Insurers Must Pay $58 Million
On sept. 12, 2008, a power plant unit owned by TransCanada Energy USA’s subsidiary TC Ravenswood in New York was taken out of service due to excessive vibrations. On Sept. 16, a crack in the unit’s rotor was discovered. The unit was out of action until May 18, 2009.
TransCanada filed a claim for $7 million in property damage and $50.8 million for loss of gross earnings from Factory Mutual Insurance Co., National Union Fire Insurance Co., ACE INA Insurance and Arch Insurance Co.
The insurers denied the claim.
In legal proceedings, the insurers argued the crack that damaged the unit formed before the policy went into effect on Aug. 26, 2008, and that the plant’s loss of sales were not covered because they were incurred after the period of liability ended.
National Union later settled.
TransCanada countered that the all risks policy covered the breakdown because the unit was operating properly when the policy began.
The New York Supreme Court ruled on March 2 that “it is irrelevant here whether the crack existed or could have been discovered before the policy commenced.” It also ruled for TransCanada on the loss of capacity revenue.
The losses, the court ruled, “were neither speculative nor incapable of being linked directly to the period of liability at issue.” &
Scorecard: The insurance companies must pay TransCanada $58 million to cover its property damage and business interruption costs.
Takeaway: It was immaterial when the cause of the damage began as long as the property damage was sustained during the policy period.
Sophisticated Buyers of Coverage
Templo Fuente De Vida Corp. formed Fuente Properties in 2002 to acquire a property for a church and daycare centers.
Templo and Fuente (collectively Templo) received a funding commitment from Merl Financial Group Inc. (which later restructured and renamed itself First Independent Financial Group).
However, Templo had to terminate its purchase agreement when the funding did not materialize on the closing date. It filed suit against First Independent in February 2006.
On Aug. 28, 2006, First Independent gave notice of the claim to National Union, which had issued the company a $1 million directors, officers and private company liability policy.
Templo and several defendants, including First Independent, reached a settlement exceeding $3 million. First Independent assigned its rights under the National Union policy to Templo.
National Union denied coverage because of the delay in notifying them of the claim. On Feb. 11, the Supreme Court of New Jersey agreed with both a lower court and an appeals court, upholding the insurance company’s decision.
At issue was whether the insurance company had to establish it suffered prejudice by the late notice in a claims-made policy. For occurrence policies, the state has ruled that insurers must show they are prejudiced by late notice because many insureds are unsophisticated consumers.
For insureds under a claims-made policy, such as D&O, however, the court ruled insureds are sophisticated buyers of insurance. &
Scorecard: National Union will not have to contribute a share of a $3 million-plus settlement agreement.
Takeaway: New Jersey insureds with claims-made policies are treated as sophisticated consumers who are expected to comply with policy terms.
Ingredients for Dismissal
In July 2008, Wisconsin Pharmacal Co. placed an order with Nutritional Manufacturing to manufacture its Daily Probiotic Feminine Supplement chewable tablet, sold at a major retailer. The tablet was to contain Lactobacillus rhamnosus (LRA), a probiotic ingredient.
Nutritional Manufacturing ordered a supply of LRA from Nebraska Cultures of California Inc., which in turn ordered the LRA from Jeneil Biotech Inc.
After the tablets were manufactured and sold by Pharmacal, the retailer notified the company in April 2009 that the tablets contained Lactobillus acidophilus (LA) instead of LRA.
Nutritional Manufacturing assigned its causes of action against Nebraska Cultures and Jeneil to Pharmacal, which filed suit against those companies on Jan. 14, 2011, along with their respective general liability insurers, Evanston Insurance Co. and The Netherlands Insurance Co.
In October 2011, a Wisconsin circuit court dismissed some of the allegations and held others in abeyance while it decided whether the insurers must defend and indemnify its insureds. The court ultimately granted the insurers’ request for summary judgment.
That decision was reversed by the court of appeals, which ruled the defective ingredient physically injured the other tablet ingredients, and that the claim was covered by the policies.
On March 1, the Supreme Court of Wisconsin reversed that decision, in a 3-2 ruling.
It ruled there was no property damage because the policies covered only products that caused damage to “property other than the product or completed work itself.” Because the LA ingredient was integrated into the tablet, it did not cause damage to “other property,” it ruled.
In addition, it ruled, there was no “loss of use of tangible property” because a “reduction in value” of the tablets is not the same as “loss of use.” &
Scorecard: The insurance companies do not have to defend or indemnify Nebraska Cultures or Jeneil.
Takeaway: Blending all of the ingredients together into one tablet created one product.
Captives See Growth for Terrorism Risk
An advance look at the “2016 Marsh Captive Benchmark Review” revealed a substantial growth in the number of captives targeted to terrorism coverage.
In the last three years, nearly 40 captives by Marsh clients were created to cover risks excluded from conventional terrorism policies and/or to provide access to reinsurance to cover the potential gap under the Terrorism Risk Insurance Act, said Ellen Charnley, San Francisco-based managing director, captive solutions, during a RIMS luncheon session on April 12.
“That’s a big growth area,” she said.
In addition, more than 20 other captives were formed to address international terrorism risks, she said.
Typically excluded perils include nuclear, biological, chemical and radiological risks, as well as cyber terrorism, and the captives provide access to the government backstop.
Other non-traditional coverages that are seeing captive growth are medical stop loss, cyber, international employee benefits, political risk, supply chain and crime, she said.
“We see a continued growth in non-traditional coverages,” Charnley said.
Chris Lay, London-based president, Marsh captive solutions, said the brokerage is seeing “a lot of activity tailoring captive programs to address cyber risks.”
In addition to evolving cyber risks and terrorism, other top risks being addressed by captives were catastrophic earth/weather events, economic downturn and political unrest, Lay said.
The top industry sectors that form captives remain financial institutions; health care; auto/manufacturing; retail/wholesale; and communications, media and technology.
However, Charnley noted, if premium dollars were used to rank the industries, communications, media and technology companies would probably rank second, below financial institutions.
Top-ranked unique or emerging industries forming captives were construction; energy; real estate; education; and sports, entertainment and events, she said.
For construction, the increased number is probably the result of improved economic conditions, she said.
For education, it’s more likely the reason is to seek access to reinsurance programs, said Art Koritzinsky, managing director, captive solutions, in New York.
He said Marsh expects to see continued growth in the number of 831(b) small captives, which have increased by 35 percent.
“That’s where a lot of the growth [in the captive market] is,” Koritzinsky said.
In December, the IRS rules regulating 831(b) captives increased the limit on direct premium from $1.2 million to $2.2 million and removed the ability of such captives to be used for estate planning, among other changes.
As for predictions, Marsh anticipates increased growth of captives for international employee benefits; terrorism, small captives; non-traditional risk; and in emerging markets such as Latin America and Asia Pacific.
They also anticipate companies beginning to use cash surpluses in captives for sophisticated investment strategies.
Marsh manages about 1,250 captives worldwide, with about $42 billion in premium. About 1,000 captive owners participated in the benchmark survey. Final results will be released in May.
Looking to Bridge the Gap
There is a “growing gap” between the way risk managers and C-suite executives view risk management, according to Brian Elowe, managing director, U.S. client executive practice leader at Marsh.
Elowe co-authored the “Excellence in Risk Management” survey along with Carol Fox, of RIMS. The report was released on April 11 during the annual RIMS convention, held this year in San Diego.
“We expect risk managers to manage the known risks but what we really want to know is what is coming around the corner,” said Elowe.
“What organizations struggle with is how to deal with the here and now, and do they have the bandwidth to look down the road?” he said.
Cyber attacks, at 61 percent, was cited as the “next critical” risk faced by organizations, followed by regulations, at 58 percent. Talent availability was third, at 40 percent.
Six in 10 (60 percent) of the 700 risk executive survey respondents said they use claims-based reviews as one of the primary means to assess emerging risks, compared to 38 percent who said they use predictive analytics.
“There is absolutely a rising demand for more and more analytics,” he said, so that organizations can move from a retrospective approach to risk to a more predictive approach.
Nearly half of survey respondents (48 percent) said that forecasting critical business risks will be more difficult three years from now; with another 26 percent saying it would be the same.
Elowe said it would be “very hard, quite frankly,” for organizations to switch to a more forward-looking way of viewing risk.
A predictive analytics approach requires harnessing a depth of knowledge that transcends just one organization’s experience, he said.
“They need a giant database of information to help them understand what is happening in their own sectors,” he said.
In addition, there are often cultural or institutional barriers – such as a lack of collaboration across the organization – that prevent a full understanding of the risk landscape.
About half of risk executives are not members of their organization’s risk committee, he said. “They have input but they could do more to help risk committees.”
One way to help would be to add “emerging risks” to committee discussions. About two-thirds of those committees do not have “emerging risks” on their agendas, he said.
“We think that’s a big opportunity to increase discussions about broader threats, at least on a periodic basis in their risk committees, to be more effective going forward.”
He said it’s helpful to view risks in three buckets: those that are present “here and now;” those around the corner in one to three years; and those on the horizon, about five years out.
Still, he said, the role of risk management is growing in organizations. Five years ago, cyber security would probably only involve the chief technology officer.
These days, in most companies, the risk manager, chief technology officer and others are part of an interdisciplinary committee “and the risk management approach is being applied to how the organization is responding.”
“I see a growing trend where the expectation of risk management is definitely higher and the risk manager is rising to the occasion, not to say there isn’t the opportunity for continued growth,” he said. “I think they are definitely aware of that gap [with the C-suite’s expectations] and are trying to meet that gap.”