Preparing for Hail
Hailstorms are expanding their geographic footprint in every direction.
In Texas, storms are striking as far south as San Antonio. While the city normally experiences one to five hailstorms per year — a moderate risk zone for hail — this year it had more than 30, according to data tracked by Liberty Mutual’s risk engineering arm.
“Hail activity has also been expanding more into the North and Northeast,” said Arindam Samanta, director, product management and innovation at Verisk Insurance Solutions.
“We’ve noticed it becoming more of a problem in parts of Ohio, Illinois and Minnesota, outside of traditional hail-prone areas.”
As these areas become more developed, more properties are built in hail’s path, increasing claim frequency and severity.
Areas on the west and south sides of Oklahoma City, for example, have largely transformed from wheat fields to sprawling suburban communities in the last 10 years.
“We know that the weather patterns responsible for the formation of hail are fairly consistent over certain geographic areas — the Great Plains states, the Rocky Mountain West, parts of the Midwest — but over time the expansion and aerial coverage of cities and suburbs throughout these regions have increased, so the number of properties in the path of these damaging hailstorms will increase,” said Curtis McDonald, product manager, weather verification services, CoreLogic.
The type of storm has changed too. Smaller stones with diameters of less than 2 inches combined with higher velocity winds wreak different types of damage than larger, denser stones.
Hail typically smashes up roofs, siding, skylights and roof-mounted equipment like refrigeration units. In 2016, though, wrecked air conditioner coils have constituted roughly 30 percent of hail damages.
The smaller hailstones have an easier time getting into the coils — which are fragile and susceptible to damage — but are not heavy enough to significantly damage roofing materials and sturdier equipment.
The costs associated with hail damage have also risen due to the expensive repair and replacement of air conditioning units that are either too old or too new. For out-of-date equipment, there may no longer be parts available, while newer units must adhere to eco-friendly guidelines that elevate their price.
Many newer A/C units are also custom-built, especially for large commercial properties, so the replacement process is not only costly, but time-consuming.
Commercial property insurers can build a defense strategy by arming themselves with data, and there are plenty of ways to gather it.
“For 200-ton to 500-ton air conditioning units, it could take three to four months to get a new unit built and installed. And sometimes roof modifications are necessary during that process,” said Ralph Tiede, vice president, commercial insurance, and manager, property risk engineering, at Liberty Mutual.
“The business interruption impact can be significant, and that’s one piece of the puzzle that risk managers may not think about,” Tiede said.
If a storm strikes in the middle of a hot Texas summer, then the property may need to shut down completely while it waits for the new unit.
Commercial property insurers can build a defense strategy by arming themselves with data, and there are plenty of ways to gather it.
The Insurance Institute for Business and Home Safety (IIBHS), a research organization funded by insurance companies, conducts storm simulations inside its massive laboratory in Chester County, S.C., firing lab-created hailstones from cannons into full-size buildings to study effects on roofing, siding and outdoor equipment.
The organization also conducts field testing using impact probes to analyze hailstone size and density, and radar to track weather patterns.
“The IIBHS supplies member companies [including Liberty Mutual] with the most up-to-date information. That’s critical, because otherwise we’d be left making risk mitigation recommendations to clients based on building codes that are years old and don’t reflect what’s happening today,” Tiede said.
Other analytics organizations provide similar real-time insights.
Verisk Analytics uses weather modeling and ground observations to complement its real-time weather monitoring data feed.
“We use an extensive ground-based network, including dual-pol radars, which collect huge amounts of data on fast-moving storms every two to five minutes,” Samanta said. This helps to complete the picture of a property’s exposure and keep an accurate record of hail events.
Storm history, collated with industry-wide hail claims data, informs Verisk’s Hail Damage Score, which ranks a location on a scale from one to 10. Higher numbers indicate higher likelihood of exposure to past damaging hail events and the presence of pre-existing hail damage.
Such data can help insurers discern what to look for when conducting property inspections for potential new clients, and may lead them to decide that a location is too risky to underwrite.
Analytics firm CoreLogic also produces retrospective data using a proprietary forensic database that houses three years’ worth of storm data.
“At CoreLogic, we score properties based on the actual number of hail events that previously impacted it,” McDonald said. “It’s a tool underwriters can use when evaluating a new property or geographic area.”
But with hailstorms fanning into new regions and the resulting damage changing in nature, data based on past events may not suffice. Forward-looking probability metrics complete the risk picture.
“We’ll also run a 10,000-year simulation and look at the probability of hail 1 inch in diameter or greater impacting a specific property in the future,” McDonald said.
Other data points to consider are more property-specific: the types of building materials for roofing and siding, the number of roof-mounted equipment units and skylights, the age of the equipment, the current value of the building, and any mortgage or potential liens.
“High quality data is key in forming a basis for a view of risk in areas where it is still emerging,” Samanta of Verisk said.
Hailstorm and property-specific data can aid insurers in multiple capacities, from initial assessments of a potential new client to risk mitigation recommendations to expeditious claims processing.
“We have specific guidelines for our engineers when they go out to do an assessment of a new building in an area prone to hailstorms and wind,” Tiede of Liberty Mutual said. “We will want them to look at specific things like the roof condition, roof-mounted equipment, and any maintenance programs in place.”
The engineers then report back to account managers, who use the information to customize pricing and deductible structures, and to develop specific risk mitigation recommendations.
“We built a proprietary hail tool where we’ll enter in all the property-specific data collected for us by our engineers, and it will show us the loss potential for that specific location.
“We pass that along to the account managers, who help clients develop and prioritize specific steps they can take to reduce their exposure,” Tiede said.
Recommendations can include installing factory-approved hail guards over air conditioning and heating units, replacing an old roof with stronger material, conducting regular roof maintenance and installing protection for skylights.
At about $250 each, “manufacturer-installed hail guards are a surprisingly inexpensive fix” that won’t compromise the unit’s efficiency, Tiede said.
Liberty Mutual’s tool also has the benefit of identifying customers who are doing their homework and have already taken steps to protect themselves.
“If we have a customer who is proactively taking these steps that could reduce loss expectancy, this might make them more attractive, which would likely be reflected in that risk’s pricing,” said Brent Chambers, underwriting consultant, national insurance property, Liberty Mutual.
“It’s a tool we can use to sharpen our quote.”
“Customers who are loss-conscious deserve some type of credit. If we can, we like to give them something back to demonstrate that we’re partners in this together,” Tiede said.
Insurers can also use weather monitoring systems to send out alerts to clients sitting in a storm’s path, advising them of immediate steps they can take to limit damage and providing them with a claims contact if a loss occurs.
“If they suffer serious damage, they may not be able to get inside the building or get access to their files where they keep their insurance information,” said Chambers.
“We send them the claims intake phone number to call so they have it right in front of them if they need it.”
When insureds are warned and prepared, claims can be filed and resolved more quickly.
“Hailstorms aren’t going to stop, and in fact we’re going to see more and more of them,” Tiede said. “2016 saw a lot of hail damage — about 5,400 storms this year, and it’s a risk the whole industry is waking up to.” &
Court: A Mudslide Is Not an Explosion
On Sept. 12, 2013, a “violent flow of water, mud and debris thundered down a hillside,” destroying a commercial building in Boulder, Colo.
Colorado Casualty Insurance Co. denied an insurance claim by the insured, citing an exclusion for mudslides or mudflows.
An engineer hired by Paros Properties LLC, owner of the property, concluded that the impact caused the property to split in two. On Oct. 24, 2013, the insured asked the insurance company to reconsider its denial, stating that the “force of the mudslide caused [the owner’s] building, literally, to explode.”
Paros noted that damage caused by an explosion was compensable. The company filed suit in Colorado state court seeking the policy limit of $907,600 for the physical damages, debris removal and loss of income that exceeded $1.4 million.
The case was later removed to the U.S. District Court for the District of Colorado, which on Aug. 29, was “not persuaded” that the damage was caused by an explosion.
“We disagree that demolition by an external cascade of water, mud and debris is an explosion under the policy,” it ruled on Aug. 29.
“We would be reluctant, for example, to construe policy language to include figurative meanings. … Although a football player may ‘explode’ off the line of scrimmage, we would not construe the exception to the exclusion to include damage to a wall from someone (even someone who is 6-foot-6-inches tall and weighs 330 pounds) fleeing a flash flood.”
Scorecard: The insurance company does not have to pay more than $2.3 million for the claim.
Takeaway: The court rejected the argument that any external impact with “sufficient kinetic energy” that destroys a structure is an explosion.
Insurer Must Cover Social Engineering Loss
On July 8, 2015, the controller of principle solutions group received an email from one of his managing directors requesting a wire transfer related to a company acquisition.
The email instructed the controller to work with attorney “Mark Leach” to “ensure that the wire goes out today.” The managing director was out of the office that day.
Later that day, Leach emailed the controller and sent wiring instructions for a bank in China. Subsequently, the controller wired $1.72 million in accordance with the instructions.
The controller informed his managing director of the wire the following day, after which the company unsuccessfully tried to recover the funds. It filed a claim for the loss with Ironshore Indemnity Inc. under a commercial crime policy, which had a $5 million per occurrence limit with a $25,000 deductible.
The policy stated it would pay for a “loss resulting directly from a ‘fraudulent instruction’ directing a ‘financial institution’ to debit your ‘transfer account’ and transfer, pay or deliver ‘money or securities’ from that account.”
Ironshore denied the claim, stating that loss did not result “directly” from the initial email because of the subsequent information supplied by Leach, and that Principle’s employees subsequently set up and approved the wire transfer.
Following a lawsuit filed in the U.S. District Court for the Northern District of Georgia, Judge Richard Story ruled on Aug. 30 that Ironshore’s argument would render the policy “ ‘almost pointless’ and would result in illusory coverage.”
Scorecard: The insurance company must cover the $1.72 million loss.
Takeaway: Because the policy language was ambiguous, it must be read in the light most favorable to the insured.
Defense Required for Assault at 49ers’ Stadium
On Oct. 5, 2014, cousins Amish and Kiran Patel were assaulted while waiting in line in the men’s bathroom just before kickoff of a San Francisco 49ers game at Levi’s Stadium. Kiran Patel was left with “traumatic brain injury,” according to reports.
The men filed suit against Elite Show Services Inc. (which provided security at the stadium), the 49ers, the stadium and its management company, the City of Santa Clara and the Santa Clara Stadium Authority, alleging negligence in security services and creating a dangerous condition due to the lack of adequate toilet facilities “where crowds and long lines foreseeably created frustration, anxiety and confrontation.”
First Mercury Insurance Co., which issued a primary commercial general liability policy to Elite, subsequently filed suit in U.S. District Court for the Northern District of California against Great Divide Insurance Co., which issued a primary commercial general liability policy to the 49ers.
First Mercury sought a declaratory judgment that Great Divide had a duty to defend in the underlying action, that it had a duty to share defense costs, to participate in settlement discussions and share in indemnification.
On Aug. 29, U.S. District Judge Lucy Koh dismissed the motion related to settlement discussions and indemnification, ruling those issues were not yet “ripe” and could be reintroduced when future events render them relevant.
As for the duty to defend, she ruled that some of the claims in the underlying action were potentially covered by Great Divide and that it had a duty to defend in that action. Koh also rejected a motion to postpone the litigation pending resolution of the state court action.
Scorecard: Great Divide must share costs to defend against a lawsuit filed against the 49ers and related entities.
Takeaway: The potential liability relating to “unreasonable risk of harm” due to inadequate toilet facilities triggered the insurer’s duty to defend.
Mind the Gap in Global Logistics
Manufacturers and shippers are going global.
As inventories grow, shippers need sophisticated systems to manage it all, and many companies choose to outsource significant chunks of their supply chain management to contracted providers. A recent survey by market research firm Transport Intelligence reveals that outsourcing outnumbers nearshoring in the logistics industry by 2:1. In addition, only 16.7 percent of respondents stated they are outsourcing fewer logistics processes today than they were three years ago.
Those providers in turn take more responsibilities through each step of the bailment process, from processing, packaging and labeling to transportation and storage. Spending in the U.S. logistics and transportation industry totaled $1.45 trillion in 2014 and represented 8.3 percent of annual gross domestic product, according to the International Trade Administration.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management,” said Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin.
Such companies are known as third-party logistics (3PL) providers, or even fourth-party logistics (4PL) providers. They could provide transportation, storage, pick-n-pack, processing or consolidation/deconsolidation.
As the provider’s logistics responsibilities widen, their insurance needs grow.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps,” said Alexander McGinley, Vice President, US Marine, XL Catlin.
A comprehensive logistics form can close those gaps, and demand for such a product has been on the rise over the past decade as logistics providers search for a better way to manage their range of exposures.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management.”
–Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin
A Complementary Package
XL Catlin’s Logistics Services Coverage Solutions takes a holistic approach to the legal liability that 3PL providers face while a manufacturer’s stock is in their care, custody and control.
“A 3PL’s legal liability for loss or damage from a covered cause of loss to the covered property during storage, packaging, consolidation, shipping and related services would be insured under this comprehensive policy,” McGinley said. “It provides piece of mind to both the owner of the goods and the logistics provider that they are protected if something goes wrong.”
In addition to coverage for physical damage, the logistics solution also provides protection from cyber risks, employee theft and contract penalties, and from emerging exposures created by the FDA Food Modernization Act.
This coverage form, however, only protects 3PL companies’ operations within the U.S., its territories and possessions, and Canada. Many large shippers also have an international arm that needs the same protection.
XL Catlin’s Ocean Cargo Coverage Solutions product rounds out the logistics solution with international coverage.
While Ocean Cargo coverage typically serves the owner of a shipment or their customers, it can also be provided to the internationally exposed logistics provider to cover the cargo of others while in their care, custody, and control.
“This covers a client’s shipment that they’re buying from or selling to another party while it’s in transit, by any type of conveyance, anywhere in the world,” said Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin. “When provided to the logistics company, they in turn insure the shipment on behalf of the owner of the cargo.”
The international component provided by ocean cargo coverage can also eliminate clients’ fears over non-compliance if admitted insurance coverage is purchased. Through its global network, XL Catlin is uniquely positioned as a multi-national insurer to offer locally admitted coverages in over 200 countries.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps.”
–Alexander McGinley, Vice President, US Marine, XL Catlin
A Developing Need
The approaching holiday season demonstrates the need for an insurance product that manages both domestic and international logistics exposures.
In the final months of the year, lots of goods will be shipped to the U.S. from major manufacturing nations in Asia. Transportation providers responsible for importing these goods may require two policies: ocean cargo coverage to address risks to shipments outside North America, and a logistics solution to cover risks once goods arrive in the United States or Canada.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures,” D’Alessio said.
In another example, D’Alessio described one major paper provider that expanded its business from manufacturing to include logistics management. In this case, the paper company needed coverage as a primary owner of a product and as the bailee managing the goods their clients own in transit.
“That manufacturer has a significant market share of the world’s paper, producing everything from copy paper to Bible paper, wrapping paper, magazine paper, anything you can think of. Because they were so dominant, their customers started asking them to arrange freight for their products as well,” he said.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures.”
–Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin
The global, multi-national paper company essentially launched a second business, serving as a transportation and logistics provider for their own customers. As the paper shipments changed ownership through the bailment process, the company required two totally different types of insurance coverage: an ocean cargo policy to cover their interests as the owner and producer of the product, and logistics coverage to address their exposures as a transportation provider while they move the products of others.
“As a bailee, they no longer own the products, but they have the care, custody, and control for another party. They need to make sure that they have the appropriate insurance coverage to address those specific risks,” McGinley said.
“From a coverage standpoint, this is slowly but surely becoming the new standard. A logistics form on the inland marine side, combined with an international component, is becoming something that a sophisticated client as well as a sophisticated broker should really be asking for,” McGinley said.
The old status quo method of bolting on coverage forms or additional coverages as needed won’t suffice as global shipping needs become more complex.
With one underwriting solution, the marine team at XL Catlin can insure 3PL clients’ risks from both a domestic and international standpoint.
“The two products, Ocean Cargo Coverage Solutions and Logistics Service Coverage Solutions, can be provided to the same customer to really round out all of their bailment, shipping, transportation, and storage needs domestically and around the globe,” D’Alessio said.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of December 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.