Time for Property
Is it an insurance issue or a nonprofit issue? Is there an insurance market for these risks or is government intervention needed? Is Congress looking to tell the insurance industry what’s what or are lawmakers looking to facilitate a market-based solution?
The bigger question is: Whom do you trust?
At the heart of these questions is an insurance law: the Liability Risk Retention Act (LRRA). Having passed it in 1981 in response to a collapse of the product liability insurance market, Congress last amended the law in 1986 to include most commercial liability.
Since then, a vibrant subculture within the self-insurance world has grown up. In 2014, the average annual premium written by risk retention groups (RRGs) was $12.6 million. With 234 RRGs now in existence, according to the Risk Retention Reporter, that amounts to nearly $3 billion in total premium.
Despite such a success story, surprisingly, RRGs haven’t expanded further — say, to property coverages. It’s not for want of trying.
Janice Abraham, CEO of one of the biggest RRGs, United Educators, has been in her position for 18 years.
“I don’t believe the government should be in the business of insurance at all.” — U.S. Rep. Dennis A Ross, a Florida Republican
“I have been working on this for almost the whole time,” she said, referring to the fight for RRGs to retain property risk.
Right there with her has been Pamela Davis, CEO of another massive RRG provider, the Alliance of Nonprofits for Insurance (ANI). They spearhead a renewed effort to expand the LRRA to allow RRGs to underwrite property coverage.
The fight is being led in Congress by Florida Republican Rep. Dennis A. Ross, who assures constituents and insurance professionals that he’s a “strong free market person.”
“I don’t believe the government should be in the business of insurance at all,” he said. Efforts to expand the LRRA is not “the camel’s nose under the tent trying to get into the industry.”
Instead, Ross, whose brother Bill served as CFO of the Hillsboro County Boys & Girls Club, said that he appreciates the challenges nonprofits face, and hopes to create an opportunity for such groups to pool resources and focus on their primary missions, not premiums.
The pro-LRRA expansion argument is best illustrated by a plausible example: A nonprofit senior center can purchase $1 million in liability through an RRG to cover the liability to transport its seniors in a van, but that RRG cannot underwrite damage to the $20,000 van itself.
Or take the example of a college that buses its sports teams to various competitions and shuttles its students around campus. An RRG could offer the school millions in third-party liability, but not the thousands to fix the bus after a fender-bender.
That just doesn’t make sense, advocates said. Of course, their opponents tell a different story.
A primary argument for the new LRRA is that it won’t be a big change at all. The draft bill now in Congress would only allow certain groups to write coverages like property, fleet auto physical damage and business interruption: RRGs active for 10 consecutive years, with at least $10 million in capital and surplus.
Perhaps most limiting, the bill only applies to RRGs protecting 501(c)(3) organizations.
The argument: The commercial insurance market has failed these nonprofits. These community and educational nonprofits tend to be small in size and faced with unique risk.
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management,” said Abraham.
Sometimes, commercial insurers are interested in these risks, Abraham said. Sometimes, they are not.
What often happens: A 501(c)(3) purchases liability insurance through an RRG, then finds it challenging to buy unbundled property from a commercial carrier. What’s more, seeking out unbundled property coverage adds operational costs to small organizations on constrained budgets.
According to Davis, 85 percent of 501(c)(3)s that would benefit from the law change have annual budgets of less than $1 million.
In United Educators’ case, schools come to the RRG year after year looking for help with this issue, Abraham said.
She went on the record — the Congressional Record — about that unmet demand when she testified to the Subcommittee of Housing and Insurance of the Financial Services Committee of the U.S. House of Representatives on May 20, 2014.
Davis said she hears from insurance brokers about these problems and the unmet demand. They tell her that only 6 percent of commercial markets would consider standalone property risks from nonprofits.
“I would love to see the market come up to [nonprofits] and say, ‘There is no need for this,’ ” Ross said, but unfortunately “games” are being played in the commercial market.
But the main takeaway from proponents is: A vote for the LRRA change is a vote that benefits communities and their nonprofits. It’s not about commercial insurance. So how can people dare oppose it?
The Other Side
Opposition is aligned against the LRRA expansion, just as it has been for the past 18 years that Abraham fought for it.
On one side of the opposition is the National Association of Insurance Commissioners (NAIC).
“These are hard to cover property, auto physical damage issues that really warrant a lot of attention and a lot of risk management.” — Janice Abraham, CEO, United Educators
The insurance regulators have never been fond of risk retention groups, as one insider in the captive insurance industry put it, perhaps in large part because the 1981 law and its 1986 addendum are two of only a few instances when the feds have intervened in state-based regulation.
In the last serious effort to reform the LRRA, a two-year attempt that ran aground in 2013, opposition from the NAIC was cited as one major reason the bill didn’t pass.
News reports at the time focused on the NAIC’s belief that RRGs are more prone to insolvency than commercial carriers.
For their part, commercial carriers might argue that RRGs aren’t on an even playing field. Once formed, RRGs are regulated only by the insurance department in the state in which they are domiciled (not in every state they write business).
Another argument might be that they aren’t as safe for consumers. RRGs are not subject to state guarantee funds in the event they go belly up.
Beyond these two distinctions and the fact that they can only write liability, RRGs are also a unique form of captive because only owners can contribute capital, only policyholders can be owners.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), also oppose expanding LRRA.
Jen McPhillips, its senior director of federal government affairs, said concerns include consumer protection and the fact that RRGs have no experience writing property, but the primary objection is the failure to demonstrate a market using empirical data.
“The traditional marketplace is there and is willing to take on the risk,” she said.
Whereas the original LRRA was passed in response to a clear crisis in coverage, no such crisis exists today.
Independent insurance agents, represented by the Independent Insurance Agents & Brokers of America (Big I), oppose expanding LRRA.
However, data does support the contention that RRGs serve their policyholders well.
In A.M. Best’s “2015 Captive Review,” the rating agency found that risk retention groups outperformed commercial counterparts in loss adjustment expense, underwriting expense and combined ratio, among others. They did not outperform them in policyholder dividends.
The review’s authors were also quick to mention the other benefit of the RRG structure — dividends and surplus buildup are returned to policyholders. Between 2009 and 2013, that amounted to $638 million for rated RRGs.
Also, RRGs are known to provide members with tailored risk management and loss-control services.
“Because RRGs serve a single industry, they are able to develop and share best practices including risk management initiatives, which isn’t common among commercial carriers,” wrote Christina Kindstedt, senior vice president of Willis’ Global Captive Practice for the Americas, in a blog calling for the LRRA expansion passage.
To insurers that voice concerns about RRGs not “playing on a level playing field,” David Provost, deputy commissioner for Vermont’s Captive Insurance Division, said: “Most RRGs are playing on a field that you abandoned.”
Vermont, it should be noted, is the No. 1 home for RRGs in the world; one-third of all groups are domiciled in Vermont, and they bring in two-thirds of all RRG-related premiums.
The Chances of Passage
Beyond the insurance industry lobbying against the bill in Washington, D.C., another hindrance is the overall inertia in the Capitol.
“Ask Congress,” said Abraham when asked why an LRRA expansion hasn’t passed. It “would be foolish to be overly optimistic” about the bill’s passage this year, she said.
As of early July, Ross had not yet presented the bill to the Subcommittee on Housing and Insurance, waiting on industry groups to provide market information.
Davis is optimistic and determined. Even if it doesn’t pass this year, she is “absolutely determined to get this through.”
“It certainly would help our schools and it would certainly help our small nonprofits in our communities,” she said.
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.
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.
Global 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.
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.
Detention Risks Grow for Traveling Employees
It used to be that most kidnapping events were driven by economic motives. The bad guys kidnapped corporate employees and then demanded a ransom.
These situations are always very dangerous and serious. But the bad guys’ profit motive helps ensure the safety of their hostages in order to collect a ransom.
Recently, an even more dangerous trend has emerged. Governments, insurgents and terrorist organizations are abducting employees not to make money, but to gain notoriety or for political reasons.
Without a ransom demand, an involuntarily confined person is referred to as ‘detained.’ Each detention event requires a specialized approach to try and negotiate the safe return of the hostage, depending on the ideology or motivation of the abductors.
And the risk is not just faced by global corporations but by companies of all sizes.
“The world is changing. We see many more occasions where governments are getting involved in detentions and insurgent/terrorist groups are growing in size and scope. It’s the right time for a discussion about detention risks.”
— Tom Dunlap, Assistant Vice President, Liberty International Underwriters (LIU)
“Practically any company with employees traveling abroad or operations overseas can be a target for a detention risk,” said Tom Dunlap, assistant vice president at Liberty International Underwriters (LIU). “Whether you are setting up a foreign operation, sourcing raw materials or equipment overseas, or trying to establish an overseas sales contract, people are traveling everywhere today for so many reasons.”
Emerging Threats Driven By New Groups Using New Tools
Many of the groups who pose the most dangerous detention threats are well versed in how to use the Internet and social media for PR, recruiting and communication. ISIS, for example, generates worldwide publicity with their gruesome videos that are distributed through multiple electronic channels.
Bad guys leverage their digital skills to identify companies and their employees who conduct business overseas. Corporate websites and personal social media often provide enough information to target employees who are working abroad.
And if executives are too well protected to abduct, these tools can also be used to identify and target family members who may be less well protected.
The explosion of new groups who pose the most dangerous risks are generally classified into three categories:
Insurgents – Detentions by these groups are most often intended to keep a government or humanitarian group from delivering services or aid to certain populations, usually in a specific territory, for political reasons. They also take hostages to make a political statement and, on occasion, will ask for a ransom.
In other cases, insurgent groups detain aid workers in order to provide the aid themselves (to win over locals to their cause). They also attempt prisoner swaps by offering to trade their hostages for prisoners held by the government.
The most dangerous groups include FARC (Colombia), ISIS (Syria and Iraq), Boko Haram (Nigeria), Taliban (Pakistan and Afghanistan) and Al Shabab (Somalia).
Governments – Often use detention as a way to hide illegal or suspect activities. In Iran, an American woman was working with Iranian professors to organize a cultural exchange program for Iranian students. Without notice, she was arrested and accused of subversion to overthrow the government. In a separate incident, a journalist was thrown in jail for not presenting proper credentials when he entered the country.
“Government allegations against detainees vary but in most cases are unfounded or untrue,” said Dunlap. “Often these detentions are attempts to prevent the monitoring of elections or conducting inspections.”
Even local city and town governments present an increased detention risk. In one recent case, a local manager of a foreign company was arrested in order to try and force a favorable settlement in a commercial dispute.
Ideology-driven terrorists – Extremist groups such as Boko Haram and ISIS are grabbing most of today’s headlines with their public displays of ultra-violence and unwillingness to compromise. The threat from these groups is particularly dangerous because their motives are based on pure ideology and, at the same time, they seek media exposure as a recruiting tool.
These groups don’t care who they abduct — journalist, aid worker, student or private employee – they just need hostages.
“The main idea here is to shock people and show how governments and businesses are powerless to protect their citizens and employees,” observed Dunlap.
Mitigating the Risks
Even if no ransom demands are made, an LIU kidnap and ransom policy will deliver benefits to employers and their employees encountering a detention scenario.
For instance, the policy provides a hostage’s family with salary continuation for the duration of their captivity. For a family who’s already dealing with the terror of abduction, ensuring financial stability is an important benefit.
In addition, coverage provides for security for the family if they, too, may be at risk. It also pays for travel and accommodations if the family, employees or consultants need to travel to the detention location. Then there are potential medical and psychological care costs for the employee when they are released as well as litigation defense costs for the company.
LIU coverage also includes expert consultant and response services from red24, a leading global crisis management assistance firm. Even without a ransom negotiation to manage, the services of expert consultants are vital.
“We have witnessed a marked increase in wrongful detentions involving the business traveler. In some regions of the world wrongful detentions are referred to as “business kidnappings.” The victim is often held against their will because of a business dispute. Assisting a client who falls victim to such a scheme requires an experienced crisis management consultant,” said Jack Cloonan, head of special risks for red24.
Without coverage, the fees for experienced consultants can run as high as $3,000 per day.
Given the growing threat, it is more important than ever to be well versed about the country your company is working in. Threats vary by region and country. For example, in some locales safety dictates to always call for a cab instead of hailing one off the street. And in other countries it is never safe to use public transportation.
LIU’s coverage includes thorough pre-travel services, which are free of charge. As part of that effort, LIU makes its crisis consultants available to collaborate with insureds on potential exposures ahead of time.
Every insured employee traveling or working overseas can access vital information from the red24 website. The site contains information on individual countries or regions and what a traveler needs to know in terms of security/safety threats, documents to help avoid detention, and even medical information about risks such as pandemics, etc.
“Anyone who is a risk manager, security director, CFO or an HR leader has to think about the detention issue when they are about to send people abroad or establish operations overseas,” Dunlap said. “The world is changing. We see many more occasions where governments are getting involved in detentions and insurgent/terrorist groups are growing in size and scope. It’s the right time for a discussion about detention risks.”
For more information about the benefits LIU kidnap and ransom policies offer, please visit the website or contact your broker.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.