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.
Contingency Clouds Business Interruption
Broadly speaking, capacity across the U.S. for business interruption insurance (BI) is ample, and terms and conditions are far from onerous.
That said, brokers report that the utility sector as well as a few others have experienced unexpected high losses, both in frequency and in value.
A few carriers have reduced their exposure to BI coverage in general, or to specific sectors or sub-segments.
As a result, there have been several situations where insureds were in the uncomfortable position of having to file and pursue a claim or claims, and simultaneously seek new placements after underwriters declined to renew or sought smaller positions in the owners’ programs.
On top of those tactical concerns for owners and their brokers, there are also more strategic shifts taking place in BI and more generally in the property and casualty market, driven by the realization by underwriters that contingent coverage is far less quantified than had long been thought.
Overlooked Supply Chain Risk
The trends of outsourcing, just-in-time delivery, and electronic orders and billing have been highly effective in reducing costs and boosting profitability. But that same evolution leaves even the most stable companies vulnerable to small disruptions in the physical supply chain or the internet.
Several of this year’s Power Brokers earned their laurels sorting complex BI claims compounded by short-notice renewals.
Michael J. Perron, senior vice president for the northeast region and property placement leader in the energy and engineered risk group at Willis Towers Watson, has made something of a cottage industry out of slicing through Gordian knots in BI claims.
“In general, BI capacity and coverage are available,” said Perron, a Power Broker® in the Utilities-Alternative category.
“Some carriers have seen losses in the power sector, and a few other places, but generally P&C remains soft. Still, carriers are being especially careful these days on contingent coverage. They are finding they did not realize the full exposures they had. They are finding it difficult to get their arms around all the exposures.”
Part of the problem, Perron suggested, is modeling, especially in the catastrophe market. “For the most part insurers do a good job of monitoring CAT risk. But for the most part those models do not include supply chain.”
Even those that do can cause further complications for insureds. Perron recalled that recently one client wanted to increase its coverage. Based on limits, that should not have been a problem.
“But their carrier, which is one that is particularly good with contingency and with supply chain, also writes for several of their suppliers, so the carrier was concerned about aggregation risk,” he said.
That situation was resolved by going back to the market, but for other clients it hasn’t been that straightforward.
Solving Complicated Claims
In one instance, the owner of a hydropower plant had a failure in one of twin turbines. The second unit continued to operate normally, albeit under more careful watch.
The property insurer decided not to renew because they feared the second unit could suffer the same failure as the first. Only one of the units could be dewatered at any given time, so it was impossible to open the operating unit to inspect until the disabled turbine was back in operation. A real Catch 22.
It is difficult to compile traditional best practices for unique situations.
Several insurers would not write the risk. One offered to write the risk but excluded BI and equipment breakdown (boiler and machinery).
“That approach would render the policy effectively useless against common failures very different than what impacted the disabled turbine,” noted Perron.
Another insurer offered coverage, including BI and equipment breakdown, but with a deductible of $20 million for the turbines until the operating unit was inspected and found to be free of the problems that seemed to have damaged the other.
For a permanent resolution, Perron said he and his group “worked with several insurers to provide coverage that was not perfect, but better than the coverage offered by the first two to bid.
Two carriers offered coverage similar to the client’s expiring coverage with one key exception: They would exclude an event emanating from a failure similar to what had occurred.
Another insurer charged a higher premium, but provided coverage without this limitation.”
In another case, a gas-fired power generator sustained three very different losses: one involving turbine failure, another involving a generator breaker failure, and a third involving a transformer failure.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses.” — Michael Perron, senior vice president, Willis Towers Watson
“The incumbent carrier recognized that the client had taken appropriate steps to address lessons learned from each of these events, and actually had taken steps to minimize the carrier’s claim payments with savvy negotiations with providers and others,” said Perron.
“Still, the carrier chose to take a reduced line on the renewal.”
It is difficult to compile traditional best practices for unique situations, but Perron does suggest some guidance.
“Together the broker and the client have to convince the underwriters that the owner is managing the situation,” he said.
“Losses happen. That is why you have insurance. It helps for owners to understand that if they have multiple losses, their carrier is going have internal questions from management about the situation and the insurability of this client.”
Just as Perron spoke with underwriters and the carriers’ engineers to understand their take on the loss, he urges owners to do everything they can to help insurers understand that the owner can manage and mitigate the loss.
That may seem counterintuitive; BI by definition is for events out of the owner’s control.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses,” said Perron.
In one recent situation a client needed a replacement transformer. Rather than order a new one with a longer lead time from the manufacturer of the original equipment, the owner was able to rent a transformer. That enabled them to accelerate the recovery time, and also saved the carrier a million dollars.
That little maneuver also expanded the owner’s supply chain. Ultimately, the insured ordered a new replacement transformer from the rental supplier, rather than from the maker of the initial unit, thus broadening its portfolio of suppliers.
In the end, maximizing recovery and minimizing loss is not just a sound strategy for expediting claims and mitigating for renewal after the claim. It is enlightened self interest.
“Companies often underestimate the tremendous impact that business interruption has,” Perron said. “It is not just the loss of revenue. It can be loss of prestige in the industry. It can be loss of customers.” &
Searching for Stability in Cyber Space
As headline-grabbing breaches crack systems and tarnish reputations of major retail, healthcare and financial companies, the need for cyber insurance has become increasingly apparent.
Given the constantly changing nature of cyber risk and the market landscape, creating a stable, sustainable cyber insurance business demands a prudent approach, with an eye on the long road.
“We’ve seen carriers jump in and out, wanting to take advantage of a new opportunity, but perhaps underestimating the risk,” said Danielle Librizzi, Senior Vice President, Head of Professional Liability, Berkshire Hathaway Specialty Insurance (BHSI).
“As cyber exposure became more tangible to carriers, in-force coverage was tested and many made radical changes to pricing and availability of coverage. BHSI is committed to entering the cyber market in a thoughtful and sustainable way. We want to be there for our customers as the risks continue to evolve.”
Diverse, Evolving Risks
Cyber exposure – and coverage — have been evolving, posing different risks and underwriting challenges for different industries. The technology, financial services and healthcare industries illustrate the diverse issues that must be considered in order to provide effective, financially sustainable cyber solutions.
The technology sector was the first cyber battleground, and technology E&O forms included some cyber coverage by virtue of the nature of the risk. “There’s inherent cyber coverage for third party liabilities in E&O,” Librizzi said.
While coverage is widely available, tech companies pose challenges to underwriters because of their unique position in the cyber “supply chain.” These companies provide software, hardware and cloud services; virtually every organization in the world is dependent on a tech provider of some stripe. If an insurer is covering both the provider and its clients, the aggregate risk should be monitored closely.
Think of a DOS attack on a cloud provider that prevents all of its clients – which could include anyone from a bank to a retailer or transportation company — from accessing stored customer or corporate data or running cloud-based service apps. That single attack could bring business in multiple industries to a grinding halt, potentially causing business interruption and E&O losses.
The tech industry hasn’t seen a large scale event like this yet, but it isn’t waiting around for one to strike before addressing the underlying risk. Controlling and accounting for the aggregate exposure will mold the direction that coverage development takes.
“Our combined form, introduced in October, 2015, is a comprehensive solution that includes first and third party cyber coverage as well as traditional E&O coverage,” Librizzi said.
However, that approach may not be appropriate for other industries. Financial Institutions, for example, may seek a dedicated cyber only policy which does not include traditional E&O coverage.
While banks typically have strong protocols for network security and privacy, they also have a much greater exposure in massive stores of customer data. Financial Institutions are looking to address liability in the form of class action lawsuits or heavy regulatory investigations and fines emanating from cyber, and may not want to compromise their traditional E&O limits.
“Additionally, given the increased reliance on outsourced providers for technology solutions, we have started to see the introduction of sub-limited coverage for dependent business interruption and payment card industry (PCI) fines and assessments as enhancements to coverage,” Librizzi said. “We might see those sub-limits go to full coverage as competition gets heavier.”
Other industries, which may not be as advanced as financial institutions in addressing cyber threats, have suffered more from a lack of robust cyber coverage that can keep up with increasing exposure.
Healthcare, for example, has seen a surge of cyber attacks since hospitals and other health systems went electronic. To a hacker, healthcare providers represent a warehouse of valuable personal identifiable and protected health information.
Email addresses from healthcare systems typically are white-listed and less likely to get caught in a spam filter, giving hackers incentive to obtain access and gain control of a healthcare provider’s network in order to launch phishing attacks.
After some high-profile breaches in 2015, Human Health Services and the Office for Civil Rights came under scrutiny for not doing enough enforcement of HIPPA. Fines imposed by regulators increased dramatically over the past decade, and seem poised to only get higher.
“They’ll be ramping up enforcement of regulations in 2016, and that’s only a peek of what’s on the horizon,” Librizzi said.
The burgeoning of healthcare’s cyber exposure has challenged the insurance industry to better understand the nature of the risk and how best to secure hospital systems. Coverage for this sector remains the most difficult to write effectively.
BHSI understands the need for different customers to have different solutions. Some customers desire a dedicated cyber policy that does not include traditional E&O coverage. BHSI’s Network Security and Privacy stand-alone policy is designed to address the needs to those customers.
“The cyber exposures and coverages needs of healthcare, financial services and technology are on different timelines and will look very different in the future,” Librizzi said.
Even in more mature markets, the conflation of commercial and personal cyber risk will challenge insurers going forward. Most existing cyber products don’t cover property damage and personal injury; as the risks emerge and the Internet of Things becomes more pervasive, the coverage will have to evolve as well.
“We must always be thinking about what is on the horizon from a risk and coverage perspective – our technology driven society demands it,” Librizzi said.
Anticipating challenges and adapting to each industry’s needs has been a cornerstone of BHSI’s approach to cyber. It’s careful and measured approach has also helped the specialty insurer build an arsenal of experts and ancillary services to help clients better grasp and mitigate their exposure.
“We know the importance of really understanding the risk and communicating it clearly to our customers,” Librizzi said. “We don’t bury our coverage in a pile of definitions, and we provide the expertise to help insureds stay ahead of the next big breach.”
To learn more about BHSI’s professional liability products, visit http://www.bhspecialty.com/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Fort Lauderdale, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.