Specialty Insurance Blog

Offshore Reinsurance

The reinsurance business is a critical backstop for the US insurance industry, and a significant percentage of this business is ceded offshore.  According to the Offshore Reinsurance in the U.S. Market: 2006 Data study, completed by the Reinsurance Association of America (RAA), 53.1% of US unaffiliated reinsurance premium in 2006 was ceded to offshore reinsurance companies (see here & here).  This is an increase from the 51.8% ceded offshore in 2005.  Bermuda and the UK were among the largest markets.  See our prior posts on Bermuda (here & here).

Consent to Assign Provision May Not Apply

Insurance agents with clients who are in an acquisition mode may be interested in any recent court decision in Indiana.  In this decision, the court determined that consent to assign provisions in occurrence policies do not necessarily preclude the acquiring company from seeking coverage under the policies.  In Travelers Casualty and Surety Co. et. al vs. United States Filter Corp (see here, and here for a summary) the court made the following comments:

The failure of the parties to comply with the consent-to-transfer language prevented the transfer of the insurance policies to Waste Management or U.S. Filter. However, that same language does not preclude U.S. Filter from seeking coverage from an Insurer for lawsuits filed by claimants who contend that they were exposed to silica from the Wheelabrator blast during that Insurer’s policy period.

The realities of the market place must ensure that assets are freely transferable. If an insurer could effectively prevent such transfers by failing to consent to the assignment of a liability policy (and no insurer would agree to the assignment where it could avoid liability for insured occurrences by refusing to consent), this public policy would be undermined.

Professional Services Exclusion

As all insurance agents know, the intention of the professional services exclusion is to ensure that professional liability claims are excluded from coverage under a general liability policy and covered under a professional liability policy (see here).  Underwriters have used professional services exclusions on general liability (GL) policies for years and have done so effectively. But there are gray areas, as two recent court rulings demonstrate.

An appellate court case in Minnesota (see here) involved an investment management firm that sought coverage for claims under its GL policy as a result of improprieties in the management of two trust accounts. The management firm tried to claim that it did not provide professional services and therefore the professional services exclusion should not apply and the GL policy should cover all damages.

The court ruled that the management firm did in fact fall under the professional services exclusion as the firm referred to its “client base” on its renewal application. The court also found that serving as a trust manager in the firm required specialized skill that is predominantly intellectual rather than physical and clearly involves professional services under Minnesota law.

In an unrelated case, the Appellate Division of the Superior Court of New Jersey (see here) found that the professional services exclusion did not apply to a lawsuit that resulted from the acts of a company’s safety manager. The court considered the role of a safety manager to be one that was neither authorized by law, nor regulated by law.

The court ruled against the insurer in this case as it rejected the assertion that the professional service exclusion applies because the safety manager did not hold a degree in engineering or architecture; had not engaged in any prolonged formal course of training; and his training involved more general academic instruction rather than a professional paid a fee for specialized service. 

Both of these cases demonstrate that the professional services exclusion can work effectively, and the first shows the importance of seeking professional liability insurance coverage in addition to GL for professional firms.

Liability Waiver Decision

Liability waiver forms are being used more and more to protect organizations from liability ( see our prior post here), but are not always effective and are under attack by the plaintiffs bar.  The California Supreme Court recently ruled that a liability release waiver was not enforceable in protecting a governmental entity from gross negligence, and only applies in ordinary negligence situations (see here & here).

The lawsuit involved the drowning of a developmentally disabled recreation program participant in a pool at a city summer camp in 2002, and the parents had signed a liability waiver form.  The Court ruled that liability waivers cannot protect a recreational program from the consequences of gross negligence.

This decision is clearly an issue for recreation and other organizations that use liability waiver forms in California.   A legal blog, Defending Sports Blog, ( see here) points out that this will open the door wider for plaintiffs attorneys:

As an immediate result of this ruling, one can expect that all lawsuits hereinafter filed relative to injuries suffered by participants in sports and recreation will include a cause of action for “gross negligence.” This decision clearly makes it easier for a plaintiff to create triable issues of material fact and defeat motions for summary judgment. More cases will inevitably proceed toward trial resulting in a high percentage of settlements and increased settlement value as the result of reduced leverage.

In addition, the blog points out that the ruling may void existing agreements that do not distinguish between ordinary negligence and gross negligence.

Customer Service Matters

In the insurance industry, customers tend to seek the best coverage they can get for the price. As agents, you know the level of service you deliver to your customers as it is important to your long term success. But does the same ring true for all those individuals in the company in a position to support your customer base?

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A recent J.D. Power and Associates study (see here, here & here) found that the majority of insurance customers will remain with their current carrier, even if they shop around. However, 33% will be enticed to make a switch and nearly 75%of these consumers do so because of a poor customer service experience.

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For many customers, the insurance industry has traditionally been price-driven in that consumers will select their carrier based on price and the value they perceive is included in the offering. The results of this study indicate that this could be changing, making customer service an even greater priority for preserving the bottom line.

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Such a change can better position agents to improve profit margins, but also increases the pressure to ensure the customer is satisfied at all times. Greenwich Associates surveyed middle-market and small companies that had switched carriers regarding buying decisions. This consulting firm found that more than 90% realized reductions in premiums by making the switch. If a customer is dissatisfied due to poor customer service and the competitor is offering a better deal, what is left to keep the customer?

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Last year, J.D. Power and Associates studied customer satisfaction in auto insurance customers (see here) and found that high levels of customer service deliver positive financial implications. Satisfaction was derived from such simple elements as the customer experiencing resolution within one company contact and receiving annual policy reviews. Even more daunting is that in this study, customers were twice as likely to switch carriers due to poor service as lower price.

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A University of Hanover report (see here) provides compelling evidence of the link between customer satisfaction and retention. These findings were published before the absolute proliferation of the Internet as a main communication portal that has created an environment where customers can change providers in a couple of clicks. As the competitive landscape continues to tighten in the industry and changing carriers takes very little effort, the burden is ultimately placed on the agent to ensure customer loyalty.

California Fires - Another Agent E&O Problem?

As insurance agents, you advise your clients to protect themselves in case of disaster. But don't forget to protect yourself as well. Whether natural or man-made, any major disaster could potentially increase your exposure to insurance agents E&O claims (see our prior post here).

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The California Insurance Commission is projecting devastating losses due to the state's recent Angora fire, and lamenting the state's "serious problem with underinsurance" (see here, here, and here).

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Numerous claim disputes arose after the devastating 1991 Oakland Hills fire. Some resulted in claims against insurance agents for inadequate coverage limits. That fire spawned over $2 billion in claims.

Loss estimates from the most recent fire are still pouring in, but primary indications are that many California homeowners will fall short when they try to rebuild with their claim proceeds. Total losses are estimated at $150 million so far.

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Today, insurers are protected to some extent: their liability on most homeowners' policies is limited to 20-25% above the listed coverage amount - a change driven by the bitter disputes that followed the Oakland Hills fire. Insureds with significantly inadequate limits may turn to their agents for compensation.

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How can you protect yourself from disaster-borne claims? Review a 2004 article by Louis Castoria of Wilson, Elser, Moskowitz, Edelman & Dicker (see here). Louis points out that insureds want lower premiums, which means lower policy limits. This pressure can lead to underinsurance. Legally, an agent's obligation regarding policy limits is not clear-cut. Make sure that your file documentation supports the level of coverage purchased.

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And just as California homeowners are being advised to review their coverage, you need to review your own E&O coverage as well. Make sure that your E&O deductible and limit are reasonable. Don't let your clients' crisis spell disaster for you, too.

Underwriting A&E in a Soft Market

Insurance agents are aware of the soft insurance market and the pressure this puts on both agents and underwriters.  One of our markets recently wrote a short article on the challenges of underwriting architects & engineers (A&E) professional liability insurance in a soft market (see here).  They correctly noted that a wide variety of factors beyond billings impact A&E pricing such as class, location, loss history and experience.  And they went on to acknowledge

What they did not mention is that underwriters in the specialty lines business, including A&E underwriters, do not take a consistent approach to underwriting and rating specialty lines accounts.  The soft market has a way of encouraging underwriters to aggressively pursue accounts that fall within the scope of their underwriting parameters.  Therefore, while an incumbent underwriter may not be willing to reduce pricing based on his or her underwriting parameters, another (new) underwriter might be. 

As results play out over time it will become clear which underwriter was correct in their assessment of the market.  The article notes that the proper terms are those which allow the insurer to be a long-term viable market.  It is entirely possible that more than one set of terms may produce positive results in the same market, and that multiple underwriters can produce good results using different underwriting strategies.  This is particularly true in the professional liability arena.

Product Distributor Liability

Insurance agents could be seeing higher products liability insurance premiums for clients that distribute products made by foreign manufacturers.  Products liability insurance is an exposure that all manufacturers have, but the exposure is increasing for some US distributors of products manufactured outside the US.  Typically the liability for a product found to be defective runs to the manufacturer.  However, a distributor of a foreign made product may be exposed when the manufacturer of that product has no assets or operations in the US, and no products liability insurance.

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Recent legal activity in this area was summarized in a short BusinessWeek article (see here).  The article notes that some plaintiffs attorneys have begun targeting distributors since the foreign manufacturers may not have insurance or assets in the US.  Some guidelines on steps a distributor can take are noted here.

Should Lawyers Buy Malpractice Insurance?

As insurance agents we are all required carry insurance agents E&O (professional liability insurance) by industry practice.  Should those attorneys who choose not to carry attorneys’ malpractice (E&O or professional liability) insurance have to disclose this to their clients?  This question is the subject of intense debate right now in California.  The State Bar of California has proposed a rule that would require attorneys to disclose to their clients when they do not have malpractice or professional liability insurance (see here).

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Supporters claim that such disclosure would provide an incentive for all attorneys to maintain such insurance, and would protect clients.  Critics, small law firms and sole practitioners, complain that the cost is prohibitive (see here & here).

Oregon is the only state requiring lawyers to maintain coverage, and a number of other states require disclosure when coverage is not purchased.  The State Bar notes that 1 in 5 firms are not covered by professional liability coverage.

Update:  The State Bar has formed a task force to further consider the measure (see here).