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.
Were Burns the Result of Work Risk or Personal Risk?
A worker for Wright Tree Service filled up a chainsaw with gasoline for the foreman. When he picked up the chain saw to hand it to the foreman, gas leaked out of the cap and spilled onto his shirt.
After the spill, the foreman told the worker that he had a clean shirt in his work truck that the worker could put on. The foreman told the worker that he could take a short break until the foreman was done, and then they could walk back to the truck together.
While waiting for the foreman, the worker lit a cigarette. Wright permitted workers to smoke while waiting for tree limbs to drop, and many of them did. While lighting his cigarette, the worker’s shirt caught on fire.
After the worker put out the fire, the foreman applied first aid to his burns and took him to the emergency room. The worker’s burns required a skin graft, and he had scarring on his thigh, torso, shoulder, and hip.
The worker sought workers’ compensation benefits. The administrative law judge denied the claim, finding that smoking was a risk personal to the worker, so his injuries did not arise out of and in the course of his employment.
The Workers’ Compensation Appeals Board reversed the ALJ’s decision, concluding that the worker’s injury had a causal connection to his employment. Wright appealed.
Was the board correct in finding that the worker’s injury was compensable?
- A. No. The worker’s smoking rather than spilling gasoline was the cause of his accident, and smoking is a personal risk.
- B. Yes. The risk of gasoline spilling on the worker’s shirt and later catching fire was a risk associated with his work.
- C. No. Injuries occurring during smoke breaks are not compensable.
How the Court Ruled
A is incorrect. The court explained that catching fire is a risk associated with working with flammable liquids. Even though the worker’s burns did not occur at the moment gasoline spilled on his shirt, the injury still arose out of a risk distinctly associated with his job.
C is incorrect. The court pointed out that the board previously found in several cases that injuries that occurred during smoke breaks are compensable. The board held that smoking and smoke breaks fall within the personal comfort doctrine. Here, the worker was on an authorized break on the clock and was allowed to smoke on the job.
B is correct. In Gould v. Wright Tree Service, Inc., No. 114,482 (Kan. Ct. App. 05/13/16, unpublished), the Kansas Court of Appeals held that the worker was entitled to benefits for his burn injuries.
The court concluded that the worker’s actions were causally connected to his job, and he was working at the time of his injury, so his injuries were compensable.
The court also found that the worker’s injury arose out of and in the course of his employment. The worker was required to work with flammable liquids as part of his employment, and he was on an authorized short break, although still on the clock, at the time the injury occurred. The court also found that the worker did not recklessly violate Wright’s fire-prevention policy.
Editor’s note: This feature is not intended as instructional material or to replace legal advice.
Buyers Beware: General Liability Outlook May be Shifting
The soothing drumbeat of “excess capital” and “soft market” to describe the general liability (GL) market is a familiar sound for brokers and buyers. Emerging GL trends, however, suggest the calm may not last.
Increasing severity of GL claims may hit some sectors like a light rain at first, if they have not already, but they could quickly feel like a pelting thunderstorm in others. A number of factors could contribute to the potential jump in GL prices for certain industry segments or exposures, possibly creating “micro” or niche hard markets in the short-term, and maybe even turning the broader market over the longer-term.
“There are trends we’re seeing that will play out slowly. Industries that carry more general liability exposure will and have been hit first and hardest, but it won’t apply across the board initially,” said David Perez, Senior Vice President and Chief Underwriting Officer, for Liberty Mutual Insurance’s National Insurance Specialty operation. “There is ample capital in the market today, which allows a poor performing account to move its policy frequently from carrier to carrier. Poorer performing classes, however, will likely face increased pricing for GL policies and a reduction in capacity.”
The good news for buyers is that they can take action today to lessen the impact these trends and the evolving market may have on their GL programs.
David Perez on the state of the GL market.
Medical and Litigation Trends Drive Severity
One factor increasing claim severity is the rising cost of health care, driven both by greater demand and by medical inflation that is growing faster than the Consumer Price index.
The impact of rising medical costs on commercial auto is well-known. Businesses with heavy transportation exposures are finding it more difficult to obtain coverage, or are paying more for it.
That same trend will impact general liability, just on a slower and more fragmented basis.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk.”
— David Perez, Senior Vice President & Chief Underwriting Officer, National Insurance Specialty, Liberty Mutual Insurance
“It takes longer for medical inflation to register through the tort system in general liability than it does in auto liability (AL) because auto claims are generally resolved more quickly,” Perez said. “But the same factors affecting severity in AL also exist in GL and as a result, it’s foreseeable that we will not only see similar severity trends in GL, but they may in fact be worse than we’ve seen in commercial auto.”
Industries with greater exposure to severity in general liability claims should be the first wave of companies to notice the impact of medical inflation.
“Medical inflation will drive up costs across the board, but sectors like construction and product manufacturing have a higher relative exposure for personal injury lawsuits.”
The impact of medical inflation on the GL market.
Beyond medical inflation, two litigation trends are increasing GL damages. First, plaintiffs’ lawyers are seeking to migrate the use of life care plans—traditionally employed only for truly catastrophic injuries—to more routine claims. Perez recalled one claimant with a broken thumb and torn ligaments who sought as much as $1 million in care for the injury for the rest of his life.
Second, the number of allegations of traumatic brain injuries (TBI) in GL claims is growing. It can be difficult to predict TBI outcomes initially and poor outcomes can be expensive and long tailed.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk,” notes Perez.
Changing Legal Landscape
Medical inflation and litigation trends are not the only issues impacting general liability.
Unanticipated changes in court interpretations of policy language can throw unexpected pressure on GL pricing and capacity.
Courts sometimes issue rulings interpreting policy language in a manner that expands coverage well beyond the underwriter’s original intent. Such opinions may sometimes have a retroactive effect, resulting in an immediate impact on not only open, but also closed cases in some circumstances.
Shifts in the Marketplace
In addition to facing price increases, GL brokers and buyers will be challenged by slightly shrinking capacity due to consolidation and repositioning among carriers in the marketplace. “Some major carriers have scaled back their GL writing, resulting in a migration of experienced senior management. As these executives leave, they take their GL expertise and relationships with them, resulting in fewer market leaders and less innovation,” Perez said.
“Additionally, there are new carriers coming into the business that may not have the historical GL loss data to proactively identify trends or the financial strength and experience to effectively service their GL customers and brokers. Both trends make it important for brokers and buyers to work with an insurer that is committed to the GL market and has the understanding and resources to help better manage risks impacting customers.”
Last year saw a high level of mergers and acquisitions in the insurance industry. Buyers should take advantage of that disruption to re-evaluate their needs and whether their insurers are meeting them. Or better yet, anticipating them.
What’s a Buyer to Do?
Buyers—and their brokers— should look to partner with insurers that can spot emerging trends and offer creative solutions to address them proactively.
What should buyers and brokers do, given the trends facing the GL market?
“Brokers and buyers should value insurers that have not only durability and a long history in the general liability business, but also a strong risk management infrastructure,” Perez said. “Your insurer should be able to help you mitigate your specific risks, and complement that with coverage that works for you.”
Beyond robust GL claims and legal management, Liberty Mutual also provides access to one of the insurance industry’s largest risk control departments to help improve safety and mitigate both claim frequency and severity.
In addition, notes Perez, “Even if a company has a less than optimal loss history in general liability, there can be options to provide adequate coverage for that company. The key is to partner with an insurer that has the best-in-class expertise, creativity, and flexibility to make it happen.”
By working closely with their insurers to understand trends and their potential impacts, brokers and buyers can better prepare for the possible GL storm on the horizon.
To learn more about Liberty Mutual’s general liability offering, visit https://business.libertymutualgroup.com/business-insurance/coverages/general-liability-insurance-policy.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.