Specialty Insurance Blog

Employee Internet Use

The insurance industry in is a heavy user of email and the internet, and employers are finding that employees are using the internet for personal use on company time.  According to a recent column (see here), employees spend 20% of their internet time at work on personal business.  In addition, one study found that 8% of personal internet use involved sites with potential liability for the employer.

Employer exposure from employee use of the internet can arise from accessing inappropriate sites, such as pornographic sites, and from viruses and other malicious code that can be found on these sites.  The column suggests:

It is important for employers to develop acceptable Internet usage policies and to utilize appropriate Web filtering.  The policies and filtering (if any) should match the given mission and culture of an organization.

Certificates Again

New York City has imposed a new certificate of insurance requirement on insurance agents (or insurance companies) that will significantly increase errors & omissions (E&O) exposure.  For each insured doing sidewalk and roadway construction for the City, the City is requiring that insurance agents warrant that each insured’s insurance coverage meets City requirements.  (See here and here, and here for a prior post on insurance certificates.)

Retaliation Exposure

Employer exposure to retaliation claims are getting increasing attention, and effective risk management and employment practices liability (EPL) insurance are two effective means of protection from the exposure.  A retaliation claim is a claim made in response to perceived retaliatory action by an employer after a complaint of discrimination or sexual harassment to the employer.  It is illegal to retaliate against an employee for claiming discrimination or sexual harassment.

.

Employers have a tough time preventing retaliation because it may not be clear what retaliation is, and supervisors may not be trained in this area.  A case currently be considered by the Supreme Court will (hopefully) provide some guidance on the question of what constitutes retaliation (see here – WSJ). 

.

There are effective risk management steps that employers can take to reduce the risk of a retaliation claim, and most involve employee education and changes to disciplined internal employment procedures.  (See here – WSJ – and here, here.  Information on EPL insurance is here.)

Certificates of Insurance

Insurance certificates can create significant liability for insurance agents and brokers, and cause insurance agents errors & omissions (E&O) claims.  A recent and very serious crash in Connecticut has been national news, and a significant part of the approaching litigation will center on the apparent lack of insurance and whether there is any insurance agent liability.

The short story is that an out of control truck came down Avon Mountain near Hartford, ran a stop light and crashed into a number of cars waiting for the light, killing and injuring a number of people.  The insurance on the truck had been cancelled a few months before, and the owner has been charged with attempted insurance fraud.  (Apparently the owner tried to reinstate coverage moments after the accident.)

Insurance certificates are center stage in the just filed litigation.  While the insurance had been cancelled (no question about this), the agent had issued certificates of insurance.  It appears that the certificates do not indicate coverage for the specific vehicle, but have given some hope to the victims’ families that there may be coverage.  (See here and here, and see here and here for summary information on the accident.)

While agents and brokers typically view insurance certificates as evidence, in summary form, that insurance is in place, many may not realize the significance a certificate can have after a loss has occurred.  Significant liability, and insurance agents errors & omissions (E&O) claims, can occur when certificates are not handled correctly.

Agency Agreements

Insurance agents and brokers regularly execute contracts with insurers without fully considering provisions that could have a negative impact down the road.  For example, we recently reviewed an agency contract with a simple but subtle defect.  The contract contained a provision which granted the agent ownership of the renewals, but the provision terminated with the termination of the contract.  Of course, the whole point of the renewal ownership provision is to protect the agent after the contract is terminated.

An article on troublesome contract provisions in American Agent and Broker provides insight into some of the provisions that may create problems for agents and brokers (see here).

Regulatory Competition

As everyone in the insurance business has heard, a bill has been introduced to the Senate called the Optional Federal Charter bill, or OFC.  The bill would give insurers the option to be regulated by the federal government rather than the states and has generated significant discussion and disagreement within the industry and with regulators.

According to one of the sponsors, Senator John Sununu (R-NH):

The insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation, and growth…A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue

State regulators are strongly opposed, as the system would invade their turf and impact their premium tax revenues.  And the two largest agents associations, the PIA and the IIABA, and the Property Casualty Insurers Association of America (PCI) are opposed to the bill.

But the industry is divided, with the Council of Insurance Agents & Brokers, which represents the larger insurance brokers, and the American Insurance Association both supporting the optional federal system.  Insurance Journal has an excellent summary (see here).  Here are some additional comments:

Eiland is NCOIL’s (insurance legislators) immediate past president & a state representative in Texas (see here):

The bill is not a consumer-driven bill but a bill drafted by the industry for the industry. NCOIL completely and fully oppose it.

Brevik is PIA’s CEO (see here).  While acknowledging that insurance agents have not always seen eye to eye with the National Association of Insurance Commissioners and its members, Mr. Brevik said that we know that state regulation works.

For insurance regulators, the issue is primarily a turf and revenue issue.  The insurance industry itself is torn between an onerous and inefficient state-based regulatory and an unknown federal system.

EPL Study

A recent study concludes that private companies have significant exposure to employment related charges yet many are not buying employment practices liability (EPL) insurance coverage.  Part of the study Chubb completed of private companies, called the 2005 Chubb Private Company Risk Survey (see prior post, and here), looked at employment practices liability coverages, litigation and exposures.  Key findings:

• 35% have experienced an employment charge or lawsuit in the last 5 years
• Frequency varied significantly by size
• The average cost of an employment suit was high at $1,152,000

One key finding is the high frequency of suits at companies with more than 50 employees (ranging from 44% to 80% depending on size).  While the average severity is very high, at over $1 million, this is probably skewed by some very large private companies participating in the study.  It would be helpful to have the average severity for different sized companies.  Alternative data (limited), which combines directors & officers (D&O) coverage as well as employment practices liability (EPL) coverage, is available here.

Also surprising is the number of companies that do not buy EPL insurance.  For companies with more than 50 employees, more than 50% do not buy EPL insurance.  The figure climbs to more than 80% for companies with 25-49 employees.

Disclosure

It is critically important that an insured report a circumstance that might result in a claim where coverage may be provided by a professional liability (errors and omissions or E&O), directors and officers (D&O) or employment practices liability (EPL) insurance policy. 

A recent case involving this situation is summarized here, and concludes: 

In an unpublished opinion, a federal trial court… has held that coverage was not available for a legal malpractice claim brought against a law firm where the firm failed to disclose in the policy application existing circumstances that a reasonable person would believe may result in [the] claim.

The court concluded that the insured did not answer an application question truthfully, that the correct answer to the question was material, and that the insurer would not have provided coverage if the insured had disclosed the circumstance.

Most professional liability insurers require that circumstances that might result in a claim be disclosed in applications.  In addition, policies typically include provisions which allow for these circumstances to be reported as a claim and which exclude circumstance where the insured had knowledge prior to the policy period.

An application disclosure questions may read something like this:

Are any of you aware of any alleged act, circumstance, situation, error or omission which may result in a claim being made against you or any of the persons or firm described?

Note that an insured that has knowledge of a circumstance which might result in a claim and does not disclose it to the insurer when asked on an application is failing to disclose material information and risks losing coverage as in the case noted above.  Also, some renewal applications do not contain these disclosure questions.

A prior knowledge exclusion in a policy might read something like this:

The Insurer will not pay for claims arising out of any fact, circumstance, transaction or event known to any insured as of the inception date of this policy that a reasonably prudent person might expect to give rise to a claim.

Additional information is available on application warranties and reporting claims for E&O, D&O and EPL coverages.

Insurance vs Risk Management

We do not believe that insurance encourages less risk management, particularly in the professional liability lines (which include directors and officers (D&O) and employment practices liability (EPL) coverages).  The issue was raised recently by John Quarterman of Perilocity blog when he said the future of Internet security is insurance (see here) and Spire Security Viewpoint responded by saying (see here):

Sure, insurance is useful. But the implication is that it is okay to do less preventive stuff

Perilocity points out, from a New York Times article (see here), that the incentives of insurers are to encourage prevention.

We use the term risk management rather than prevention, and find that insurers insist on risk management.  In professional liability this is the core of the underwriting process.  For example, professional liability underwriters expect their professional insureds to have robust internal procedures and systems, and underwriters of D&O expect insureds to follow the internal control directives embodied in Sarbanes-Oxley.

To see how this works in a simple form, take a look at an employment practices liability application (see here, go to page 2).  The application asks whether the employer applicant has basic risk management procedures in place, such as employment applications and a reference check process, and whether the applicant uses employment counsel.  Rather than insurance being a replacement for risk management, our experience is that insurance drives risk management.

Insuring Sports

The doctrine of assumption of risks inherent in a sporting activity are critically important for underwriting liability insurance for organizations and facilities involved with all sorts of sports and recreation.  There is an excellent summary on Declarations & Exclusions of three appellate court decisions in California which uphold the assumption of risk doctrine in baseball, skiing and a personal trainer situation (see here).

Underwriters have a difficult time assessing risk for sporting and recreational activities when it is not clear whether the courts will uphold assumption of risk.  If not, the exposure to the account is significantly higher, and rating can become problematic.