The Fine Print
When insurance buyers seek out hard-to-place risks — coastal property-catastrophe insurance in coastal Florida, for instance — they turn to a retail broker who in turn seeks coverage from a wholesale broker with access to surplus lines insurers or other specialty markets.
Trouble may ensue, however, if the agreement between the retailer and wholesaler are unwritten or otherwise unclear. Too often, that is the case.
Mark Robinson, co-founder of national law firm, Michelman & Robinson, LLP, and chair of the firm’s insurance industry group, said that “it is alarmingly common for wholesale insurance brokers to not have formal written agreements in place with their retail producers, which exposes the wholesaler to potential liability.”
“While some of the key points that should be included in a written agreement are rather obvious — commission rates, payment of premiums, etc. — other essential terms such as the scope of binding authority, special cancellation provisions, and ownership of expirations can be much more nuanced, and should be spelled out in detail so as to mitigate the risk of conflicting interpretations,” he said.
Robinson noted that “it is critical that wholesaler/retailer agreements contain a mutual indemnification provision as a safeguard against third-party claims resulting from one party’s negligent acts, errors or omissions, or breach of duties under the agreement.”
In terms of commissions, for instance, “It’s pretty obvious [the rate should be spelled out], Robinson said, but contracts also need to spell out whether there is a right to change the commission rate paid to the retailer by the wholesaler at some stage.
Bernie Heinze, executive director of the American Association of Managing General Agents (AAMGA) in King of Prussia, Pa., agreed.
“In an age where lawsuits are quick to follow on the heels of many adverse coverage determinations, it is extremely important that these specific roles and responsibilities and expectations are specifically delineated, and it’s necessary that each party to the transaction understands their legal and contractual responsibilities,” said Heinze.
“It’s important to understand that it’s the carrier that has expressly conveyed and delegated its authority to bind risks in accordance with its underwriting guidelines and its risk appetite to the wholesaler, which serves the role of the defacto branch office of the insurer,” he said.
“In order to be in compliance with the statutory obligations of the insurer and its duties to the market,” he said, “the wholesaler has to be sure and the retailer similarly must be certain that the lines of demarcation between them have been established and understood.
“This would also include the issuance of certificates of insurance and endorsements to the policy, which are derived specifically from the authority the carrier has conveyed to the wholesaler,” Heinze said.
These certificates and endorsements can essentially change the coverage grants of the policy, Heinze noted.
Robinson said that “if the retailer thinks they have binding authority and represents to the risk manager, ‘This is bound. No worries,’ it could turn into a complicated legal issue.
“The agreement should expressly provide that the retail producer has no authority to bind, make, alter, vary, issue or discharge any insurance policy, extend the time for payment of premiums, waive or extend any policy obligation or condition, or incur any liability on behalf of the wholesaler or the insurers,” he said.
An attorney/consultant who has worked with insurance brokers for more than 25 years, and requested anonymity, said that in the 1980s, representatives of both retail and wholesale tried to address concerns over these sorts of agreements, with some organizations proposing a model contract.
Nothing came of the various initiatives, the attorney noted, due to the disparate nature of the wholesale universe, which includes small independents, national firms and boutiques.
Particularly problematic issues related to wholesale/retail broker contracts are commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations.
Another area of complexity was that wholesale brokerage community agreements can vary widely between individual organizations, he said.
Particularly problematic were commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations, he said.
Some of these difficulties may have been eased or resolved by the passage of the Nonadmitted Reinsurance Reform Act in 2010, he said. The NRRA states that only one state, the home state of the insured, can regulate and tax a nonadmitted transaction.
That’s not to suggest that conflicts cannot still emerge if the correct contract language is not in place. Quite the contrary in fact, he said.
As they discuss their “merger of equals,” John Haley and Dominic Casserley emphasize a willingness to let the chemistry between their two legacy organizations develop naturally, rather than through top-down directives.
Haley, CEO of the newly created Willis Towers Watson, and Casserley, the company’s deputy CEO and president, sat down with Risk & Insurance® at the RIMS convention in San Diego to talk about the progress of their company since the Willis/Towers Watson merger was completed in January.
The merger combined a benefits firm with a global large cap network — Towers Watson — with Willis, which had a strong large cap presence in commercial property/casualty insurance broking globally, but was best known as a middle market player in the United States.
“When Dominic and I were sitting down and talking about this, we thought the real prize is if we can create an environment where we have people working together and where we think of ourselves as an integrated firm,” said Haley, a Rutgers University mathematics major who rose up the ranks from the early roots of the Towers Watson organization in 1977.
Sure, the two leaders talk to their teams about their talent mix and the business opportunities the merger presents.
But since the firms merged in January, Haley and Casserley say they have been happy to let members of the two legacy firms reach out to one another, to start solving customer challenges together under their own steam and see how they gel as teammates.
He reiterated that point in a May 6 WTW earnings call with analysts.
“As I travel to the various offices and see firsthand the collaborative sales efforts and hear about our market success, it’s clear our colleagues are not waiting for a top-down integration mandate or reporting tools to go to market,” Haley said.
“We don’t know exactly what all the new capabilities, the new products and services are going to be,” Casserley said in San Diego in April.
“We do know that we are creating a unique organization, which is truly global and which is integrated as opposed to operating in silos,” said Casserley, a University of Cambridge graduate who before the Towers Watson marriage oversaw the completion of Willis’ acquisition of the large French brokerage Gras Savoye and its 3,900 colleagues at the end of 2015.
Willis bought its first stake in Gras Savoye back in 1995, taking a third of the French firm at that point in time.
The Relevance of Scale
Both men lead firms with a history of making big deals.
Just to name a couple, Towers Watson was formed by the merger of Towers Perrin and Watson Wyatt back in 2010. Haley oversaw that merger.
A big part of the Willis middle market presence in the United States stems from its 2008 acquisition of Hilb, Rogal and Hobbs.
Scale comes into the Willis Towers Watson combination in a couple of ways. Haley sees the fact that Towers Watson and Willis are coming together as two same-sized companies as an advantage.
“It is much easier to create a working environment when you have two roughly equal-sized firms than when you have one that is much larger than the other,” Haley said.
Pre-merger, according to company statements, Willis had more than 18,000 employees. Towers Watson had approximately 15,000.
Scale, as in bigger size, is also a consideration in the investment realm according to Casserley.
Among other responsibilities, Casserley oversees investment and reinsurance for WTW.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms,” Casserley said.
Although both Casserley and Haley have plenty of experience in acquisitions, and this is a busy time for M&A in general, Haley said Willis Towers Watson and its leaders are concentrating on clients and merging their cultures, rather than casting about for more acquisition targets, at least for now.
“For the first 12 to 18 months, it would have to be an exceptional opportunity,” said Haley.
“It would have to be unique and something that if we let it pass we would never have the chance again,” he said.
As it stands, the global reach of Towers Watson and its client list are a grand opportunity for Willis.
“One of the things we know is that if you don’t have the relationships ahead of time it is very difficult not to finish second,” Haley said.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms.” — Dominic Casserley, deputy CEO and president, Willis Towers Watson
On the other side, adding the legacy Willis expertise in property/casualty insurance broking gives legacy Towers Watson team members one more tool to bring into their conversations with clients.
“We have client relationship directors that are responsible for understanding their whole business strategy and for understanding the key people and for bringing together the appropriate subject matter experts. What we are doing now is we are adding one more subject matter expert,” Haley said.
“We are not asking them to do something new or fundamentally different from what they’ve done before.”
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.” — John Haley, CEO, Willis Towers Watson
Casserley stressed that the fact that Willis can now take advantage of Towers Watson’s large cap relationships doesn’t mean that Willis is turning away from its strength or its relationships in the middle market.
“This is not a pivot,” Casserley said.
The merger also allows the benefits-focused legacy Towers Watson employees to bring yet another tool to their clients, the insurance expertise of the legacy Willis employees.
“We don’t know what the solutions we come up with will be,” Haley said.
“But we do know that the human side and the risk side are related. We think they are not only related today but they are going to be increasingly related in the future.
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.”
Casserley said how the Willis Towers Watson colleagues find those solutions as part of a new, integrated platform is an exciting unknown.
“It may well be applying property and casualty techniques to a benefits problem and vice versa,” he said.
“Or it might be applying an actuarial analysis to a property/casualty risk in a way that hasn’t been done before. You won’t know that until you see the teams literally intertwined,” he said.
To Keep Cool in a Crisis, Companies Need a Comprehensive Solution
Threats against corporate security come in many forms, from intentional acts of violence to civil unrest to cyber-attacks. The perpetrators don’t discriminate by company size or sector, and the consequences can range from several thousand dollars lost to several lives lost.
The recent shooting in an Orlando nightclub that killed 49, for example, or last year’s San Bernardino shooting that killed 14, are somber reminders that terrorism and violence can erupt anywhere and in any type of business. In addition to loss of life, violence can translate into business interruption and property damage. In Ferguson, Mo., riots lead to over $4 million in property damage.
Cyber-attacks have also become commonplace, with hackers infiltrating private networks to steal data or hold it ransom.
Is your organization prepared for these risks?
“A lot of companies have a crisis response plan on paper, but they don’t have outside resources to come to their aid if there is an incident,” said Reggie Gibbs, Underwriter and Product Manager, Starr Companies.
Mid-size companies especially tend to lack comprehensive insurance coverage and crisis management services for a variety of security events due either to limited resources or an underestimation of their exposure.
Starr Companies’ Cyber and Terror Response (CTR) solution provides three coverages as well as crisis response services tailored to meet the needs of these companies. Each of its components addresses a common security threat.
“We don’t just want to indemnify the security risks our clients face; we want to help them actively manage them.”
— Reggie Gibbs, Underwriter & Product Manager, Starr Companies
Terror and Political Violence
“Political violence can be defined as a strike, riot, protest, or any type of unrest that gets out of hand and turns violent,” said Gibbs, who specializes in terrorism and political violence, workplace violence, and crisis management.
In the case of the Ferguson protests, any first party property damage or third party liability incurred by the disruption would be covered under the terrorism and political violence segment of the CTR solution.
In the case of a terror attack, organizations cannot necessarily rely on TRIA to pick up property losses. In the case of the Orlando shooting, for example, the likelihood of TRIA being invoked is low because property damage will not meet the threshold for coverage to kick in.
TRIA, reauthorized in 2015, provides a federal insurance backstop in the event of a terror attack. The U.S. Secretary of the Treasury, U.S. Attorney General, and U.S. Secretary of Homeland Security must declare an attack to be an act of terrorism, and property damage must exceed $5 million to trigger TRIA.
“We would still view the Orlando shooting as an act of terror, however, because of who the shooter claimed he was working for regardless if the ties to terror groups are clear or not. Therefore, our coverage would apply,” Gibbs said. Even if TRIA was enacted, however, companies would still have a lot of pieces to pick up following an attack. They may have injured or deceased employees, or face legal action from third parties.
For these situations, and any other incident of violence not driven by terrorism, the workplace violence component of Starr’s CTR solution would act as an umbrella to cover other liabilities such as legal liability, loss of life benefits, psychiatric care, and other crisis response services.
One such incident struck a Boston-area Bertucci’s in early May. An attacker wielding a knife drove his car into a Boston shopping mall before making his way into the nearby restaurant. He killed five, including restaurant workers and patrons.
“There was no ideological or political motivation behind it. He was just deranged.” Gibbs said. “Our workplace violence coverage can handle the loss of life benefits for both the employees and patrons killed in situations like this one.”
In the best cases, though, violence can be prevented altogether.
“If an employee reports a stalking threat, the policy would cover the expense of security guards,” Gibbs said. “In this case, it’s more of a pre-workplace violence coverage. It would de-escalate the situation.”
Attacks can also be non-physical.
Cyber extortion in particular is on the rise. Phishing scams lead employees to click on malicious links, unknowingly downloading ransomware onto their internal networks. The cyber criminals then hold companies’ networks ransom, asking for a sum of money in return for the release of data or to prevent a business interruption. The ransoms can be low — amounts that organizations can afford to pay.
“The hackers don’t want to attract the attention of law enforcement or regulatory agencies,” said Annamaria Landaverde, National Cyber Practice Leader & Professional Liability Underwriting Manager, Starr Companies. Landaverde specializes in the cyber component of the CTR coverage. “The FBI may not get involved if someone asks for $5,000. They are more likely to get involved if someone asks for $5 million.”
Since companies are not required by law to report cyber extortion —like they are for data breaches — many choose simply to pay the ransom and move on without generating any negative news headlines.
“The hackers don’t want to attract the attention of any law enforcement or regulatory agencies. The F.B.I. won’t get involved if someone asks for $5,000. They will get involved if someone asks for $5 million.”
— Annamaria Landaverde, National Cyber Practice Leader & Underwriting Manager, Professional Liability Division, Starr Companies
“A California medical center recently had an incident like this where the hackers asked for $17,000 in ransom,” Landaverde said,” but the amounts can vary.”
While the ransom itself may seem manageable, many companies fail to recognize other costs associated with the identification and removal of the malware from their system. There may also be costs associated with forensics investigations, legal experts, public relations firms, third party lawsuits, and notification and credit monitoring.
“The cyber arm of the CTR coverage extends to liability that an organization would suffer as a result of a breach, or failure of security of the insured’s network,” Landaverde said. That includes not just cyber extortion, but outright data theft or denial-of-service attacks.
Crisis Management Services
“We don’t just want to indemnify the security risks our clients face; we want to help them actively manage them,” Gibbs said.
The fourth component of Starr’s CTR solution – crisis response — provides two outside consultants to insureds, with one specializing in “hard” security services like guards or instances of cyber extortion, and another focusing on crisis communications.
Without these outside services, there is only so much insurance can do in the aftermath of a crisis. Experienced consultants provide a range of security preparedness and response services to complement coverage and help insureds recover from an episode of violence or cyber event.
“From a communications perspective, our consultants can manage the public relations front to create clear and consistent messaging, but they can also stay in touch with families after a terror or other violent attack to make sure everyone stays informed,” Gibbs said.
They also serve as a first point of contact for insureds immediately after an event. If they need guidance quickly, consultants await at the ready.
“When a client purchases the product, they get a 24-hour hotline set up with one of our consultancies,” he said. “They can report an incident at any time, and our consultant will help either resolve a situation or deal with the aftermath in whatever way they can.”
While the Cyber and Terror Response package provides a comprehensive solution tailored for mid-size companies, Starr also offers standalone cyber liability and crisis management coverage on a primary and excess basis.
“For companies with greater exposure to a particular type of risk, or who simply want higher limits or greater customization, we have those standalone polices.” Landaverde said.
For more information on Starr Companies’ Cyber and Terror Response solution, visit https://www.starrcompanies.com/Insurance/CyberAndTerrorResponse.
Starr Companies is the worldwide marketing name for the operating insurance and travel assistance companies and subsidiaries of Starr International Company, Inc. and for the investment business of C. V. Starr & Co., Inc. and its subsidiaries.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.