E&S Market Continues to Evolve
Risk managers should treat changes in the excess and surplus lines market with caution. Overcapacity is drawing more insurers to seek growth in that market, and they may not necessarily have the specialty underwriting knowledge needed to succeed in the sector.
That would mean a subsequent decision to remove themselves from E&S lines — leaving their insureds in the lurch – or not being able to effectively service accounts or manage claims.
“There are companies writing business in the specialty world that they wouldn’t normally write,” said Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox.
“On the mergers and acquisitions side, A.M. Best would probably not be surprised if more M&As occurred.” — Robert Raber, senior financial analyst, A.M. Best
“Companies are looking for anything to write because there’s overcapacity,” he said. “Many of the companies do not have the experience, expertise and talent but they are still venturing into this territory.
“Companies are jumping through hoops to write business and the rates keep coming down because of continued overcapacity,” he said.
Some insurers acquire organizations with a nonadmitted platform, while others bring over teams of experienced players in the field, such as when Berkshire Hathaway brought on Peter Eastwood from AIG and a team from Lexington to launch Berkshire Hathaway Specialty Insurance in 2013.
David Blades, senior research analyst, A.M. Best, said that another such event occurred in June 2015 when Argo Group through Colony Specialty expanded the environmental division within its E&S segment by hiring four individuals who had been with Freberg Environmental Insurance.
“On the mergers and acquisitions side, A.M. Best would probably not be surprised if more M&As occurred,” said Robert Raber, senior financial analyst, A.M. Best. “With current market conditions, it’s a challenge for them to grow their business.”
With all of the competition in E&S lines, Kaufman said risk managers may be tempted to look only at price instead of “expertise and where that company will be down the road. The company may have a strong enough rating to offer the product but will they be around to effectively handle the claims and service the insured?”
“I think if I was a risk manager,” said Raber, “I would probably be comfortable with a team that was familiar and had a lot of industry expertise in the business I was looking at. … I would be looking for consistency in the market, a presence in the market.”
“You want a company that has proven they understand that type of business,” said Blades.
“It’s not just underwriting, it’s claims and loss control. You want a company that has proven they understand that type of business, that they have committed to it for a long period of time.”
The interest in the E&S market has been increasing for several years because insurers are finding it challenging to grow organically in the standard lines, Raber said. At the same time, insurers are contending with a soft market and the continuing problem of low investment returns.
Kaufman said the acquisitions were also a way for insurers and brokers to acquire much needed talent.
The most significant new entrants to the E&S market include Kemper Corp., Knight Holdings and Hamilton Insurance.
The most notable M&As in the past year were ACE’s acquisition of Chubb (with the merged company retaining the Chubb name) and XL Catlin.
AIG, which primarily writes E&S through Lexington Insurance Co., remains at the top of the U.S. field, although Lloyd’s of London remains the leading surplus lines market, with 20 percent of the market share, according to A.M. Best.
E&S is also drawing new entrants into market.
The most significant new entrants, though still with minor direct premiums written, according to SNL Financial, include Kemper Corp., whose direct E&S premium in Q3 2015 was $40.5 million; Knight Holdings at $12.2 million; and Hamilton Insurance at $6.5 million.
In comparison, Lexington Insurance Co. wrote $965.9 million in direct E&S premium in the U.S. in the third quarter of 2015, according to SNL Financial.
No Damages for Peanut Explosion
On Aug. 4, 2009, Industrial Fumigant (IFC) dumped about 49,000 Fumitoxin tablets into a single access hatch of a peanut dome owned by Severn Peanut Co. to fumigate the North Carolina building.
A fire broke out on Aug. 10, which smoldered until an Aug. 29 explosion caused extensive structural damage and the loss of nearly 20 million pounds of peanuts.
Travelers Insurance Co. paid Severn $19 million to cover the costs of the peanuts, damage to the peanut dome, lost business income, and remediation and fire suppression costs.
On Jan. 4, 2012, Travelers, Severn and Meherrin Agriculture & Chemical Co. (Severn’s parent company) sued IFC and Rollins Inc. (IFC’s parent company) for breach of contract and negligence.
Severn argued that the Fumitoxin tablets were known to produce a toxic and flammable gas when piled atop each other, and that its agreement with IFC required the company to apply the pesticide “in a manner consistent with instructions.”
The Eastern District of North Carolina court dismissed the case, noting that the $8,604 contract between IFC and Severn specified that the fumigation fee was not “sufficient to warrant IFC assuming any risk of incidental or consequential damages” to Severn’s property or product.
The court also dismissed the negligence claims, finding Severn was “contributorily negligent” in its actions.
On appeal to the U.S. 4th Circuit Court of Appeals, IFC prevailed again. Allocating contractual risks between sophisticated business partners provides business predictability, it ruled. Enforcing such provisions is “far from an outlandish exculpation of responsibility.”
Scorecard: Severn and Travelers will not receive damages to offset the $19 million paid by the insurer.
Takeaway: The manufacturer “chose to bargain away protection for consequential damages” through its contract with the fumigation company.
Excess Coverage Not Triggered
Montello Inc. distributed an oil-drilling mud viscofier containing asbestos between 1966 and 1985, resulting in numerous lawsuits from individuals claiming injury as a result of exposure to asbestos.
The company had primary insurance coverage from The Home Insurance Co. from 1975 to 1984, but the insurer had not paid out any claims for bodily injury by the time it was declared insolvent in 2003.
After Home’s insolvency, Canal Insurance Co., which had issued excess coverage, filed a legal action against Montello seeking a court determination that it had no duty to defend or indemnify the company. Montello responded by filing counterclaims, as well as filing complaints against Continental Casualty Co. and Houston General Insurance Co.
Houston General had also issued excess coverage. Montello alleged Continental had issued an insurance policy as well, but neither Montello nor Continental had a copy of it.
A U.S. District Court dismissed the cases in a series of rulings. On Nov. 27, 2015, the U.S.10th Circuit Court of Appeals agreed with those rulings.
The court noted that Montello’s policy with Canal and Houston General “did not undertake to insure the solvency of Montello’s primary insurer.”
“The Excess Clause is clear: When the underlying insurer’s limits are reduced by payment of loss, Canal’s liability is triggered. The underlying insurer’s inability to pay is not payment of loss.” — U.S. 10th Circuit Court of Appeals
“The Excess Clause is clear: When the underlying insurer’s limits are reduced by payment of loss, Canal’s liability is triggered. The underlying insurer’s inability to pay is not payment of loss,” it ruled, noting that the provisions in Houston General’s policies were similar.
As for the lost policy, it ruled Montello had the burden of establishing its existence. It said the company’s witness at the district court level could not testify as to which umbrella policy was in use or its specific wording. &
Scorecard: The three insurers need not defend or indemnify Montello.
Takeaway: Excess insurers usually have no obligation to drop down to cover a primary insurer’s obligations.
Court: Flood Threat Was Not Direct Physical Loss
In late May 2011, the U.S. Army Corps of Engineers issued warnings of potential flooding of the Missouri River near three properties owned by Infogroup, a data provider in Carter Lake, Iowa.
On June 1, 2011, Infogroup relocated most of its business operations and data center, and decided to set up a new permanent location elsewhere. The Phoenix Insurance Co. advanced $500,000 to the company for anticipated claims under its property and personal business property coverage.
The insurer noted the policy would cover relocation, but not establishment of a new facility.
The company’s parking lot flooded in August; Infogroup and Phoenix disputed whether water caused any physical loss or damage.
Infogroup submitted a claim for $12.2 million, minus a deductible and the $500,000 advance. Phoenix denied the claim under the policy’s Extra Expense coverage because there was no physical damage to the properties.
The U.S. District Court for the Southern District of Iowa ruled on Nov. 30, 2015 that the policy was unambiguous in its requirement that “direct physical loss or damage” was necessary to trigger the Extra Expense clause. It also said that the Preservation of Property clause covered property, not operations, but there was “a genuine issue of material fact” as to what relocation costs were necessary. It rejected the insurance company’s request to dismiss that element of the lawsuit. &
Scorecard: Further legal proceedings are needed to determine how much of the $12.2 million claim is properly due Infogroup.
Takeaway: While the Extra Expense clause required “direct physical” loss or damage, the broader Protection of Property clause required only “loss or damage.”
Advocacy: The Impact of Continuous Triage
In the world of workers’ compensation, timing is everything. Many studies have shown that the earlier a workplace incident or injury is acted upon, the more successful the results*. However, there is further evidence indicating there is even more of an impact seen when a claim is not only filed promptly, but also effective triage is conducted and management of the claim takes place consistently through closure.
Typically, every program incorporates a form of early intervention. But then what? While it is common knowledge that early claims reporting and medical treatment are the most critical parts of a claim, if left alone after management, an injured worker could – and often does – fall through the cracks.
All Claims Paths are Not Created Equal
Even with early intervention and the best intentions of the adjuster, things can still go wrong. What if we could follow one injury down two paths, resulting in two entirely different outcomes? This case study illustrates the difference between two claims management processes – one of proactive, continuous claims triage and one of inactivity after initial intervention – and the impact, or lack thereof, it can have on the outcome of a claim. By addressing all indicators, effective triage can drastically change the trajectory of a claim.
While working at a factory, David, a 40-year-old employee, experienced sudden shoulder pain while lifting a heavy box. He reported the incident to his supervisor, who contacted their 24/7 triage call center to report the incident. After speaking with a triage nurse, the nurse recommended he go to an occupational medicine clinic for further evaluation, based on his self-reported symptoms of significant swelling, a lack of range of motion and a pain level described as greater than “8.”
The physician diagnosed David with a shoulder sprain and prescribed two weeks of rest, ice and prescription strength ibuprofen. He restricted David from any lifting over his head.
By all accounts, early intervention was working. Utilizing 24/7 nurse triage, there was no lag time between the incident and care. David received timely medical attention and had a treatment plan in place within one day.
A critical factor in any program is a return to work date, yet David was not given a return to work date from the physician at the occupational medicine clinic; therefore, no date was entered in the system.
One small, crucial detail needs just as much attention as when an incident is initially reported. What happens the third week of a claim is just as important as what happens on the day the injury occurs. Involvement with a claim must take place through claim closure and not just at initial triage.
The Same Old Story
After three weeks of physical therapy, no further medical interventions and a lack of communication from his adjuster, David returned to his physician complaining of continued pain. The physician encouraged him to continue physical therapy to improve his mobility and added an opioid prescription to help with his pain.
At home, with no return to work in sight, David became depressed and continued to experience pain in his shoulder. He scheduled an appointment with the physician months later, stating physical therapy was not helping. Since David’s pain had not subsided, the physician ordered an MRI, which came back negative, and wrote David a prescription for medication to manage his depression. The physician referred him to an orthopedic specialist and wrote him a new prescription for additional opioids to address his pain…
Costly medical interventions continued to accrue for the employer and the surmounting risk of the claim continued to go unmanaged. His claim was much more severe than anyone knew.
What if his injury had been managed?
A Model Example
Using a claims system that incorporated a predictive modeling rules engine, the adjuster was immediately prompted to retrieve a return to work date from the physician. Therefore, David’s file was flagged and submitted for a further level of nurse triage intervention and validation. A nurse contacted the physician and verified that there was no return to work date listed on the medical file because the physician’s initial assessment restricted David to no lifting.
As a result of these triage validations, further interventions were needed and a telephonic case manager was assigned to help coordinate care and pursue a proactive return to work plan. Working with the physical therapist and treating physician resulted in a change in David’s medication and a modified physical therapy regimen.
After a few weeks, David reported an improvement in his mobility and his pain level was a “3,” thus prompting the case manager’s request for a re-evaluation. After his assessment, the physician lifted the restriction, allowing David to lift 10 pounds overhead. With this revision, David was able to return to work at modified duty right away. Within six weeks he returned to full duty.
With access to all of the David’s data and a rules engine to keep adjusters on top of the claim, the medical interventions that were needed for his recovery were validated, therefore effectively managing his recovery by continuing to triage his claim. By coordinating care plans with the physician and the physical therapist, and involving a case manager early on, the active management of David’s claim enabled him to remain engaged in his recovery. There was no lapse in communication, treatment or activity.
After 24/7 nurse triage is conducted and an injured worker receives initial care, CorVel’s claims system, CareMC, conducts continuous triage of all data points collected at claim inception and throughout the life of a claim utilizing its integrated rules engine. Predictive indicators send alerts to prompt the adjuster to take action when needed until the claim is closed – not just at the beginning of the claim.
This predictive modeling tool flags potentially complex claims with the risk for high exposure, marking claims that need intervention so that CorVel can assign appropriate resources to mitigate risk.
Claims triage is constant – that is the necessary model. Even on an adjuster’s best day, humans aren’t perfect. A rules engine helps flag things that people can miss. A combination of predictive systems and human intervention ensures claims management is never stagnant – that there is no lapse in communication, activity or treatment. With an advocacy team in the form of an adjuster empowered by a powerful rules engine and a case manager looking out for the best care, injured employees remain engaged in their recovery. By perpetuating patient advocacy, continuous triage reduces claim severity and improves claim outcomes, returning injured workers to the workforce and reducing payors’ risk.