Risk Insider: Peter Taffae

Excess Follow Form? The Problem

By: | August 23, 2016 • 3 min read
Peter R. Taffae, is managing director of ExecutivePerils, a national wholesale broker. He can be reached at [email protected]

Imagine a $100 million D&O (or E&O, EPL, Cyber) program made up of 10 insurance companies each providing a $10 million limit. The market standard dictates that each insurer use its own “excess follow form.”

Shortly after the CEO is briefed that his company has secured $100 million “state of the art” D&O program, a securities class action is filed, followed by parallel derivative litigation. The litigation progresses and ultimately the Insured resolves the litigation costing $70 million (defense and settlement).

During the litigation process, the insurance companies on the program reserved their rights each referencing provisions of their excess policies. Now that the insured seeks to collect on the insurance, one by one each Insurer sites a provision that is different than the primary and underlying Insurers. It may be the definition of Insureds, or different Reporting Provisions, or even differences in the Insuring Clauses.

Reality sets in and the CEO finds out that the “state of the art” $100 million D&O program Is not state of the art and has inherited numerous obstacles.

This scenario is not imagined. Despite the name, “excess follow form” policies do not completely follow the primary policy’s wording. Although the differences might seem small at the time of binding they can have significant consequences at the time of a claim.

Advertisement




Qualcomm, Inc. v. Certain underwriters at Lloyd’s London, 161 Cal. App. 4th 184, 73 Cal. Rptr. 3d 770 (ct.App, 4th Dist. 2008) is a clear example why it is necessary to have true follow form excess wording.

AIG wrote Qualcomm’s primary D&O policy with $20 million limit, followed by a Lloyd’s excess “follow form” policy. After incurring $28 million in defense and indemnity, Qualcomm sought insurance recovery for the loss.

Despite the name, “excess follow form” policies do not completely follow the primary policy’s wording. Although the differences might seem small at the time of binding they can have significant consequences at the time of a claim.

Qualcomm settled a coverage dispute with AIG for $16 million (AIG’s policy has a $20 million limit). Lloyd’s refused to pay anything towards the $28 million because Lloyd’s “excess follow form” policy included a provision stating: “underwriter shall be liable only after Insurer(s) under each Underlying Policies have paid or been held liable to pay the full amount of the Underlying Limit of Liability”. Qualcomm sued and the court held in favor of Lloyd’s.

This is a clear example how “excess follow form” policies are not. Or as some would say “Excess Policies Matter.”

Another example of an “excess follow form” myth, is the arbitration provision that is in each policy.

Most D&O (E&O, EPL, and Cyber) policies require coverage disputes to be resolved by arbitration. Remember our $100 million D&O program with 10 insurers? The primary policy requires AAA arbitration in the laws of New York, the first excess may require that resolution be in London under the Arbitration Act of 1996, the next layer require may require arbitration under the laws of Bermuda, and so on.

Not only do these inconsistencies require different venues for resolution, but it is also likely that each arbitration location could have different results, thus compounding an already serious problem.

Hopefully, we can all agree that “excess follow form” policies are not excess follow form policies. Insureds need to recognize that not all excess programs are the same and there is a need to place significant importance on all the contractual wordings, not simply the primary.

I’ve now presented you with the problem. In my next post I’ll discuss the solution.

Share this article:

Brokerage

The Fine Print

Wholesale and retail broker contracts must spell out roles, responsibilities and expectations.
By: | July 18, 2016 • 3 min read
Close-up Of Person's Hand Looking At Contract Through Magnifying Glass

When insurance buyers seek out hard-to-place risks — coastal property-catastrophe insurance in coastal Florida, for instance — they turn to a retail broker who in turn seeks coverage from a wholesale broker with access to surplus lines insurers or other specialty markets.

Advertisement




Trouble may ensue, however, if the agreement between the retailer and wholesaler are unwritten or otherwise unclear. Too often, that is the case.

Mark Robinson, co-founder of national law firm, Michelman & Robinson, LLP, and chair of the firm’s insurance industry group, said that “it is alarmingly common for wholesale insurance brokers to not have formal written agreements in place with their retail producers, which exposes the wholesaler to potential liability.”

“While some of the key points that should be included in a written agreement are rather obvious — commission rates, payment of premiums, etc. — other essential terms such as the scope of binding authority, special cancellation provisions, and ownership of expirations can be much more nuanced, and should be spelled out in detail so as to mitigate the risk of conflicting interpretations,” he said.

Robinson noted that “it is critical that wholesaler/retailer agreements contain a mutual indemnification provision as a safeguard against third-party claims resulting from one party’s negligent acts, errors or omissions, or breach of duties under the agreement.”

Mark Robinson, co-founder, Michelman & Robinson, LLP

Mark Robinson, co-founder, Michelman & Robinson, LLP

In terms of commissions, for instance, “It’s pretty obvious [the rate should be spelled out], Robinson said, but contracts also need to spell out whether there is a right to change the commission rate paid to the retailer by the wholesaler at some stage.

Bernie Heinze, executive director of the American Association of Managing General Agents (AAMGA) in King of Prussia, Pa., agreed.

“In an age where lawsuits are quick to follow on the heels of many adverse coverage determinations, it is extremely important that these specific roles and responsibilities and expectations are specifically delineated, and it’s necessary that each party to the transaction understands their legal and contractual responsibilities,” said Heinze.

“It’s important to understand that it’s the carrier that has expressly conveyed and delegated its authority to bind risks in accordance with its underwriting guidelines and its risk appetite to the wholesaler, which serves the role of the defacto branch office of the insurer,” he said.

Bernd G. Heinze, executive director, American Association of Managing General Agents

Bernd G. Heinze, executive director, American Association of Managing General Agents

“In order to be in compliance with the statutory obligations of the insurer and its duties to the market,” he said, “the wholesaler has to be sure and the retailer similarly must be certain that the lines of demarcation between them have been established and understood.

“This would also include the issuance of certificates of insurance and endorsements to the policy, which are derived specifically from the authority the carrier has conveyed to the wholesaler,” Heinze said.

These certificates and endorsements can essentially change the coverage grants of the policy, Heinze noted.

Robinson said that “if the retailer thinks they have binding authority and represents to the risk manager, ‘This is bound. No worries,’ it could turn into a complicated legal issue.

“The agreement should expressly provide that the retail producer has no authority to bind, make, alter, vary, issue or discharge any insurance policy, extend the time for payment of premiums, waive or extend any policy obligation or condition, or incur any liability on behalf of the wholesaler or the insurers,” he said.

An attorney/consultant who has worked with insurance brokers for more than 25 years, and requested anonymity, said that in the 1980s, representatives of both retail and wholesale tried to address concerns over these sorts of agreements, with some organizations proposing a model contract.

Nothing came of the various initiatives, the attorney noted, due to the disparate nature of the wholesale universe, which includes small independents, national firms and boutiques.

Particularly problematic issues related to wholesale/retail broker contracts are commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations.

Another area of complexity was that wholesale brokerage community agreements can vary widely between individual organizations, he said.

Advertisement




Particularly problematic were commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations, he said.

Some of these difficulties may have been eased or resolved by the passage of the Nonadmitted Reinsurance Reform Act in 2010, he said. The NRRA states that only one state, the home state of the insured, can regulate and tax a nonadmitted transaction.

That’s not to suggest that conflicts cannot still emerge if the correct contract language is not in place. Quite the contrary in fact, he said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected]
Share this article:

Sponsored: Lexington Insurance

Handling Heavy Equipment Risk with Expertise

Large and complex risks require a sophisticated claims approach. Partner with an insurer who has the underwriting and claims expertise to handle such large claims.
By: | August 4, 2016 • 5 min read
SponsoredContent_Lex_0816

What happens to a construction project when a crane gets damaged?

Everything comes to a halt. Cranes are critical tools on the job site, and such heavy equipment is not quickly or easily replaceable. If one goes out of commission, it imperils the project’s timeline and potentially its budget.

Crane values can range from less than $1 million to more than $10 million. Insuring them is challenging not just because of their value, but because of the risks associated with transporting them to the job site.

“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment,” said Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance, a member of AIG.

On the jobsite, operator error is the most common cause of a loss. While employee training is the best way to minimize the risk, all the training in the world can’t prevent every accident.

“Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage,” Clarke said.

Crane losses can easily top $1 million in physical damage alone, not including the costs of lost business income.

“Many insurers are not comfortable covering a single piece of equipment valued over $1 million,” Clarke said.

A large and complex risk requires a sophisticated claims approach. Lexington Insurance, backed by the resources and capabilities of AIG, has the underwriting and claims expertise to handle such large claims.

SponsoredContent_Lex_0816“Cranes travel on a flatbed truck, and anything can happen on the road, so the exposure is very broad. This complicates coverage for cranes and other pieces of heavy equipment. Simple mistakes like forgetting to put the outrigger down or setting the load capacity incorrectly can lead to a lot of damage.”
— Rich Clarke, Assistant Vice President, Marine Heavy Equipment, Lexington Insurance

Flexibility in Underwriting and Claims

Treating insureds as partners in the policy-building and claims process helps to fine-tune coverage to fit the risk and gets all parties on the same page.

Internally, a close relationship between underwriting and claims teams facilitates that partnership and results in a smoother claims process for both insurer and insured.

“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy,” said Michelle Sipple, Senior Vice President, Property, Lexington Insurance. “This helps us tailor our policies or claims handling to suit their needs.”

“The shared goals and commonality between underwriting and claims help us provide the most for our clients,” Clarke said.

Establishing familiarity and trust between client, claims, and underwriting helps to ensure that policy wording is clear and reflects the expectations of all parties — and that insureds know who to contact in the event of a loss.

Lexington’s claims and underwriting experts who specialize in heavy equipment will meet with a client before they buy coverage, during a claim, or any time in between. It is important for both claims and underwriting to have face time with insured so that everyone is working toward the same goals.

When there is a loss, designated adjusters stay in contact throughout the life of a claim.

Maintaining consistent communication not only meets a high standard of customer service, but also ensures speed and efficiency when a claim arises.

“We try to educate our clients from the get-go about what we will need from them after a loss, so we can initiate the claim and get the ball rolling right away,” Clarke said. “They are much more comfortable knowing who is helping them when they are trying to recover from a loss, and when it comes to heavy equipment, there’s no time to spare.”

SponsoredContent_Lex_0816“Our underwriters and claims examiners work together with the broker and insured to gain a better understanding of their risk and their coverage expectations before we even issue a policy. This helps us tailor our policies or claims handling to suit their needs.”
— Michelle Sipple, Senior Vice President, Property, Lexington Insurance

Leveraging Industry Expertise

When a claim occurs, independent adjusters and engineers arrive on the scene as quickly as possible to conduct physical inspections of damaged cranes, bringing years of experience and many industry relationships with them.

Lexington has three claims examiners specializing in cranes and heavy equipment. To accommodate time differences among clients’ sites, Lexington’s inland marine operations work out of two central locations on the East and West Coasts – Atlanta, Georgia and Portland, Oregon.

No matter the time zone, examiners can arrive on site quickly.

“Our clients know they need us out there immediately. They know our expertise,” Clarke said. “Our examiners are known as leaders in the industry.”

When a barge crane sustained damage while dismantling an old bridge in the San Francisco Bay that had been cracked by an earthquake, for example, “I got the call at 6 a.m. and we had experts on site by 12 p.m.,” Clarke said.SponsoredContent_Lex_0816

Auxiliary Services

In addition to educating insureds about the claims process and maintaining open lines of communication, Lexington further facilitates the process through AIG’s IntelliRisk® services – a suite of online tools to help policyholders understand their losses and track their claim’s progress.

“Brokers and clients can log in and see status of their claim and find information on their losses and reserves,” Sipple said.

In some situations, Lexington can also come to the rescue for clients in the form of advance payments. If a crane gets damaged, an examiner can conduct a quick inspection and provide a rough estimate of what the total value of the claim might be.

Lexington can then issue 50 percent of that estimate to the insured immediately to help them get moving on repairs or find a replacement. This helps to mitigate business interruption losses, as it normally takes a few weeks to determine the full and final value of the claim and disburse payment.

Again, the skill of the examiners in projecting accurate loss costs makes this possible.

“This is done on a case-by-case basis,” Clarke said. “There’s no guarantee, but if the circumstances are right, we will always try to get that advance payment out to our insureds to ease their financial burden.”

For project managers stymied by an out-of-service crane, these services help to bring halted work back up to speed.

For more information about Lexington’s inland marine services, interested brokers should visit http://www.lexingtoninsurance.com/home.

SponsoredContent
BrandStudioLogo

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.Advertisement




Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
Share this article: