Legal Spotlight: February 2014
Subrogation Attempt Rejected
St. Paul Mercury Insurance unsuccessfully sought to recover $14.5 million from a security company after a propane tank exploded in an insured’s building.
A tank of liquefied petroleum — which later was determined to be damaged or defective prior to delivery — had been delivered to a jeweler who rented space in the building.
St. Paul Mercury Insurance, as subrogator for Mallers, claimed the security company was negligent and breached its contract by not stopping or reporting the delivery of the propane tank. The insurer argued that Aargus “knew or should have known” that it was creating “a dangerous condition.”
The contract between the building owner and the security company did not include specific responsibilities regarding the inspection of deliveries.
The Circuit Court of Cook County, Illinois, rejected the insurer’s argument, granting a summary judgment. That court also rejected affidavits from experts, who offered their opinions that appropriate security procedures would not permit delivery of propane tanks. On appeal, the court agreed, ruling that neither expert was part of the contract between the building owner and security company, and that their views on high-rise security were “irrelevant.”
The appeals court upheld the lower court’s decision that the security company “never undertook a duty to check on propane tanks” as part of its responsibilities.
Scorecard: St. Paul Mercury Insurance Co. will not recoup the payment of $14.5 million it paid in claims following an explosion.
Takeaway: A court will not expand a defendant’s duties beyond what the parties agreed upon in their contract.
Insurer Need Not Pay for Atrium Collapse Settlement
The U.S. Fourth Circuit Court of Appeals upheld a summary judgment which allowed ACE American Insurance Co. to reject reimbursement of a $26 million settlement claim.
The claim resulted from the Sept. 5, 2007 collapse of an 18-story, 2,400 ton glass atrium that was being built as part of a $900 million Gaylord National Resort and Convention Center in Oxon Hill, Md. Gaylord hired PTJV, a joint venture between Perini Building Co. and Turner Construction Co., to serve as construction manager.
A year after the collapse of the atrium, PTJV filed a complaint against Gaylord for establishment and enforcement of a mechanic’s lien, breach of contract, quantum meruit, and violation of the Maryland Prompt Payment Act. PTJV alleged Gaylord owed it nearly $80 million. Gaylord countersued for breach of contract and breach of fiduciary duty, seeking reimbursement of about $65 million due to PTJV’s alleged failure to properly manage scheduling and costs, and failing to build a high-quality project at the agreed-upon price.
Gaylord and PTJV agreed to settle the Gaylord action on Nov. 28, 2008, with Gaylord paying an additional $42.3 million and PTJV crediting back $26 million. PTJV did not seek ACE’s consent prior to entering the settlement agreement, and did not seek reimbursement for the settlement amount until about six months afterward, according to court documents.
ACE denied payment, and PTJV filed suit alleging breach of contract and bad faith. A district court upheld ACE’s subsequent motion for a summary judgment because of the lack of prior consent to the settlement, and the appeals court agreed with that decision.
Scorecard: ACE will not need to pay a $26 million insurance claim, following an insured’s settlement of litigation without prior consent.
Takeaway: The decision breaks away from the trend of courts requiring evidence of prejudice when an insurance company denies coverage due to lack of notice.
ERISA Time Limits Upheld
The U.S. Supreme Court denied the petition of a Wal-Mart public relations executive to litigate the denial of long-term disability benefits under the retail store’s plan, administered by Hartford Life & Accident Insurance Co.
A unanimous decision of the High Court ruled that Julie Heimeshoff failed to abide by the three year statute of limitations in filing her request for judicial review of the insurance company’s denial of benefits.
Although Heimeshoff filed the litigation within three years after the final denial of benefits, she did not file it within three years after “proof of loss,” as was required in the plan documents.
Suffering from lupus and fibromyalgia, Heimeshoff stopped working in June 2005. In August of that year, she filed a claim for long-term disability benefits, listing her symptoms as “extreme fatigue, significant pain, and difficulty in concentration.” That claim was ultimately denied by Hartford when her rheumatologist never responded to requests for additional information.
Hartford later allowed her to reopen the claim without need for an appeal, if the physician provided the requested information. After another physician evaluation and report, Hartford’s physician concluded Heimeshoff was able to perform the “activities required by her sedentary occupation.”
In her complaint, which was joined by the U.S. government, Heimeshoff argued the controlling statute should be the Employee Retirement Income Security Act, which provides a two-tier process of internal review and litigation. A district court granted a motion by The Hartford and Wal-Mart to dismiss the lawsuit. That was upheld by the U.S. Second Circuit Court of Appeals. The High Court agreed, ruling the statute of limitations was reasonable and there were no contrary statutes that should control the process.
Scorecard: The Hartford need not pay long-term disability benefits to the employee.
Takeaway: The U.S. Supreme Court’s decision resolves a split among various federal appeals courts, some of which had upheld plan provisions and others which found they were not enforceable.
Court Reverses Product Liability Decision
Indalex was seeking duty-to-defend coverage from the insurer under a commercial umbrella policy as a result of lawsuits filed in five states alleging the company’s doors and windows were defectively designed or manufactured, resulting in water leakage, mold, cracked walls and personal injury.
The trial court ruled there was no obligation to defend or indemnify Indalex as the claims involved “faulty workmanship” and thus did not constitute an “occurrence.” It dismissed the lawsuit.
On appeal, the higher court found that the underlying claims did count as “occurrences” because the defective products led to damages elsewhere and were “neither expected nor intended from the standpoint of the Insured.”
The court ruled that the lower court improperly ignored legally viable product-liability-based tort claims, rejecting the use of the state’s “gist of the action” doctrine, which prevents a “plaintiff from re-casting ordinary breach of contract claims into tort claims.” The case was remanded to the lower court for further action on the claims.
Scorecard: National Union may incur claims up to $25 million as Indalex defends itself from the underlying lawsuits in five states.
Takeaway: The decision provides an expansive reading of an insurance company’s obligations in commercial general liability coverage.
Finding Their Niche
Independent insurance agencies that specialize in niches and focus on technological improvements are getting a leg up on their competition — and reaping greater profits, according to the 2013 Best Practices Study by the Independent Insurance Agents & Brokers of America.
By focusing on niches, agencies have increased their targeted leads and referrals, improved retention rates and boosted their competitiveness, according to a study of “best practice agencies,” chosen by the in Alexandria, Va.-based trade group and Reagan Consulting for their “outstanding management and financial achievement.”
Specializing in certain product lines or courting specific industry sectors has paid off: The average revenue growth rate in total commissions and fees was 9.8 percent for agencies with net revenue of more than $5 million, up from 4.5 percent in last’s year’s study. For agencies with net revenue less than $5 million, the growth rate was 9.4 percent, up from 2.1 percent last year.
Agency revenue was also boosted by the results of higher technology spend, including for search engine optimization and social media marketing, as well as by increased hiring and improved producer accountability.
Finding niches is key, said Madelyn Flannagan, the trade group’s vice president of agent development, research and education. Many agencies are adding personal lines such as auto insurance to their product mix, often bundling them with commercial lines to enhance offers to business clients.
Some agencies are also specializing in cyber liability insurance.
“Almost every business now has to safeguard information about their customers and employees, and they need to have the correct liability insurance for when security breaches occur,” Flannagan said.
Specializing for Assurance Agency, with offices in Schaumburg, Ill. and Chesterton, Mo., means focusing on particular industries, including temporary staffing companies, contractors, nursing homes, manufacturers, municipalities and school districts, said Jackie Gould, chief operating officer.
“The benefit of specializing in our clients’ industries is that it allows us to dig deeper into their business and understand the issues they are facing, so we can be better at solving their problems with special coverage they might need,” Gould said.
“We have the right carriers in place to handle their exposures, and our claims advocates and safety advocates know how to deal with claims and risk control issues,” she said.
M.F. Block in Paragould, Ark., concentrates on serving family farms, said partner Phillip Greer. Few carriers are in that market, so there is less competition.
“We understand family farms, so we can price the insurance right,” Greer said. “We also try to go above and beyond insurance, and offer other services to family farms, such as loss control and risk management.”
Firms cited for their best practices in the study also were noted for increasing their technology spend.
Agencies with annual revenues above $5 million invested more in agency management systems, while smaller firms spent more in Internet SEO marketing and social media marketing.
Agencies of all sizes devoted more staff time to social media marketing: On average, 1.3 employees spent 10 percent of their time marketing via social media.
“Social media is becoming more important to agencies as they try to get a leg up on their competition,” Flannagan said. “They use it to become more visible in their communities, which makes them more effective in selling and marketing in those communities.”
Assurance Agency has “a very big initiative around social media,” geared toward enhancing the firm’s relationship with its existing clients and attracting prospective clients by posting articles on topical issues, Gould said. The firm also uses social media to publicize its seminars and webinars on hot topics, such as on health care reform.
“We help hundreds of employers to figure out how to manage their benefits programs, and that can be very different, depending on the industry, such as the temporary staffing industry,” she said. “It’s a moving target, so we help employers by giving them a step-by-step playbook on what they can do now to prepare.”
Pierson & Fendley Insurance LLC in Paris, Texas, increased its SEO marketing spend to use on sites such as Google and Yahoo! to attract more clients, said partner Matt Frierson. Moreover, the agency has a Facebook page and its producers are encouraged to post topical information and helpful advice on their own Facebook pages, which are tied to the firm.
“Facebook is a great way to get your brand out for an inexpensive price,” Frierson said. “It’s a media that’s far more encompassing than anything the agency has seen before.”
The agency also encourages its producers to post updates on their LinkedIn profiles to trigger push emails to their connections.
But the company’s growth is mainly attributed to buying two other agencies as well as hiring additional producers, he said. In 2010, Pierson & Fendley had three producers; it now has eight.
Stuart S. Durland, vice president, operations at Seely & Durland Inc., said the Warwick, N.Y.-based company has been “consistently growing” due to IT implementations including imaging, eSignature, real time technology, consumer website ratings and a “sophisticated” website.
“Agencies have got to have an agency management system — and use it, as well as technologies that take advantage of marketing capabilities and those that enable us to work in real time,” Durland said.
“Instead of taking four hours to input information for a quote to four different commercial line carriers, we use our agency management system, Applied Systems, that enables us to input the information just once, and then send data to any of our real time carriers.
“That has significantly reduced the process, which not only saves us money, but frees up time to allow my [customer service representatives] to do more important things, like cross-selling and writing new business,” he said.
At Insure-Rite, a Norman G. Olson Co. in Evergreen Park, Ill., each generation of the family-owned business grows the enterprise by taking “it to the next level,” said Pete Olson, who works alongside his father and grandfather.
Over the past several years, processes have been turned “upside down” to improve producer accountability, he said.
“We’re focused on placing business where it belongs, not just how it could help our profits,” Olson said. “We place according to what’s best for the client, not on what’s best for us.”
The trade group’s study also showed that profitability improved at many best practices agencies over the past year.
While profit margins in the prior year’s study “remained stubbornly flat” due to waning contingent income growth, that trend has reversed — contingent income grew an average of 10.7 percent for those with revenue of more than $5 million, and an average of 21.8 percent for agencies with revenue less than $5 million.
Moreover, agencies did “a much better job” of controlling expenses so that operating profits grew faster than contingent income, according to the study. As a result, larger firms averaged 22.7 percent proforma EBITDA, and smaller to midsized firms averaged 29.3 percent.
Every three years, the Independent Insurance Agents & Brokers of America collaborates with Reagan Consulting to select “best practices” firms throughout the nation, nominated by either an affiliated state association or an insurance company.
The agencies are grouped into six revenue categories: less than $1.25 million; $1.25 million to $2.5 million; $2.5 million to $5 million; $5 million to $10 million; $10 million to $25 million; and more than $25 million. Financial and benchmarking information for the participating agencies are also reviewed and updated.
Sixteen insurance companies and four industry vendors provide financial support for the research and development of the best practices study: Agency Business Solutions/Amerisure Insurance, Applied Systems, Beyond Insurance, Central Insurance Cos., Chubb, CNA, EMC Insurance Companies, Encompass Insurance, Erie Insurance, Great American Insurance Group, The Hanover Insurance Group, Harleysville Insurance, Imperial PFS, InsurBanc, Kemper Preferred, Liberty Mutual Agency Corporation, Main Street America Group, Ohio Mutual Insurance Group, Travelers and Westfield Insurance.