coverage for losses.

Takeaway: Informal settlement negotiations did not trigger the insurer’s duty to defend the policyholder.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Captives for BI

A Narrow Slice

Using captives for business interruption coverage is still rare but interest is growing.
By: | August 3, 2015 • 8 min read

Business interruption is one of the most complicated exposures that companies face. And it takes so many faces: Does it cover supply chain interruption? Is it due to political upheaval, or a cyber event?


When it’s part of a standard property policy, business interruption coverage requires a physical event, like a fire or earthquake, to trigger coverage. When business interruption coverage is placed in a captive, however, the terms and conditions can be specialized to each individual organization.

If an organization wants business interruption coverage without the need for it to be triggered by a physical event, or if it wants coverage to begin immediately instead of dealing with a waiting period, a captive allows the organization to do so.

Experts believe, though, that globalization and supply chain risks amidst a world in upheaval may increase attention to the potential benefits.

But that doesn’t mean that it’s a popular way to transfer the risk. BI coverage is only a narrow slice of the captive market at this point. Experts believe, though, that globalization and supply chain risks amidst a world in upheaval may increase attention to the potential benefits.

“We do see it, but it’s rare,” said Ellen Charnley, managing director, and global sales and marketing leader of Marsh’s captive solutions practice.

“That doesn’t necessarily mean it will always be the case, but it’s not common to date.”

Charnley said that of the more than 1,250 captives in a recent Marsh benchmarking report, the brokerage has “literally a handful of clients” that write supply chain or business interruption risk in their captive.

One company that does see the value, said Darren Caesar, senior executive vice president and chief commercial lines officer at HUB International, is a large telecom client.

The telecom, which has a large number of offsite facilities, uses the captive to insure up to the first million in BI coverage, as well as excess coverage. It took the step when underwriters were unreceptive to covering the exposure, he said.

“In my experience and my colleagues’, we’ve only seen that captive used for business income and business interruption loss,” said Caesar.

In most cases, he said, business interruption coverage is “either a super-high exposure or it’s very low, and therefore, it’s not really germane to a captive,” he said.

An Unpredictable World

The sticking point for many organizations is that business interruption is unpredictable, hard to calculate and difficult to price.


For multinational organizations, though, it’s an unpredictable world. Of the top 10 global risks cited by the World Economic Forum for 2015, three of the top four most likely risks were related to geopolitical instability: interstate conflict, failure of national governance, and state collapse or crisis. The other, ranked No. 2, was extreme weather events.

Protecting against political violence is not a traditional use of captives, but interest is growing, said David Anderson, senior vice president, director, global business development credit, and political risk, Zurich.

“I think multinational firms are clearly more worried about the world than in the past.” — David Anderson, senior vice president, director, global business development credit, and political risk, Zurich

“Few do it, but there are a lot more who want to talk about it,” he said, noting that events in Ukraine, North Africa, Latin America and the Middle East have sparked concern.

“I think multinational firms are clearly more worried about the world than in the past,” he said.

“Obtaining political risk coverage in places like Ukraine can be difficult. There is some capacity available for certain projects in high risk areas, but it can be challenging,” Anderson said.

“Using captives for these types of exposures and partnering with insurers on the broader portfolio, customers can efficiently achieve prudent risk management.”

Strategic Planning

A company’s risk transfer strategy, said Charnley, depends on how sensitive the organization’s balance sheet is.

“If the loss is easily absorbed, I don’t see the need to fund into a captive. If the exposure is significant, I do think there is value to funding this over time, to smooth the volatility over time.”

It also adds visibility for senior leadership of the risks that are retained by the organization, she said. A captive can also assist a corporation which has multiple business units by providing specific coverage to match each unit’s risk appetite.

One difficulty in planning for a captive, she said, is that companies really can’t use historic losses to determine this risk. The exposure is “too volatile.”

Captives should always be thought of as a long-term strategy, said Steven Bauman, senior vice president, head of capital services, Zurich global corporate North America.

Generally, he said, companies “have to plan strategically to grow into the risk. They should start slowly and step up the risk; take up more risk each year and build up. You wouldn’t want to expose your captive in a first year scenario to a fairly significant business interruption loss.”

“You wouldn’t want to expose your captive in a first year scenario to a fairly significant business interruption loss.” — Steven Bauman, senior vice president, head of capital services, Zurich global corporate North America.

Once the captive is making an underwriting profit and investment income, and has built up its capital, it can afford to take on more risk in their captives around different lines of business, he said.


He also suggested partnering with insurers or other risk-bearing entities to cover some of the risks, since they are low frequency/high severity exposures.

“It comes down to the potential volatility,” he said. “Doing it with a captive means finding capacity to share the risk.”

Jeffrey Kenneson, senior vice president, business development, R&Q QuestManagement Services Ltd., said his firm has a sponsored captive that covers business interruption losses, with some members “paying multiple millions of dollars” for the coverage.

The mostly U.S.-based captive members run the gamut from law firms, a motorcycle manufacturer and a movie studio to a pharmaceutical company, architectural firm and fitness center, among others.

Instead of general business interruption coverage in smaller captives, what he has seen is BI coverage that has “morphed into some other coverages that you see more frequently,” such as loss of key vendor or loss of key employee.

Regardless of coverage, however, there must be a legitimate insurance risk, as opposed to a general business risk, he said.

For example, if a key vendor is unable to do business with an insured due to a factory fire, that would be a covered risk. If the vendor simply decides to break ties with the insured, such a loss would not be considered insurable, he said.

For the largest P&C captives, he said, he has not seen a great deal of interest in using captives for business interruption. “That’s a very narrow topic,” Kenneson said.

Risk Management Benefits

One of the ways a captive can help organizations is through the focus on resiliency and risk management, said Hart Brown, vice president and practice leader, organizational resilience, HUB International.

Hart Brown, vice president,practice leader, organizational resilience, HUB International

Hart Brown, vice president,practice leader, organizational resilience, HUB International

Because coverage in captives can be tailored to an organization’s specific needs, it helps better control costs and offers more control over risks.

He noted that risk management conversations related to building in operational redundancy and financial resilience tend to take place more often when captives are involved.

“When a captive comes into play, the company can write policies very specific to what the company needs in that time of crisis. … Claims can be very straightforward. We can reduce a lot of those challenges about how to recoup some of those financial issues that are lost and continue to be lost,” Brown said.

“You can pretty much write whatever you want in it,” Marsh’s Charnley agreed.
“That’s the beauty of a captive.”

The only caveats are that the captive must gain approval of the domicile regulator and the IRS.

“I do anticipate growth in the next few years in this style of risk,” she said.

“Not business interruption on its own, but among the bucket of trade credit risk, cyber risk [and] ERM risk. … Larger organizations seem keen to retain more risk these days.”

The first step to considering whether a captive should be formed for BI coverage, or whether such coverage should be added to an existing captive, is to identify the exposure and determine whether it could be mitigated by other means, such as through contracts or better vendor management, said Caesar of HUB International.

Then, companies must quantify the cost of the risk transfer and determine whether it makes sense to fund all or part of the exposure through a captive.

That’s not an easy task because of the unpredictability, since you need “some level of statistical probability you can work with in managing your own capital,” Brown said.

He also noted that business interruption coverage does not have “a very high acceptance within the market,” even without the use of captives entering the conversation.

Why? “I think it’s how companies prioritize their risk. Some are not able to look at the risk to prioritize and address the financial impact,” he said.

“It’s a difficult conversation to have unless they can get an assessment done and get a real sense of the financial impacts and decide which risks to retain and which not to retain.


“Because we know that the coverage is complex for business interruption and business income,” Caesar said, “the captive can be a very beneficial mechanism to transfer that risk. It can be very broad versus what you would get in the marketplace.”

Still, with pricing so soft in the insurance marketplace, and more insurer flexibility on terms and conditions because of that, it may be cheaper and easier to purchase insurance on the open market instead of forming a captive, or adding the line to an existing captive.

“If you could obtain large limit coverage in the open market for a very low price,” Kenneson said, “it wouldn’t make sense to put this through your captive. If you own your own captive, you are putting the captive’s equity at risk, and if you can get large limits in the open market at a very low premium, why take the risk yourself?”

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Global Connections

Nonprofit global brokerage network has transitioned to a for-profit corporation.
By: | July 21, 2015 • 2 min read
abstract - world connect

Brokerslink, a global network of independent brokers and risk consulting firms, has transformed itself from a nonprofit association to a for-profit corporation.

José Manuel Dias da Fonseca, group chief executive, MDS, and CEO of Brokerslink

José Manuel Dias da Fonseca, group chief executive, MDS, and CEO of Brokerslink

The group was founded in 2004 by José Manuel Dias da Fonseca, group chief executive of MDS, a Portuguese brokerage that also has a big presence in Brazil and Angola. He currently serves as CEO of Brokerslink, which has its headquarters in Zurich.

The original business model was created so all of the broker members were able to protect already existing clients, Fonseca said. “We decided we should be more than that. We should be creating business, not just managing business.”

To further that aim, he said, required better financial alignment among Brokerslink members. Incorporating allows the group to have resources to finance a strong business development team, invest in reputation and branding awareness, and build the necessary infrastructure.

Brokerslink is in the process of offering shares to firms within the association, which are in more than 90 countries around the world and have written more than $20 billion in premiums and consulting services.


The full transformation into a corporation will be finalized when the organization completes its private stock offering, said Paul Bitner, the organization’s managing director, who is based in Houston.

Initial stockholders are MDS of Portugal, Crystal & Company of the U.S., Nova Risk Services Holdings of Hong Kong, Filhet-Allard of France, and CGNMB of London.

Previously, the organization was funded by member fees and sponsorship from insurers, but fees and sponsorships are limited, Fonseca said. Raising money through the stock offer will allow Brokerslink to finance its business expansion.

Bitner said that mergers and acquisitions within the industry create opportunity for brokers within Brokerslink “because there is less choice.”

“We feel that there is a niche in the market for clients that don’t want to work with the big brokers,” Bitner said.

The organization offers other advantages as well, he said. In addition to size, Brokerslink has in-country expertise because its brokers are native to that country. The group also does not need to worry about the short-term investor demands that sometimes plague publicly held brokerages.

Paul Bitner, managing director, Brokerslink

Paul Bitner, managing director, Brokerslink

“Another component is our different structure. We are structured in a way that is not U.S.-centric or London-centric,” Bitner said. “Our ideas are not coming from the traditional centers of insurance. They are coming from around the world.”

The organizational structure limits participation to one broker per country. In the U.S., that broker is Crystal & Company, whose executive vice president, Jamie Crystal, serves as chairman and an executive director of Brokerslink.

Bitner said the brokers associated with Brokerslink are selected carefully, using qualitative and quantitative measures, including references from insurance companies and client retention data.

“They need to be strong and well-respected in the local market,” he said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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