Insurer To Pay “Extra” Expenses
On May 22, 2011, a tornado struck Joplin, Mo., substantially damaging the Midwest Regional Allergy, Asthma, Arthritis & Osteoporosis Center and its contents.
While at the temporary location, Midwest Regional did not accept new patients, operated at a reduced schedule and did not install various pieces of specialty equipment — such as an MRI machine, X-ray machine and bone density machine — because of space restrictions and other reasons.
The new location finally opened on May 1, 2012, and Dr. Joseph requested additional reimbursement from Cincinnati Insurance Co. under the “extra expense” provision of his business owner’s policy for the cost to repair and relocate the MRI machine and other specialty equipment.
Cincinnati Insurance had already paid Midwest Regional the policy limits of $2.4 million for building loss, $388,000 for business personal property loss and $828,100 for business income interruption and extra expenses.
It denied the physician’s request for the additional payment, contending that the specialty equipment expenses had already been covered under the building and personal business property provisions.
After Midwest Regional filed suit in the U.S. District Court for the Western District of Missouri-Joplin, the federal court ruled the expenses were recoverable under the extra expense provision. It noted that the policy was ambiguous and therefore should be read as providing coverage.
Although the insurer and physician subsequently settled, the insurer appealed the court decision to the U.S. 8th Circuit Court of Appeals.
Cincinnati Insurance argued the expenses were not recoverable because they were connected to the policy’s business income provision. It also argued the request was the insured’s attempt to circumvent the policy limits of the building and business personal property provisions.
The court ruled on July 31 that “an ordinary person of average understanding” would interpret the policy’s definitions of extra expenses as “distinct and separate” from the business income provision, and that the policy “specifically states that ‘Extra Expense’ coverage is not subject to the policy limits.”
Scorecard: Although the insurance company had already agreed to a settlement, the ruling underscored that reimbursement was covered under the policy.
Takeaway: Because the policy did not clearly prohibit reimbursement of the extra expense coverage, “an ordinary person” would expect the insurer to pay the disputed amount.
Court Rejects Claim
On April 7, 2011, a custom-built bookmobile for the City of Beverly, Mass., was destroyed after fire spread from a nearby vehicle at Moroney’s Body Works Inc.
The city refused to accept delivery of the damaged bookmobile, and Moroney submitted a claim to Pilgrim Insurance Co., which had issued a garage insurance policy, and to Central Insurance Cos., which had issued a commercial property insurance policy.
Pilgrim paid $12,450 to Moroney, based on an appraiser’s estimate of repair costs. Central denied coverage, asserting that its policy was not triggered until Pilgrim’s coverage was exhausted.
Moroney sued both insurers in Massachusetts Superior Court, after which Pilgrim settled the case, with a total payment of $30,668. The judge found in favor of Moroney, and ordered Central to pay $126,232 – which was the difference between the original contract price for the bookmobile ($156,900) and the amount received from Pilgrim.
Central appealed. On Aug. 6, 2015, the state’s Supreme Judicial Court reversed the decision.
It ruled the “other insurance” provision in Central’s policy meant that it did not come into play until Pilgrim’s limits were exhausted. It also agreed with Central’s other argument that if it did have liability, its coverage was limited to the cost to repair the bookmobile.
“Because both policies insure the same insured’s interest (Moroney’s ownership) in the same property (bookmobile) against the same risk (fire), Central’s ‘other insurance’ provision applies,” the court ruled. “Accordingly, Central’s liability does not begin until Pilgrim’s policy limit is exhausted.”
The three-panel judicial panel also ruled that Moroney was not entitled to receive anything more than repair costs.
Scorecard: The insurance company did not have to pay $126,232 for the claim.
Takeaway: Claims involving “other insurance” clauses often default to allocation of liability between carriers, whether it is excess, such as in this case, pro-rata shared liability, or escape clauses, which result in no payment.
Paralyzed Man Can’t Collect From Insurers
In September 2009, Scot Vandenberg fell from the upper deck of a 75-foot chartered yacht during a five-hour cruise. The bench he was sitting on tipped over when turned around to speak to someone. It left him paralyzed from the chest down.
Rose Paving was insured by Westfield Insurance Co. for commercial general liability and an umbrella policy.
Vandenberg settled liability claims against the owners and operators of the yacht for $25 million on Oct. 10, 2012. In addition, RQM’s insurer paid $2 million; Rose Paving, Michael Rose and Alan Rose agreed to pay $300,000. The $25 million was to be satisfied through an assignment of rights of recovery under their insurance policies.
Earlier, in January 2012, Westfield had sought a court determination that it owed no duty to defend or indemnify Rose Paving. It noted that Rose Paving represented that it did not use watercraft on its insurance application and that the CGL policy had a “watercraft exclusion.”
A federal district court in Illinois agreed.
On appeal to the U.S. 7th Circuit Court of Appeals, Vandenberg argued the policy did not expressly exclude accidents on the yacht. He also argued that even if Rose Paving was designated a construction business, the policy should extend to all of that corporation’s businesses, including yacht charters.
The federal appeals court rejected the arguments, noting the insurance policy only covered premises and operations “in connection with construction, reconstruction, repair or erection of buildings.”
“A policy does not need to exclude from coverage liability that was not contemplated by the parties and not intended to be covered under the agreement,” according to the ruling.
“Such a speculative exercise in hypotheticals [such as requiring Rose Paving to explicitly exclude all possible risks] would be nonsensical,” the court ruled.
Scorecard: Westfield Insurance Company did not have to pay $25 million to settle the liability claim.
Takeaway: For Vandenberg to succeed, he would have had to prove his injuries were wholly independent of any negligent operation of the watercraft.
Surplus Lines See Pressure on Rates
Excess capacity, an abundance of capital and few CAT losses are driving pressure on rates in many lines of business, yet premiums are rising as well. That’s the situation for surplus lines, said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices.
The annual NAPSLO conference earlier this month in San Diego drew about 4,200 brokers, carriers and other insurance professionals – a new record attendance, Kelley said.
The slowly recovering economy is increasing the need for surplus lines coverage, he said, noting a 6.7 percent growth in surplus lines direct premium written (DPW) in 2014 over the prior year, reaching $40.2 billion – the highest in history, according to A.M. Best.
While surplus lines carriers continue to “feel pressure on rate,” he noted that “there is a lot of optimism. The market is growing and that’s a good thing.”
As always, cutting-edge carriers are tackling the latest risks associated with drone technology, driverless cars and the sharing economy, such as Uber, as well as an ongoing demand for cyber protection, he said.
Some of the legislative items NAPSLO is paying attention to are adoption of a flood modernization bill that would continue to allow surplus lines carriers to provide coverage; formation of the National Association of Registered Agents & Brokers (NARAB II) board that would streamline nationwide registration of brokers; and exemption from the “burdensome” Foreign Account Tax Compliance Act (FATCA) regulations that require brokers to collect premiums from clients on behalf of foreign carriers
No End in Sight for M&As
Mergers and acquisitions in the insurance industry will continue due to excess capacity, a need for expertise and talent, and the benefits of scalability, said Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox.
The impact for risk managers will be fewer choices, he said.
“They will have more limited opportunities,” Kaufman said. “Risk managers will have to be better. They will have to have more expertise to deal with expertise. Experts want to deal with experts.”
Among the major M&A’s impacting both insurers and brokers, are Ace/Chubb, XL Catlin, AmWINS Group/Colemont Insurance Brokers, Tokio Marine/HCC Insurance Holdings, Global Indemnity/American Reliable and Fosun Group/Meadowbrook Insurance.
“These are very large acquisitions of consequence, and what is that going to do for our world?” — Alan Jay Kaufman, chairman, president and CEO, Burns & Wilcox
“There seems to be a heightened interest in who’s next,” he said. “These are very large acquisitions of consequence, and what is that going to do for our world?”
He envisions more limited distribution by insurers “in order to get more market share.”
“The relationship of being a broker or MGA is going to become more valuable in the future,” he said.
The lack of talent and the need for expertise is a key reason for the M&As, he said
“The insurance industry overall doesn’t have enough new talent coming in,” he said. “That’s why people are taking from each other.”
But, he noted, companies don’t have to be big to have expertise. “There will always be a place for expertise in boutique companies.”
Need for Technology
Commercial lines insurers are, generally speaking, behind the technology curve, at least as it comes to providing user-friendly web platforms for clients or the brokers that serve them.
“Where I believe insurers have made significant progress over the last decade or so, it’s been notably in the personal lines arena, such as travel, life, health or auto insurance,” said Michael Sillat, president and CEO of WKFC Underwriting Managers, a subsidiary of Ryan Specialty Group.
He noted, however, that there are a growing number of standard commercial business policies that can be procured on the web these days as well.
“Carriers that offer, or are developing products that a web platform can help distribute, quote, bind and issue, have been, and will continue to become more and more prevalent in future,” he said.
“For now, I think all insurance companies are at least looking at it.
“No doubt, some probably wonder how on earth they can do it, but in my opinion, they have to, whether they develop the technology in house or outsource to an entity with such capabilities.”
“Carriers that offer, or are developing products that a web platform can help distribute, quote, bind and issue, have been, and will continue to become more and more prevalent in future.” — Michael Sillat, president and CEO, WKFC Underwriting Managers
A big part of the process requires developing sufficient intelligence, driven by data analytics and predictive modeling, to create and implement pricing algorithms, so that insurers can integrate risk-based decision-making tools into online platforms or at least within internal underwriting systems.
The excess and surplus lines should be able to provide such online access, he said.
Although given the diversity of the risks that enter this space, the challenge is greater and therefore, development in this arena, while not at all impossible, will probably require a longer gestation period than for standard lines.
A Competitive Environment
Bruce Kessler, division president, ACE Westchester, agreed that excess capacity in the market is making the insurance market more competitive in some lines.
E&S insurers “have to be really quick to adapt to a changing marketplace and use data to tell us what to do in addition to intuitive and experienced underwriting. … How we manage a portfolio and use data is never static.
“It’s generally hard to write new property business because at renewals, [the incumbent carrier] will take the business at a lower rate,” he said.
Casualty is also more challenging, he said, although not as fiercely competitive as property.
ACE Westchester continues to build out product in such lines as product recall, railroad, professional risk, private company D&O, life sciences, and allied medical services, he said
“While rates get more competitive, I think the results in those lines of business are still pretty good.”
Some structural changes as part of the ACE/Chubb integration — which is scheduled to close in Q1 2016 — will bring together ACE Westchester and Chubb Custom’s E&S businesses, which includes the wholesale sales and program business, he said.
“It will be a powerful platform, so we are excited about it,” Kessler said.
The integration overall, he said, is ongoing and complex, but “it’s a good match-up in appetite and product” and will allow the company to combine data and resources.
E&S in Transition
The E&S market is in transition, with significantly more competitiveness than in early 2015, said Vincent Tizzio, president and CEO of Navigators Management Co. Inc.
Nevertheless, while E&S will ebb and flow over the years, it has grown to about 7 percent of total property/casualty DPW in 2014, he said.
And in the 10-year period ending 2014, according to A.M. Best, surplus lines insurers grew from a 6.1 percent share of commercial lines DPW in 1994 to 13.9 percent in 2014.
“The death of the E&S marketplace has been predicted many, many times, said Jeff Saunders, president Nav Specialty, “and as many times as its demise has been predicted, it’s been reinvented or has evolved” by focusing on service, solutions, underwriting expertise and client need.
One way it needs to evolve again requires technological advances. Insurers need to use data, segment customers, enhance cost containment and offer a self-service approach to insurance, particularly for small to midsize businesses, Tizzio said, noting there have been some “nascent” advances in the commercial space.
“No one seems to have the special sauce to create technology solutions that aren’t rendered obsolete before they can be rendered,” he said.
A Wake up Call for Any Company That Touches Food
It’s not easy to be in the food industry these days.
First, there is tougher regulation. On August 30, 2015, the Food Safety Modernization Act (FSMA) required companies to file planning paperwork for Preventive Controls for Human Food. The final FSMA rules take effect on August 30, 2016.
Next, increases in food recalls, some deadly, are on the rise. In early September, 9,000 cases of frozen corn were pulled from shelves after a listeria scare. A few days later, a salmonella outbreak in cucumbers imported from Mexico resulted in one death, while sickening hundreds of consumers nationwide.
Courts are getting tougher, too, as owners/executives in particularly egregious cases involving consumer deaths have been prosecuted criminally, with one receiving a recommendation for a life sentence.
Finally, advances in science – including whole-genome sequencing technology, which maps DNA of microbes to more easily pinpoint precisely where contamination occurs – can expose every player in the supply chain to potential losses and lawsuits.
“Few companies have the balance sheet or brand loyalty to survive a serious recall. Outbreaks, new regulations, prosecutions and science have made purchasing product recall and contamination insurance literally an act of survival for companies of all ages and sizes,” said Jane McCarthy, Senior Vice President of Global Crisis Management at Liberty International Underwriters (LIU), who has over 30 years of industry experience.
Working with growers, processors, manufacturers, importers, shippers, packagers, distributors, wholesalers or retailers, LIU’s policy provides indemnity to pay for losses a company might incur from a recall, including logistic expenses, lost income and access to crisis management and public relations consultants.
Legislation tightens on food-related companies
Passed in 2011, the FSMA gives the Food and Drug Administration a far more proactive weapon in the war on tainted food, as the focus shifts to prevention combined with the FDA’s newfound authority to close businesses that aren’t complying with FSMA rules and regulations.
In addition to the August 30, 2015 deadline for filing paperwork for preventive controls, as part of the law, all companies need to be registered if they do anything with food in the United States, or a company is a foreign entity bringing food into the U.S.
“It’s the law and every regulation and benchmark has to be met,” McCarthy said. “The FDA will shut someone down if they don’t think a company is handling a food product properly. With these new rules and regulations, the whole industry has to change.”
With LIU’s product contamination policy, companies have 24/7 access to pre-loss consultancy through red24, one of the world’s leading security consultants and global crisis management consultancies. For example, they’ll work with clients to best prepare them to meet the FDA’s 48-hour response deadline should a food contamination or product recall incident occur.
Costly outbreaks on the rise
According to a Wall Street Journal article, food recalls from 2012 to 2014 increased more than five times compared to the total number of recalls from the prior eight years combined. The Journal also reported that foodborne illness is often never formally reported, so about 48 million Americans, or one in six, get sick each year from food. The CDC estimates 128,000 hospitalizations and 3,000 deaths from tainted food.
Food contaminations happen in two main categories: allergens (peanuts, etc.) and pathogens (bacteria). There were four listeria outbreaks in 2014 alone, compared with one in each year from 2011 to 2013. Listeria is a particularly tricky and virulent pathogen that continues to survive and blossom, even in refrigerated environments. Listeria does not impact the appearance, taste or smell of food it invades, so a company in the food industry can only confirm contamination through testing or, unfortunately, once a customer becomes ill.
“Listeria is one of the worst nightmares. Not only is it deadly, but once it gets into a plant, it’s very difficult to eradicate,” said industry veteran Meg Sutton, LIU’s Senior Claim Officer. “It sneaks into drains and crevices that you thought were clean. Attempts to clean those drains and crevices, if done improperly, can result in aerosolizing the listeria and spreading it throughout the facility. In some cases, companies are forced to shut down the plant for extended periods of time, resulting in significant business interruption and loss of revenue.”
Courts get tough on deadly cases
With the increase and severity of food contamination recalls rising, the courts are getting tougher too. The food industry was rocked last month by a recommended life sentence for the ex-CEO of a peanut manufacturing company following a multiple-felony conviction for knowingly selling tainted peanut butter that ended up killing nine people.
“The judge ended up sentencing him to 28 years in federal prison, still the harshest penalty ever in a case of food contamination. While our policy won’t cover your defense if you’ve committed a crime, the penalty is another wake up call for the food industry that executives at the highest levels will be held accountable,” McCarthy said.
Science boosts detection, transparency
By using today’s scientific methods to trace back to the source (grocery store, restaurant, wholesaler, etc.), experts can determine the production facility or farm that originated the food or food additive. They can swab the facility for DNA matches and pinpoint the contamination.
Considering those four prime drivers, it’s not surprising that interest in food product recall and contamination coverage from companies of all sizes is gaining momentum.
“We don’t want them to just buy our insurance,” McCarthy said. “We want them to be better for it with us as their partner by making sure they have the right coverage in place and improving their business from a health, safety and compliance standpoint.”
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.