Subrogation Attempt Rejected
St. Paul Mercury Insurance unsuccessfully sought to recover $14.5 million from a security company after a propane tank exploded in an insured’s building.
A tank of liquefied petroleum — which later was determined to be damaged or defective prior to delivery — had been delivered to a jeweler who rented space in the building.
St. Paul Mercury Insurance, as subrogator for Mallers, claimed the security company was negligent and breached its contract by not stopping or reporting the delivery of the propane tank. The insurer argued that Aargus “knew or should have known” that it was creating “a dangerous condition.”
The contract between the building owner and the security company did not include specific responsibilities regarding the inspection of deliveries.
The Circuit Court of Cook County, Illinois, rejected the insurer’s argument, granting a summary judgment. That court also rejected affidavits from experts, who offered their opinions that appropriate security procedures would not permit delivery of propane tanks. On appeal, the court agreed, ruling that neither expert was part of the contract between the building owner and security company, and that their views on high-rise security were “irrelevant.”
The appeals court upheld the lower court’s decision that the security company “never undertook a duty to check on propane tanks” as part of its responsibilities.
Scorecard: St. Paul Mercury Insurance Co. will not recoup the payment of $14.5 million it paid in claims following an explosion.
Takeaway: A court will not expand a defendant’s duties beyond what the parties agreed upon in their contract.
Insurer Need Not Pay for Atrium Collapse Settlement
The U.S. Fourth Circuit Court of Appeals upheld a summary judgment which allowed ACE American Insurance Co. to reject reimbursement of a $26 million settlement claim.
The claim resulted from the Sept. 5, 2007 collapse of an 18-story, 2,400 ton glass atrium that was being built as part of a $900 million Gaylord National Resort and Convention Center in Oxon Hill, Md. Gaylord hired PTJV, a joint venture between Perini Building Co. and Turner Construction Co., to serve as construction manager.
A year after the collapse of the atrium, PTJV filed a complaint against Gaylord for establishment and enforcement of a mechanic’s lien, breach of contract, quantum meruit, and violation of the Maryland Prompt Payment Act. PTJV alleged Gaylord owed it nearly $80 million. Gaylord countersued for breach of contract and breach of fiduciary duty, seeking reimbursement of about $65 million due to PTJV’s alleged failure to properly manage scheduling and costs, and failing to build a high-quality project at the agreed-upon price.
Gaylord and PTJV agreed to settle the Gaylord action on Nov. 28, 2008, with Gaylord paying an additional $42.3 million and PTJV crediting back $26 million. PTJV did not seek ACE’s consent prior to entering the settlement agreement, and did not seek reimbursement for the settlement amount until about six months afterward, according to court documents.
ACE denied payment, and PTJV filed suit alleging breach of contract and bad faith. A district court upheld ACE’s subsequent motion for a summary judgment because of the lack of prior consent to the settlement, and the appeals court agreed with that decision.
Scorecard: ACE will not need to pay a $26 million insurance claim, following an insured’s settlement of litigation without prior consent.
Takeaway: The decision breaks away from the trend of courts requiring evidence of prejudice when an insurance company denies coverage due to lack of notice.
ERISA Time Limits Upheld
The U.S. Supreme Court denied the petition of a Wal-Mart public relations executive to litigate the denial of long-term disability benefits under the retail store’s plan, administered by Hartford Life & Accident Insurance Co.
A unanimous decision of the High Court ruled that Julie Heimeshoff failed to abide by the three year statute of limitations in filing her request for judicial review of the insurance company’s denial of benefits.
Although Heimeshoff filed the litigation within three years after the final denial of benefits, she did not file it within three years after “proof of loss,” as was required in the plan documents.
Suffering from lupus and fibromyalgia, Heimeshoff stopped working in June 2005. In August of that year, she filed a claim for long-term disability benefits, listing her symptoms as “extreme fatigue, significant pain, and difficulty in concentration.” That claim was ultimately denied by Hartford when her rheumatologist never responded to requests for additional information.
Hartford later allowed her to reopen the claim without need for an appeal, if the physician provided the requested information. After another physician evaluation and report, Hartford’s physician concluded Heimeshoff was able to perform the “activities required by her sedentary occupation.”
In her complaint, which was joined by the U.S. government, Heimeshoff argued the controlling statute should be the Employee Retirement Income Security Act, which provides a two-tier process of internal review and litigation. A district court granted a motion by The Hartford and Wal-Mart to dismiss the lawsuit. That was upheld by the U.S. Second Circuit Court of Appeals. The High Court agreed, ruling the statute of limitations was reasonable and there were no contrary statutes that should control the process.
Scorecard: The Hartford need not pay long-term disability benefits to the employee.
Takeaway: The U.S. Supreme Court’s decision resolves a split among various federal appeals courts, some of which had upheld plan provisions and others which found they were not enforceable.
Court Reverses Product Liability Decision
Indalex was seeking duty-to-defend coverage from the insurer under a commercial umbrella policy as a result of lawsuits filed in five states alleging the company’s doors and windows were defectively designed or manufactured, resulting in water leakage, mold, cracked walls and personal injury.
The trial court ruled there was no obligation to defend or indemnify Indalex as the claims involved “faulty workmanship” and thus did not constitute an “occurrence.” It dismissed the lawsuit.
On appeal, the higher court found that the underlying claims did count as “occurrences” because the defective products led to damages elsewhere and were “neither expected nor intended from the standpoint of the Insured.”
The court ruled that the lower court improperly ignored legally viable product-liability-based tort claims, rejecting the use of the state’s “gist of the action” doctrine, which prevents a “plaintiff from re-casting ordinary breach of contract claims into tort claims.” The case was remanded to the lower court for further action on the claims.
Scorecard: National Union may incur claims up to $25 million as Indalex defends itself from the underlying lawsuits in five states.
Takeaway: The decision provides an expansive reading of an insurance company’s obligations in commercial general liability coverage.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.