On the Funky Side
Funky, that is unusual, risks usually require specialty excess and surplus, nonadmitted insurance coverage.
These narrow, often emerging niche markets also depend upon brokers with a thorough understanding of their client’s industry, the insurance markets, the complexities of the risks they face and the ability to adjust and develop new coverage as the risks mature and grow.
Many, if not most, of the brokers that specialize in this kind of coverage are wholesalers and program administrators.
Susan Preston, president of Professional Program Insurance Brokers in Novato, Calif., sometimes called the queen of the funky insurance business, got her start when her first boss told her, “You need to think of something different to do” and he didn’t mean another line of work. “Anyone can insure the usual like an apartment building, or a retail store or a Main Street business,” he told her. “But not anybody can insure the unusual.”
Preston took that advice to heart and began by investigating the market and discovering that the massage business could be broken into two segments: “There is one massage business that commonly gets sued and then there is the other kind that never ends up in court.”
Preston jump-started her new firm by developing her own expertise in the massage business.
Realizing the value of unusual risks, she expanded to cosmetic tattooing — an attractive medically based business that’s less risky than the litigation-prone segment of the massage and tattoo business.
Cosmetic tattooing then led to insuring body piercing and she later expanded into the more traditional tattoo market.
Each business, typical of an unusual risk, has segments that are uninsurable usually because of increased frequency and severity of losses. For example, Preston said, certain body parts — for both piercing and tattooing — are not easily insured.
Today Preston’s Professional Program Insurance Brokers operates 34 programs. Most of them are unusual, and require excellent underwriting, carefully worded policy language and endorsements, aggressive risk management and strong safety and loss control programs focused on employee training.
Almost all of these markets for Preston are placed through London using more than a dozen Lloyd’s syndicates.
“We are constantly looking for new opportunities,” Preston said.
Her focus is on general liability, professional liability and product liability, but she also offers other complementary coverage for the businesses where needed, such as property.
Underwriting: Broker Expertise
It’s not coincidental that when former President Bill Clinton spoke at last fall’s meeting of the Target Markets Program Administrators Association, he began his remarks by noting that the TMPAA website boasted an impressive array of hard to place risks from “crane riggers to roofers to tattoo shops.”
The former president specifically cited the tattoo program wondering aloud “how you price coverage for a tattoo shop.”
And that’s among the key issues that program administrators — brokers that specialize in narrowly defined niche risks — need to consider. Unlike the more traditional independent brokers, program administrators must have extensive underwriting skills because they typically “hold the pen” or the ability to bind a carrier to coverage.
It’s also a program administrators’ knowledge of a relatively small industry that enables them to underwrite the risk and also market it to the entrepreneurs and small businesses that often make up the client base. For many carriers, these smaller industries can be overlooked markets.
Wholesalers and program administrators that are skilled in underwriting for these risks can bring a profitable book of business to the carrier.
Although wholesalers and program administrators generally don’t hold risk, they can effectively become the outsourcing arm for underwriting, policy development and administration, risk management and claims for their insurance carrier partners.
Take the fireworks market, or as Jeremy Bryant calls it, the pyrotechnics market. Bryant is executive vice president of Britton Gallagher, a program administrator based in Cleveland.
He worked with his team of specialists to arrange the coverage of the New Year’s Eve extravaganza in Dubai this year, obtaining coverage for the 163-floor Burj Khalifa, currently the world’s tallest skyscraper.
During the show, fireworks were periodically ignited, floor by floor, throughout the celebration.
To date, the half-hour show is the largest fireworks display ever presented.
This 2014 New Year’s fireworks display in Dubai was of such magnitude that it earned Guinness World Record status.
Bryant’s firm also brokered the pyrotechnics displays based at two of the chains of islands just offshore.
His clients generally are the firms that design, produce, promote and operate these huge displays. Typically, most of these displays are presented by municipalities ranging from small towns to the largest cities. Almost always, the displays are regulated by local government.
The risk today isn’t that a worker will get hurt igniting the display because almost all of the events are high tech and controlled by computers. In the Dubai fireworks at the Burj Khalifa, the fireworks were ignited using a sophisticated program.
“You have to watch out for all the safety issues, especially from the spectator standpoint,” he said.
Coverage included marine and hull insurance for barges where many of the displays were based. (There was one claim for a damaged barge where a portion of the fireworks were ignited.)
Bryant’s group placed all nonadmitted surplus lines coverage and “worked with a local Dubai broker to help them arrange admitted coverage from some local Dubai carriers.”
Pyrotechnic risks can be significant and potentially severe, Bryant said.
“But the business is really safe and getting safer. Remember, you’re dealing with gun powder at these displays. It’s very technical. The operators must look at all kinds of factors from wind speeds to related weather issues. We work with people we trust — trust is key to success in this market.”
Bryant estimated that he and his team (Eric Treend, Tami Bridgeman, and Hal Rindels) write as much as two-thirds of the professional pyrotechnics market in the United States — with the coverage focused on the two big fireworks events of the year — July 4th and New Year’s Eve.
“We work with people we trust — trust is key to success in this market.” — Jeremy Bryant executive vice president, Britton Gallagher
With their carrier partners they can insure all lines of coverage including property, general and professional liability, inland marine and commercial auto.
Cannabis Heats Up
No discussion of the funky risk management business could be complete without citing the fast-growing cannabis business — a risk that is more complex than might be expected.
The business began with the medical marijuana business but now has quickly expanded to Colorado and Washington State, which now allow recreational use and retail sales.
Michael Aberle, senior vice president of Next Wave Insurance and MMD Insurance in San Diego, said the range of risks in the business is varied.
Because many of the businesses are entrepreneurial in nature, trust between the client and broker is essential.
“We work with two cannabis trade associations to develop and market policies and we are active in those associations. That helps us market and build the trust needed to succeed.”
There are the storefront, retail outlets for both recreational and medial dispensing of cannabis (and something called dispensing insurance). But Next Wave Insurance Services’ market also includes the cannabis growers (including a version of crop insurance), the distributors and the manufacturers, security firms and a group of emerging business.
For example, there are firms that specialize in the design and manufacturing of marijuana paraphernalia and there is a newly forming chain of bed and breakfasts that offer cannabis to their guests.
To many of the businesses, property insurance is especially important. If there is a fire, the potential loss in terms of the value of the inventory can be significant.
Also, it’s mostly a cash business so protection against theft is very important.
One common risk that is usually uninsurable is protection against prosecution by a government entity for an illegal act — an issue at the heart of many cannabis-related businesses and usually excluded from standard general liability policies.
New Wave has developed coverage for this risk. The coverage is for legal defense against government actions against the business. If the insured is found innocent or not guilty of a state or local law, the policy will reimburse up to $5,000 in legal costs.
“Our coverage, however, doesn’t include actions by the federal government,” Aberle said.
It’s this kind of ability to create new kinds of coverage that is at the heart of insuring many unusual businesses.
He offers a version of a BOP policy for the smaller retail operation and also offers product liability coverage to the developers of new products (such as “edibles”).
One emerging risk, he pointed out, is that as more and more states relax the local laws, “we are insuring a lot of tenants that will need liability coverage in anticipation of legalization.”
Like other unusual risks, the “industry is not your standard market. We’re in the surplus lines market with no admitted carriers. That market offers flexibility and the ability to expand quickly because the surplus lines carriers don’t need to get state by state approval of every new policy change.”
Are We Having Fun?
If Susan Preston is the queen of funky insurance, then Larry Cossio, president of Cossio Insurance Agency in Simpsonville, S.C., is probably the king.
Cossio has been in the business of insuring the amusement industry for more than 30 years. He’s insured almost every kind of amusement risk there is — from inflatables (those bounce houses for kids and family events) to mechanical bulls at bars, to paintball parks.
Recently he began coverage of “Mudders,” the incredibly challenging and often dangerous obstacle-course races in the mud that can attract thousands of entrants to a single event.
Insurance coverage is essential, he said, because the risks can be huge. Take inflatables. Stories about accidents appear regularly and dramatically in the news. Cossio noted that one outdoor inflatable was caught by the wind and went 40 feet aloft over four lanes of traffic.
Not only is there the chance of catastrophic injuries to young children — children have died from falls and been permanently disabled — but a floating moon bounce can cause severe auto accidents.
The dangers are only limited by your imagination. Worse, this risk can be both frequent and severe — a formula for failure of both the operator owner and potentially an insurer.
Much of the largest risk comes from lawsuits filed by the injured parties or their parents.
Risk management, and safety and loss prevention then are at the heart of any insurance program, he said. Outdoor inflatables, subject to the weather and thus the wind, require that the bounce house be secured at all four corners with stakes and be able to withstand high winds. Training and supervision, properly documented, remains the essential cornerstone of an effective risk management program.
As far as insurance coverage, the requirements are wide ranging, including general liability, professional liability, commercial auto and, for employees of amusement/inflatable businesses there is EPLI, workers’ comp, health and life insurance.
Some of the risks are unexpected. For example, since many of these businesses serve a market of children, abuse and molestation coverage is clearly needed.
As far as those mechanical bulls, beyond the obvious injuries that can occur (and the need for a proper, signed release form), most of them are in bars. And that’s where the risks from alcohol can make a bad situation worse. Talk about funky.
Legal Spotlight: November 2014
Court Upholds Reservation of Rights
Wellons Inc. created two thermal oxidation energy systems in 2002 for Langboard Industries in Quitman, Ga., that were designed to generate electricity to be sold to Georgia Power.
During the construction phase in 2004, a “tube bundle” collapsed, causing extensive property damage, but the system was ultimately placed in service by June 2005, at which time leaks were discovered in the “superheater” portion of the system, according to court documents.
To fix the leaks and seal weld the joints, Wellons hired Hunt Construction, which completed the work in March 2006. The superheater was put back into service even though leaks still occurred. Two weeks later, one of the superheater tubes “completely severed.” Wellons claimed Hunt’s faulty repair work was responsible.
Langboard requested a new superheater, at a cost of $850,000, to be designed and installed as the current system was “not conducive to long term operation.” Wellons agreed, but did not immediately notify Lexington Insurance Co., which had issued a commercial general liability policy, with a per occurrence limit of $1 million. Lexington also had issued an umbrella policy, with a per occurrence limit of liability of $10 million.
Two months later, Hunt filed suit against Wellons for monies owed for its work. Lexington was notified through its agent, referencing the CGL policy and not the umbrella policy. Lexington issued a reservation of rights letter, notifying the company it was “investigating this matter.”
Langboard eventually filed suit against Wellons in 2007. Lexington sent another, similar reservation of rights letter.
After a jury trial in 2010, Langboard was awarded $8.4 million for breach of the purchase and construction agreements. A month later, Lexington advised Wellons it had “no obligation” to defend or indemnify it.
Wellons filed suit seeking a court declaration that the verdict was a covered loss under its CGL or umbrella policy. Both it and Lexington sought summary judgments.
The U.S. District Court for the Northern District of Georgia ruled in Lexington’s favor. On appeal to the U.S. 11th Circuit Court of Appeals, Wellons argued the reservation of rights notification needed to be more specific to comply with Georgia law.
The appeals court disagreed in May, saying that Lexington’s “defenses of noncoverage were not known … until it concluded its investigation… .” The court also found that Wellons had never notified the company of a claim under the umbrella policy.
Scorecard: Lexington Insurance did not have to cover an $8 million jury verdict resulting from faulty construction of an energy system.
Takeaway: Insurers “must” give insureds notification of a reservation of rights, but Georgia law only recommends that specific policy terms be part of that notification.
Imitation is Not Disparagement
In 2010, Gary-Michael Dahl, manufacturer of the Multi-Cart, filed a lawsuit against Ultimate Support Systems claiming that Ultimate’s Ulti-Cart infringed on Dahl’s patent and trademark, and damaged its business and reputation, among other issues.
Both the Multi-Cart and Ulti-Cart are collapsible carts designed for the musical industry to transport music, sound and video equipment.
Ultimate sought defense under its commercial liability policy issued by Hartford Casualty Insurance Co., which denied coverage, claiming that “disparagement” was not covered by the personal and advertising injury policy terms.
The insurance company also said the policy did not cover violations of intellectual property rights.
After Ultimate sued for coverage, the California Superior Court dismissed the lawsuit. That decision was affirmed by the Court of Appeal, and on further appeal to the California Supreme Court, Ultimate lost once again.
The state’s high court ruled in June there was no disparagement, either explicit or inferred.
The possible confusion between the two products does not imply inferiority of the Multi-Cart, the court ruled. In addition, Dahl’s claim that Ulti-Cart was a “knock-off” of the Multi-Cart, and thus derogatory of the Multi-Cart, was disputed by Dahl’s own claim that the two products were “nearly identical.”
Scorecard: Hartford did not have to provide a defense to Ultimate Support Systems in a trademark infringement lawsuit.
Takeaway: The ruling limits the scope of an insurer’s duty to defend a policyholder when the allegations involve disparagement.
Court Rules on Additional Insureds
On Sept. 13, 2010, workers of Fast Trek Steel were tightening safety cables on steel beams at Yale University’s Science Area Chilled Water Plant Shell when the unsecured beams dislodged and collapsed. One ironworker, Robert Adrian, fell to his death. Three others were injured by the falling beams.
Adrian’s estate and the injured men filed suit alleging negligence against, among others, Shawmut Woodworking & Supply Inc., general contractor of the construction project, and Shepard Steel Co., a steel fabrication subcontractor.
Because of workers’ compensation laws, there were no lawsuits filed against Fast Trek, which, as required by its contract with Shepard, had obtained a general liability policy from First Mercury Insurance Co. with a $1 million per occurrence coverage limitation, and an excess liability policy from National Union Fire Insurance Co., with up to $10 million of coverage.
Both Shepard and Shawmut sought defense and indemnification from First Mercury as “additional insureds” of that Fast Trek policy. Liberty Mutual — which had issued a liability policy to Shepard and is currently providing a defense to Shepard and Shawmut under a reservation of rights — also demanded that First Mercury assume that defense.
First Mercury demurred, contending, among other reasons, that Shawmut was not included in the definition of additional insured, and that even if Shawmut and Shepard were included, there was no coverage because Fast Trek was not named in the underlying lawsuits.
The U.S. District Court for the District of Connecticut disagreed.
It ruled that when Shepard hired Fast Trek as its subcontractor — and as Shawmut’s sub-subcontractor — the agreement expressly incorporated the Shawmut-Shepard contract, and that it was “immaterial” that there was not a “direct contractual relationship” between Shawmut and Fast Trek.
In addition, it ruled that the accident was arguably caused by Fast Trek and that the reason Fast Trek was not named in the underlying lawsuits was due to the exclusive remedy rule of workers’ compensation law.
Scorecard: First Mercury must defend and indemnify the general contractor and subcontractor in the workplace death and injury lawsuit.
Takeaway: A sub-subcontractor need not be explicitly included in a contract for coverage to be extended.
3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.