Excess Follow Form? The Problem
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.
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.
The New World of Global D&O Insurance – Part 2
Note: This is the second of a two-part Risk Insider look at D&O.
As indicated in my previous Risk Insider post on Aug. 16, it’s been 10 years since the advent of the first local foreign D&O policies. Since then, many carriers have fine-tuned their process for underwriting and issuing local policies in foreign countries.
So, how should companies determine what countries have significant risk for them, and what are the key factors that should be examined in assessing the local exposure to D&O risk – whether from claims or from regulatory or tax concerns?
Not surprisingly, many multinationals have no interest in acquiring foreign local D&O coverage in countries where they believe their D&O exposure is negligible. After all, no exposure should translate into no premium allocation from the carrier, and thus no taxes or other compliance issues.
Therefore, when determining which countries are candidates for a foreign local D&O policy, it is critical to at least consider the following:
- Local exposures based on size, stock ownership, and brand.
- Types of local operations or business activities and status of the local management.
- Local regulations, including whether local non-admitted D&O coverage is permitted and recognized in country, and any potential taxes or penalties.
- Potential indemnification constraints for each country of concern.
- An assessment of local market conditions, purchasing patterns and claims activity.
Ultimately, each multinational client company [in the U.S., for example] should prioritize its international D&O risks from both a claims and compliance perspective. By assessing “regulatory risks,” such as compulsory requirements, admitted paper, indemnification constraints, tax, regulatory, local market viability, enforcement and local D&O claims history, we have built a “Regulatory Score” for each country.
Not surprisingly, many multinationals have no interest in acquiring foreign local D&O coverage in countries where they believe their D&O exposure is negligible.
Against that very substantial analysis, we have also created a simple “Business Trends” score for each country by measuring how often multinationals do business in these countries, and the extent of such business in each country in terms of the size (revenues or assets) and complexity of their operations.
By substituting your own data on country by country exposures, a customized heat map can be drawn that will help you prioritize the countries which require the most attention from a D&O insurance perspective. A sample graphic for some of the more popular countries follows:
Implementing International D&O coverage through the use of locally issued D&O policies is both important and challenging. Brexit does not help. Although “Freedom of Services” (FOS) policies were never very popular, it was helpful in some cases to place a single U.K. policy to obtain coverage for all European Union countries. And while innovative responses to Brexit have already emerged, we continue to favor local policies in each of your countries of interest.
Finally, we recognize that implementing a strong International D&O strategy puts a large administrative burden on the corporate risk manager and corporate offices in general. A large amount of information is required, which may include the collection of application materials from local operations.
However, the trade-offs are worth the trouble in high-risk countries. Sound advice, patience and persistence are critical to a successful process.
See Part I here.
Handling Heavy Equipment Risk with Expertise
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.
“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.”
“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.
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.
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.