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Complex Claims

When Insurers Say No

Complex claims — old and new — call for relationship-building to minimize surprises.
By: | October 15, 2014 • 7 min read
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After 23 years managing risk at a company with a product line that includes respirators that protect workers from toxins created during sandblasting, Roger Andrews has learned a thing or two about complex claims.

As director of risk management for personal protective equipment maker E.D. Bullard Co., Andrews has handled thousands of lawsuits over the years, including those stemming from occupational disease claims in which plaintiffs have sought damages for asbestosis and silicosis — diseases that may be contracted 10 to 15 years or more before any symptoms or actual claims arise.

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Some cases have emerged because workers used Bullard’s safety gear sporadically or not at all.

Whatever the merits of the underlying cases, it’s no surprise that historically such lawsuits have led insurers to balk at supplying policyholders with indemnification or defense. Clearly, the long-tail nature of occupational disease claims has led to disputes over items including applicable coverage triggers, policy duration, and sufficient notifications (or the lack thereof).

Nevertheless, Andrews said it is rare now that he faces conflicts with insurers, and that is largely due to ongoing relationship-building efforts to ensure he and his underwriters and claims adjusters are on the same page.

Andrews has worked with some carriers for 18 years. “It still makes sense to meet with them regularly once a year, usually in August just prior to our October renewals,” Andrews said, “just to get a feel for the marketplace, any rate increases, and what the situation is if we encountered any unique risks.

Roger Andrews, director of risk management, E.D. Bullard Co.

Roger Andrews, director of risk management, E.D. Bullard Co.

“It may be that we haven’t seen any claims or that we’ve seen lots of claims, and we’d talk through that.”

Working to solidify insurer relationships won’t always do the trick, of course. Most experts agree that insurance challenges continue to become more complex across commercial property as well as liability lines.

Industry attorney Ty Childress, a partner and head of the insurance recovery group at Jones Day in Los Angeles, said there are numerous cases where insurers are apt to deny claims — particularly when the stakes are high and large dollar amounts are at issue.

Such claims include “asbestos and environmental exposures covering multiple policy years,” he said.

Nor are the problems confined to liability insurance, Childress said, noting that the nature of business interruption can also make claims valuation difficult and subject to differing views from legal and insurance experts.

So, what are risk managers to do? Attorneys, brokers and other risk experts have several recommendations for insureds hoping to avoid insurer litigation or failing that, manage such cases more deftly.

One basic step risk managers should take is, prior to policy issuance or during annual meetings with underwriters, make sure any attorney you plan to use is on your insurers’ approved list in case litigation arises, Andrews said.

“One good rule of thumb is to anticipate that litigation will arise under most policies,” said Andrews.

“Not having your preferred attorney or law firm on the insurer’s ‘panel counsel’ list is a source of litigation in and of itself and can really prejudice the effective management of the litigation,” he said.

In addition to tightening the connection with insurers, risk managers should also ask to select the independent adjuster who will work on their account, said John Dempsey, managing director and practice leader, claims preparation, advocacy and valuations at Aon Global Risk Consulting.

Business Interruption Disconnect

Dempsey said there have been some real changes occurring in the property-catastrophe sector of late, in terms of how business interruption (BI) risks are interpreted.

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For example, when a law firm noticed its billable hours fell following Superstorm Sandy and tried to collect under its BI policy, the lead insurer on the program interpreted the coverage clause in a somewhat novel way.

“The insurer said, ‘Let’s look at each lawyer [at the firm] and whether the reduced billings were the result of physical damage to the law firm’s property, or other causes such as trees blocking their driveways, gas shortages, or time spent repairing their damaged houses,’ ” Dempsey said.

“Not having your preferred attorney or law firm on the insurer’s ‘panel counsel’ list is a source of litigation in and of itself and can really prejudice the effective management of the litigation.”— Roger Andrews, director of risk management, E.D. Bullard Co.

“If other ‘causes’ were found, the business income claim was reduced, accordingly. Yet, all of these causes were inextricably linked to Sandy and its effects. There’s a disconnect here,” he said.

Clearly, that storm helped to illustrate that insurance products have not kept up with the changing risks companies are facing, he said.

For one thing, because coastal flooding caused significant damage, it was important to know whether that peril was classified as “flood” or “storm surge” under the policy. In some cases, insureds without adequate flood coverage were out of luck, he said.

Furthermore, whereas many businesses did not suffer direct property damage, which is generally required for the recovery of business interruption losses, the wider effects of Sandy meant that thousands of employees had trouble getting to work due to infrastructure damage in the storm’s aftermath.

Others suffered losses because financial institutions closed down for two days.

The result: Although many businesses sustained Sandy-related financial losses, without direct physical damage to trigger coverage, many insureds found they lacked protection under their property BI policies.

That has led some underwriters to urge risk managers to lower their claim recovery expectations.

“They do not wish to insure all of the things that could go wrong following a natural catastrophe like Superstorm Sandy or a terrorist event like 9/11,” Dempsey said.

Insurance company claims adjusters have pointed to the broader economic impact of large-scale events such as Sandy or 9/11 and theorized that certain losses would have been incurred even if a business did not take a direct hit.

This came as a shock to businesses that thought their policy covered all BI losses stemming from Sandy.

And, in fact, this theory — put forth by insurers and insurance adjusters — often has no basis in the policy wording, Dempsey said.

To minimize surprises going forward, Dempsey generally recommends that his clients have a role in selecting the independent adjuster and other insurance company experts working on their account.

“That may sound unusual,” he said. “But so much of the claims process comes down to personal relationships,” he said.

“Knowing the adjuster and the other experts, and being able to come to a meeting of the minds in terms of objectives and working through problems will pay huge dividends,” he said.

Best Practices

Here are some tips for dealing with complex claims litigation involving insurers:

  • Timing issues often create conflicts

One problem that can frustrate risk managers is claims-made liability coverage, which requires policyholders to give notice of circumstances that may give rise to a claim in the future, said attorney Mark Garbowski, a shareholder at Anderson Kill.

“That’s caused disagreements as to whether a new claim related back to an earlier claim or circumstance, and as to which tower of policies it went into,” said Garbowski, whose practice concentrates on insurance recovery on behalf of policyholders, with particular emphasis on professional liability coverages.

He advises insureds with claims-made coverage to expand their notification to insurers about potential claims.

“You might have a claim that comes in today and that relates back to a notice of circumstances two years ago. In that case, I suggest you give notice to policies in effect today as well as those in force two years ago,” he said.

  • Know state law

Frequently, when liability cases emerge, the third-party plaintiff will demand to see all communications between the insured and its underwriters. It is of paramount importance to know the law in your state, said Childress.

“Policyholders need to be wary of whether or not their communications with their insurers may be revealed to the underlying plaintiff,” he said. The answer may depend upon whether the insurer is a primary or defending insurer.

  • Review coverage extensions and exclusions annually

“When meeting with underwriters — something that should take place once a year at least — risk managers should discuss coverage extensions or exclusions that may be or should be on the policy and that could be of particular concern,” said Andrews of E.D. Bullard.

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“A lot of the time, litigation arises because the risk manager thinks there’s coverage and the claims person says no, there’s this or that exclusion,” he said. “You want to know [in advance] what conditions might be imposed on the policy.”

  • Understand Your Cyber Liability Coverage

As cyber liability becomes a growing area of concern, risk managers need to be increasingly careful about what they’re buying.

“In the case of data breach, you’ve got to notify every single person that’s been affected,” Andrews said, and the costs can be monumental. If you want indemnification for such expenses, make sure whatever program you choose includes breach mitigation coverage.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Reducing Cat Risks

Open to Improvement

Frustration with property CAT models is leading to change.
By: | October 1, 2014 • 8 min read
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U.S. risk professionals with significant hurricane and other CAT-prone exposures are looking for a clearer picture when it comes to catastrophe loss modeling, an area fraught with confusion and increasing criticism.

Time and again, those whose risks are being evaluated have complained that they have too little control over how their specific exposures generate loss estimates, and how those estimates are calculated.

“Open” systems and “transparency” have become the buzzwords of the catastrophe modeling community of late, but how user-friendly will the newest catastrophe models really become over the next year or so?

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It’s a question that the Oasis Loss Modeling Framework hopes to help answer. The London-based nonprofit represents a total of 25 insurers, reinsurers and brokers, including units of Allianz, Zurich, SCOR, Liberty Mutual, Willis, Guy Carpenter, Hiscox, RenaissanceRe and PartnerRe.

Oasis announced in January that its framework would bring down the cost of modeling, and provide transparency and greater flexibility for users via a program that is open to anyone with an interest in creating new catastrophe risk models.

Hopes are high. Still, the reality is that thus far, Oasis has no models available for U.S. hurricane and quake, though program developers hope to have such models available by the end of the year, said Dickie Whitaker, Oasis project director.

Initially, Oasis will offer models of floods in Great Britain and Australia, earthquake in North Africa and the Middle East, and brush fire in Brazil, Whitaker told Risk & Insurance®.

Scott Clark, risk and benefits officer for the Miami-Dade County Public School system, said he wants to see Oasis offer a global open platform that would allow those most knowledgeable about the school system’s risks to go into a modeling system and enter information that will produce the best outcomes — as opposed to the rather limited current system.

“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.” — Scott Clark, risk and benefits officer for the Miami-Dade County Public School system

“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.,” said Clark.

Currently, critics said, traditional models have been too focused on the aggregation of risk that insurers tend to calculate — rather than individual exposures and properties.

Year-to-Year Variations

The modelers are also criticized for changing models from year to year in ways that do not reflect actual changes in loss exposure.

“There is a tremendous variation between RMS 11 and RMS 13,” said John Burkholder, director of risk management for Broward County, Fla.

For example, when Marsh compared the two models, it found that medium-term rates (which represent storm activity potential based on climate conditions over the next five years) were reduced 28 percent in RMS version 13 for CAT 3 to CAT 5 events, while the nationwide average was reduced 16 percent.

“How could you have that much variation in risk exposure over just a two-year period?” asked Burkholder. “It’s difficult to reconcile those models with the actual individual risks.”

Claire Souch, senior vice president of business solutions, RMS

Claire Souch, senior vice president of business solutions, RMS

Claire Souch, senior vice president of business solutions at RMS in London, said that the main drivers of change between RMS 11 and RMS 13 came from new insights into hurricane activity: the number of hurricanes per year, where hurricanes are formed and where they make landfall.

“The scientific view of hurricane activity has changed since 2011, in part because of the considerable research RMS and other organizations have carried out to determine what drives hurricane landfall frequency,” she said.

“Ocean temperatures in the Atlantic have been increasing,” she said.

“Yet, over the last few years we’ve seen very low levels of hurricanes making landfall, something that the change between the 2011 and 2013 model versions reflected,” said Souch.

Clark of Miami-Dade County schools echoed the concerns of many risk managers.

He recalled the impact of the controversial RMS version 11, which initially more than doubled the school district’s probable maximum losses (PML) to $1.9 billion, making it difficult for Clark to assemble the insurance limits he needed — until he got another modeling firm to reassess the risk.

The way it’s worked traditionally using RMS, AIR or EQECAT modeling, there is a huge blind spot for risk managers and others wanting to know how the models project losses, he said.

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Karen Clark of catastrophe risk modeling firm Karen Clark & Co. in Boston, said she understands risk managers’ concerns.

Traditional models may lack quantifiable data and can change quickly and dramatically, she said. When risk specialists are dealing with countrywide exposures, geographical changes may be less critical.

“The traditional models are not robust for individual locations and concentrated exposures.” — Karen Clark,co-founder and CEO, Karen Clark & Co.

Traditional models were never designed with risk managers in mind but with insurers in mind, she said.

“The traditional models are not robust for individual locations and concentrated exposures,” she said.

Models and Granularity

Often, risk managers and their brokers need to bring their underwriters’ attention to outliers that don’t fit with the usual assumptions.

That is one of the problems with traditional models, said Burkholder of Broward County.

“We’ve got a bulkhead at Port Everglades which models as a building,” Burkholder said.

However, it is not nearly as vulnerable.

“It is constructed solely of concrete and steel, so the model should, for loss modeling purposes, recognize its actual characteristics in the results to more accurately reflect the correct exposure,” he said.

In an effort to address some of the problems — particularly with making their systems more transparent to users, all three of the major CAT modeling vendors have released new products: Touchstone from AIR Worldwide, Risk Quantification & Engineering (RQE) from EQECAT and RMS(one) from RMS.

Souch of RMS said that RMS(one) provides “an exposure and risk management platform that enables any company to store and analyze all of the information they have about their risk, acting as a system of record for all of the risk items in the business, with the ability to run RMS and other models.”

She said RMS(one) is exposure and model agnostic so it allows companies to use catastrophe models to simulate what the impact of a hurricane or other disaster might be for all the exposures they have.

In addition, RMS’ models on RMS(one) are open and enable users to understand the impact of different scenarios, she said, such as if three hurricanes made landfall in one year instead of a single hurricane.

AIR Worldwide’s Touchstone is “an open platform, allowing clients to import third-party hazard layers or run multiple alternative models on a single platform for a more complete view of risk,” according to the company.

The major CAT modeling vendors have attempted to address some of the criticisms related to transparency.

Once more, the emphasis is on transparency and user interface.

“For example, say you believe losses from CAT 3 hurricanes should be 10 percent higher than AIR’s standard model says they are,” said Rob Newbold, senior vice president with AIR Worldwide.

A user can go into Touchstone and modify losses to better reflect their loss experience, or their own underwriting policies.

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“However, there will always be the AIR default view, alongside any modified views,” said Newbold.

Several firms are now providing data and models through Touchstone. These include Ambiental, ERN, EuroTempest, IHS Inc., KatRisk, Met Office, PERILS, and SSBN.

EQECAT has its own take on the “open model” approach.

Rodney Griffin, senior vice president of client solutions and product management for CoreLogic EQECAT, said that RQE’s simulation platform “runs 181 natural catastrophe probabilistic models for 90 countries across the globe.

The RQE platform is inherently open in that additional models or components such as the hazards or vulnerabilities can be added to the platform.

“CoreLogic EQECAT is committed to being transparent and this is reflected in the granularity of reports down to individual site levels and the very extensive documentation which includes analyses of the key drivers of risk,” Griffin said.

On the compliance side, with respect to Solvency II in Europe and ORSA in the United States, he said the company “provides tailored documentation to transparently support these requirements.”

Karen Clark, co-founder and CEO, Karen Clark & Co.

Karen Clark, co-founder and CEO, Karen Clark & Co.

Oasis, meanwhile, promises to offer perspectives from multiple modeling firms, including Karen Clark & Co. Clark noted that her company’s platform, RiskInsight, allows risk managers to build their own models.

At the same time, she said, companies can also take advantage of Oasis to see what other models say.

Other Oasis modelers include JBA Risk Management, Spa Risk LLC, and Long Beach, Calif.-based ImageCat, which plans to focus specifically on earthquake risk via SesmiCat.

“The compelling case for the Oasis is that risk managers will be able to have access to the best of breed models tailored for specific hazards and specific regions through a single portal and at a reasonable cost,” said Charles Huyck, executive vice president at SesmiCat creator ImageCat, Inc.

“SeismiCat, for example, can potentially provide risk managers access to a host of sophisticated earthquake modeling capabilities previously utilized only by the structural engineering community in the United States,” he said.

So how exactly does a risk manager tap Oasis?

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A risk manager can join as an associate member, which is free, said Whitaker. Full members are financial institutions or underwriters, all of whom pay a membership fee, he said.

Risk managers can download the software and search for a model of the geographical region and peril in question, and then negotiate their fee with the provider, he said.

Karen Clark said that the costs to access Oasis or RiskInsight will undoubtedly be a lot less than for the traditional modelers.

“Quite simply, you’re going to get more models on it,” Clark said when asked why industry members might want to tap Oasis versus an individual modeler like her firm.

“Via Oasis, you’ll be able to look at many different models’ views. That’s the [whole] idea,” Clark said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Sponsored: Liberty International Underwriters

A Renaissance In U.S. Energy

Resurgence in the U.S. energy industry comes with unexpected risks and calls for a new approach.
By: | October 15, 2014 • 5 min read

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America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor.

Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter.

“As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe.

Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.

Aging Infrastructure, Aging Personnel

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Robert Rokicki, Senior Vice President, Liberty International Underwriters

The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.

“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”

In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.

Increasing Frequency of Severity

SponsoredContent_LIUCurrent financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.

Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.

“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.

“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”

Buyer Beware

On its own, the domestic energy bonanza presents complex risk management challenges.

However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.

A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.

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In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.

Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.

“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.

Back to Basics

SponsoredContent_LIUHas the time come for a reset?

Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.

He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.

It’s something the industry used to do and got away from, but needs to get back to.

“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”

As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.

According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.

After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.

Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.

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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.


LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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