Flipping Coverage on Its Head
For almost 50 years, Southwest Airlines cemented a reputation for innovation and cost control. The company’s risk management department is no exception to the rule.
Under the leadership of risk manager Kristy Harris, Southwest developed answers to coverage challenges that helped to enhance protection while keeping tariffs in check.
A typical case is a solution created to provide Side A coverage at rates that recognize the strength of the company’s balance sheet by literally turning upside down the structure of the D&O program, when some differences in conditions apply.
Southwest’s D.I.C. Flipp solution is, at first sight, a simple one. As with usual ABC-tower D&O structures, Side A coverages sit atop Southwest’s program. However, if one of the special circumstances that can trigger the coverage applies, the Side A block drops to the bottom of the pyramid, and its primary insurer becomes the leader of the whole D&O program.
The solution looks simple, but its implementation required months of negotiation, as lawyers and brokers discussed the fine print with dozens of underwriters. Key to implementing the new arrangement was to bring on board the lead D&O insurer, which had to agree to another insurer’s wording when the flip occurs.
This mission was accomplished with a little help from the baseball gods.
Harris met her broker and the D&O leader at Stan’s Sports Bar, the legendary sports bar right across the street from the Yankees’ stadium in New York. With the game delayed two hours because of rain, Harris and ExecutivePeril’s Peter R. Taffae took the opportunity to do their own pitch to the insurer. It proved to be a home run.
“We were able to get this additional amount of coverage without having to pay more premium for it,” Harris said.
But the D.I.C. Flipp also reflects Southwest’s development of long-term, trust-based relationships with underwriters and brokers, a strategy that may not produce the biggest cost savings during a soft market, but helps to produce sustained enhancements to the insurance program.
“We are not necessarily focused on getting the lowest price. We are more interested in getting the best product.” — Kristy Harris, risk manager, Southwest Airlines
“We are not necessarily focused on getting the lowest price,” she said. “We are more interested in getting the best product.”
Southwest aims to develop creative solutions during soft cycles.
“We sit down with each carrier separately and … talk about risks and areas where we feel that we need new or improved coverages,” she said. “It is a matter of engaging underwriters in the search of solutions. In a soft market, they are looking for premium dollars. They want to be profitable, and for that they need innovation.
“I never imagined that I would end up in risk management,” she said. “But what I’ve learned is that risk management is … about knowing the company as a whole, so that it is possible to analyze a risk and control it all the way down to the management of claims.”
Relationships are an area Harris excels at as well, said Taffae.
“Kristy is extremely bright and very humble,” he said. “She is detail-oriented, but does not micromanage. And she is fun. You want to work with her.” &
Insurance Without Limits
When we think of energy, we tend to think in terms of limits.
As in, there is a limited volume of greenhouse gasses that the earth’s atmosphere can absorb; there is only so much coal; how deep must we drill the deepest hole until we find out that there is no more oil?
But what if energy resources and the future human endeavors they power were truly limitless?
That seems to be the spirit of the collaboration between Swiss Re Corporate Solutions, the corporate insurance division of the Zurich-based insurer and reinsurer Swiss Re, and Solar Impulse, an ambitious project to build and fly a solar-powered plane around the world.
Launched on its global trip in 2012 by Swiss explorer Bertrand Piccard and his partner, businessman Andre Borschberg, Solar Impulse, insured by Swiss Re Corporate Solutions, is within weeks of achieving its goal.
As of early July, the plane was in Seville, Spain and was preparing to embark on the last two legs of a 17-leg around-the-world trip, with the goal of landing at its starting point in Abu Dhabi.
Light as a small family car, but with the wingspan of a Boeing 747, the plane is powered only by solar panels on the surface of its enormous wings and has an insured value of $12.5 million.
For Juerg Trueb, a Zurich-based head of environmental and commodity markets for Swiss Re Corporate Solutions, the partnership with Solar Impulse is an example of the speed at which technology is advancing, and the imperative on the part of insurance companies that they keep pace with that change.
If you go beyond the symbol, these are the tangible things that we do and that resonate in the context of Solar Impulse.– Juerg Trueb, head of environmental and commodity markets for Swiss Re
After all, in providing aircraft liability, hull and personal accident insurance for the plane’s two-man crew, the insurer is in essence underwriting a prototype, a craft for which there is no loss history because its kind has never been seen before.
“Solar Impulse stands for the dream to power a plane by renewable energy,” Trueb said.
“It’s a symbol for technology innovation and clean energy production and a sustainable business that allows us to both prosper and conserve nature,” Trueb said.
That notion of sustainability, is something Swiss Re Corporate Solutions and its parent company puts into action, not only in the types of projects it insures, solar and offshore wind farms, for example, but in the degree of sustainability engrained in its investment portfolio.
“If you go beyond the symbol, these are the tangible things that we do and that resonate in the context of Solar Impulse,” Trueb said.
In addition to the awards it’s won for sustainable business practice and ethics, Swiss Re, through its Swiss Re Foundation, has for more than decade funded the International ReSource Award for Sustainable Watershed Management, which carries with it a $150,00 prize awarded by an international jury.
Solar Impulse already owns an aviation record for the longest continuous flight by a solar plane. In 2015, it flew from Nagoya, Japan to Hawaii. That flight lasted 117 hours and 52 minutes and covered about 4,473 miles.
Of course Solar Impulse isn’t the only solar-powered craft making news this summer. Juno, NASA’s solar-powered space probe, entered Jupiter’s orbit in early July, after a voyage of some 1.8 billion miles over five years.
Think You Don’t Need Environmental Insurance?
“I don’t work with hazardous materials.”
“My industry isn’t regulated by the EPA.”
“We have an environmental health and safety team, and a response plan in place.”
“We’ve never had an environmental loss.”
“I have coverage through my other general liability and property policies.”
These are the justifications clients most often give insurers for not procuring environmental insurance. For companies outside of sectors with obvious exposure — oil and gas, manufacturing, transportation — the risk of environmental damage may appear marginal and coverage unnecessary.
“Environmental insurance is not like every other insurance,” said Mary Ann Susavidge, Chief Underwriting Officer, Environmental, XL Catlin. “The exposure is unique for every operation and claims don’t happen often, so many businesses view coverage as a discretionary purchase. But the truth is that no one is immune to environmental liability risk.”
Every business needs to be aware of their environmental exposures. To do that, they need a partner with the experience to help them identify exposures and guide them through the remediation claims process after an incident. The environmental team at XL Catlin has been underwriting these risks for 30 years.
“Insureds might not experience this type of claim every day, but our environmental team does,” said Matt O’Malley, President, North America Environmental, XL Catlin. “We’ve seen what can happen if you’re not prepared.”
Susavidge and O’Malley debunked some of the common myths behind decisions to forego environmental coverage:
Myth: My business is not subject to environmental regulations.
Reality: Other regulators and business partners will require some degree of environmental protection.
Regulatory agencies like OSHA are more diligent than ever about indoor air quality and water systems testing after several outbreaks of Legionnaires disease.
“The regulators often set the trends in environmental claims,” Susavidge said. “In the real estate area it started with testing for radon, and now there’s more concern over mold and legionella.”
Multiple hotels have been forced to shut down after testing revealed legionella in their plumbing or cooling systems. In addition to remediation costs, business interruption losses can climb quickly.
For some industries, environmental insurance acts as a critical business enabler because investors require it. Many real estate developers, for example, are moving into urban areas where their clients want to live and work, but vacant lots are scarce. Those still available may be covering up an urban landfill or a brownfield.
“We’re able to provide expertise on those sites and the development risks so the contractor can get comfortable working on it. It’s about allowing our clients to stay relevant in their markets,” O’Malley said. “In this case, the developer is not an insured with a typical environmental exposure. But if there is a contaminant on the worksite, they could inadvertently disperse it. In a high-population urban area, the impact could be large.”
Banks also quite often require the coverage specifically because developers are turning to these locations with higher potential environmental risk.
“Though it’s not a legal requirement, insurance is a facilitator to the deal that developers really can’t operate without,” Susavidge said.
Myth: The small environmental exposure I have would be covered under other polices.
Reality: Environmental losses can result from exposure to off-site events and are excluded by many property and casualty policies.
Environmental risks on adjoining properties can lead to major third party losses. Vapor intrusion under the foundation of one property, for example, can unknowingly underlie the neighboring properties as well. The vapor intrusion can then seep into the surrounding properties, endangering employees and guests.
In other words, your neighbor’s environmental exposure may become your environmental exposure.
O’Malley described a claim in which a petroleum pipeline burst, affecting properties and natural resources 10 miles downstream even though the pipeline was shut off two minutes after the rupture. The energy company that owns the pipeline might have coverage, but what about the other impacted organizations? Many other property policies exclude environmental damage.
Sometimes the exposure is even more unexpected. In 2005, for example, a train carrying tons of chlorine gas crashed into a parked train set sitting in the yard of Avondale Mills — a South Carolina textile plant. The gas permanently damaged plant equipment and forced the operation to shut down.
“It’s not always obvious when you have an environmental exposure,” Susavidge said.
“When there is a big loss or a pattern of losses, the casualty market will typically move to exclude it,” said O’Malley. “And that’s where the environmental team looks for a solution. Environmental coverage has been developed to fill the gaps that other coverages won’t touch.”
Myth: We already have a thorough response plan if there is an incident.
Reality: Properly handling an environmental event requires experience and expertise.
In addition to coverage, risk managers need experience and expertise on their side when navigating environmental claims.
“For many of our clients, their first environmental claim is a very different experience because the claimant is not always a typical third party – it’s a government agency or some other organization that they lack experience with,” Susavidge said. “Our claims team is made up of attorneys that have specific domain experience litigating environmental claims issues.”
Beyond its legal staff, XL Catlin’s claims consulting team and risk engineers come with specialized expertise in environmental issues. 85 to 90 percent of the team members are former environmental engineers and scientists, civil engineers, chemists, and geologists.
“Handling environmental claims requires specialized expertise with contaminants and different types of pollution events,” O’Malley said. “That’s why our 30 years of experience makes a difference.”
Thirty years in the business also means 30 years of loss data.
“That informs us as a carrier how to provide the right types of services for the right clients,” Susavidge said. “It gives us insight into what our insureds are likely to experience and help us determine what support they need.”
Insureds also benefit from the relationships that XL Catlin has built in the industry over those 30 years. When the XL Catlin team is engaged following a covered pollution event, the XL Catlin claims team can deploy seasoned, experienced third party contractors that partner with the insured to address the spill and the potential reputational risk. And they receive guidance on communicating with regulatory bodies and following proper reporting procedures.
“The value of the policy goes beyond the words that are written,” O’Malley said. “It’s the service we provide to help clients get back on their feet, so they can focus on their business rather than the event itself.”
For more information on XL Catlin’s environmental coverage and services, visit http://xlcatlin.com/insurance/insurance-coverage/casualty-insurance.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of September 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.