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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
10152014_10_claims_lead

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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The Law

Legal Spotlight: October 1, 2014

A look at the latest decisions impacting the industry.
By: | October 1, 2014 • 5 min read
You Be the Judge

Firms Given More Control Over Independent Counsel

Signal Products Inc. manufactured handbags and luggage using a design known as the “Quattro G Pattern executive in brown/beige colorways,” in accordance with its license from Guess? Inc.

10012014_legal_spotlight_gucci_230x300In 2009, Gucci America Inc. filed suit against Guess?, Signal and others, claiming the design “infringed on a distinctive Gucci trade dress known as the ‘Diamond Motif Trade Dress.’ ” Signal’s share of the infringement claim was $1.8 million.

Signal filed suit in U.S. District Court in California after its insurers — American Zurich Insurance Co., which had issued a primary commercial general liability policy, and American Guarantee and Liability Insurance Co., which had issued an umbrella liability policy — refused to pay $1.9 million in defense costs.

Zurich countersued, seeking a summary judgment that it was not required to reimburse Signal for a $750,000 interim legal payment to the primary legal firm retained by Guess? (of a total $1.9 million in fees for Signal) or for $1.2 million in legal fees for a second law firm that represented Signal in the action.

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The insurers argued they were not required to pay fees to the second law firm because Signal had already retained another law firm to represent it, and that the fees were not incurred in connection with Signal’s defense.

U.S. Judge Christina Snyder in August rejected requests from both sides for summary judgment, ruling more information was needed to determine reasonableness of legal fees and other “genuine issues of disputed material fact.”

However, she did rule, in this case of first impression, that Signal could use more than one law firm as independent counsel when there is a potential conflict of interest in insurance cases.

“Having accepted that multiple attorneys may serve as … counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm,” she wrote.

Scorecard: The insurers may have to pay up to $1.2 million to the second of two law firms, in addition to possibly having to pay up to $1.9 million in litigation costs to the primary firm.

Takeaway: California law allows an insured to retain more than one law firm as independent counsel in an insurance dispute.

Attorneys’ Fees Not Included in Damages Exclusion

10012014_legal_spotlight_check_230x300Several years ago, two class-action lawsuits were filed against PNC Financial Services Group, each claiming the bank improperly charged customers $36 overdraft fees.

Both actions were settled by PNC: One in 2010 for $12 million — which included $3 million in attorneys’ fees, $77,857 in costs and expenses, and $15,000 toward incentive fees for the representative plaintiffs — and one in 2012 for $90 million, including $27 million for attorneys’ fees, $183,302 for reimbursement of costs, and $30,000 in plaintiffs’ incentive awards.

On May 21, a U.S. judge in the Western District of Pennsylvania recommended that the insurers cover the settlement costs. Both Houston Casualty Co. and Axis Insurance Co. had issued policies with a $25 million liability limit, subject to a $25 million retention.

In June, U.S. Judge Cathy Bissoon in that district disagreed. She ruled that the insurers were not responsible for the part of the settlements that returned overdraft fees to customers — since fees were excluded from the definition of “damages” in the policy.

Attorneys’ fees and costs totaling $30.3 million, she ruled, were not excluded. She ordered more proceedings on the claims expenses and damages.

Scorecard: Two insurers are responsible to cover up to $30.3 million for attorneys’ fees and costs that were included in settlements of two class-action lawsuits.

Takeaway: The fee exception to damages does not extend to the entirety of settlement costs, particularly attorneys’ fees, costs and incentive awards.

Underwriters Must Pay Recall Costs

When Abbott Laboratories agreed in December 2000 to acquire the global operations of Knoll Pharmaceutical Co., it notified its Lloyd’s of London carriers, in accordance with its product recall insurance coverage. That coverage stated the new entity would automatically be covered, but additional premiums would have to be negotiated.

10012014_legal_spotlight_tablets_230x300As part of the negotiation with a group of underwriters led by Beazley and American Specialty Underwriters, Abbott indicated there was no “current situation, fact or circumstance” that would lead to a claim under the Accidental Contamination policy (which would include any government drug recalls).

A premium was eventually paid and accepted in July 2001, even after the company advised the underwriters that the U.S. Food and Drug Administration may pull Knoll’s popular thyroid drug Synthroid from the market.

The company and its underwriters did execute in October 2001 a “tolling agreement … that would allow the parties to preserve their rights with respect to any Synthroid-related claims.”

On March 6, 2002, the Italian Ministry of Health suspended all sales and marketing of sibutramine (manufactured by Knoll as Meridia).

Abbott filed a claim under the policy, and on May 16, 2003, the underwriters informed Abbott the tolling agreement was cancelled because Abbott “had not fully responded to their document and information request.” When it asked what information was needed, Abbott received no response.

On June 2, 2003, the underwriters filed suit to rescind the policy, while Abbott countersued for a declaratory judgment for coverage, breach of contract and “vexatious delay damages.”

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A judge rejected the underwriters’ claim for recission, noting that the insurers had accepted the additional premium and that the Synthroid situation had been disclosed in a timely manner.

For damages, the court put the company’s losses at $155.2 million. Minus a deductible and 10 percent coinsurance, the underwriters were told to pay $84.5 million, plus about $2.8 million in costs and interest.

A three-judge panel on the Appellate Court of Illinois, First Judicial District, upheld that decision on appeal on July 28.

Scorecard: The underwriters have to pay $84.5 million plus $2.8 million in costs and interest.

Takeaway: By accepting the premium and failing to pursue issues of due diligence, the underwriters undercut their argument for a “material misrepresentation” by the company.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@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.

SponsoredContent_LIU

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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