Specialty Insurance Blog

Finite Reinsurance Scrutiny

Finite reinsurance will get close legal scrutiny in a case against former employees of General Reinsurance just going to trial in Hartford.  An article by Foley & Lardner LLP (see here) summarizes the case and the finite reinsurance issues that will be considered.

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Brought to you by Tennant Risk Services.

Liability for Privacy Breach

A recent New York Appellate Court decision provides a measure of the potential severity of liability costs associated with a failure to follow privacy laws, and the need for insurance coverage for breach of privacy.  What is interesting about this case is that it does not involve technology.  A simple phone call to the wrong person was the cause of the breach (we don't consider a phone call technology these days).

The case, Randi A.J. v. Long Is. Surgi-Center (here & here), was the result of a call by a medical provider to a family member after the patient specifically requested that no communications go to family members.  While the Court acknowledged that the medical provider acted in good faith, it concluded that the medical provider was grossly negligent for the privacy breach and awarded the plaintiff $365,000.  The Court also concluded that punitive damages were warranted.

The article provides a good reminder:

The court specifically pointed to the fact that the center had no written policy for protection of the patient’s right to privacy and confidentiality. The decision in this case is a reminder that companies must not only develop privacy and personal data protection policies and procedures, but must also ensure that personnel consistently implement and follow these policies and procedures.

Much of the marketing material we see for breach of privacy insurance coverage centers on technology and security breaches.  This case provides a good reminder that breach of privacy is not always technology-related, but can result from insufficient process and simple errors.

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More on Real Estate Professional Liability

As we noted in a prior post, the mortgage credit market crisis and the resulting real estate decline will have a significant impact on real estate professional liability insurance.  Guy Carpenter has two reports (here & here) on the sub-prime mortgage crisis and real estate professional liability litigation.

In one of the reports Guy Carpenter found that the likelihood of a claim against a real estate professional varied based on location.  Guy Carpenter has developed the Guy Carpenter Subprime E&O Litigation Index, which is designed to measure, on a geographic basis, factors which influence real estate professional litigation.  Key factors that impact the likelihood of a real estate professional liability insurance lawsuit:

• The number of delinquent mortgages and foreclosures
• The concentration of attorneys
• The frequency of litigation pertaining to Truth in Lending and banking laws

One interesting conclusion is that real estate foreclosures and mortgage delinquencies by themselves are not the critical factors in the incidence of real estate professional lawsuits.

The risk of E&O litigation comes from a “perfect storm” that consists of above average rankings in most categories and an extremely high result in one category…Simply having above average scores in each category can put a state at high risk of subprime E&O litigation but will not place it in the top 10.  Also, having an extremely high score in one category rarely has a disproportionate influence.

Illinois illustrates how factors can converge to create a climate that favors subprime-related E&O. The state’s foreclosure rate is below the national average, and its subprime mortgage delinquency rate is only slightly above average. But, the ATRA ranks Illinois as a “judicial hellhole,” an assessment that is supported by the fact that there are 0.22 attorneys for every mortgage professional (Bureau of Labor Statistics), nearly 20% higher than the national average of 0.19, and plenty of Truth in Lending and banking litigation. In fact, Illinois’ rates of both Truth in Lending and banking litigation are more than 300% greater than the national average. If you are a plaintiff in Illinois, the legal environment appears to be favorable.

Some of our markets have already seen an increase in claims from real estate professionals including real estate agents, mortgage brokers, escrow agents, and appraisers.  As noted before, the key question is the order of magnitude of the problem.

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Risk Management includes Preparation

There is significant attention provided to emergency response and recovery efforts, but not always the same level of attention to prevention, and prevention can have significant impacts on insurance claim outcomes.  In a National Underwriter article (see here) Don Schmidt, of Preparedness LLC, suggests some steps to take to incorporate prevention initiatives in a risk management program.  These include:

• An advisory committee
• A risk assessment process
• A prevention and mitigation plan

Some additional examples of risk management programs incorporating prevention initiatives include the following:

• Homeowners (National Underwriter, older)
• Workers Comp (National Underwriter)
• Construction (Insurance Journal)
• Health Care/RRGs (National Underwriter)
• Large Account (Risk & Insurance)

A recent report from Europe (see here) indicated strong support for risk management programs and their effectiveness.  It is easy to ignore prevention in an era of lowering insurance pricing and expanding coverages, however the market has a way of correcting for poor loss experience.

Brought to you by Tennant Risk Services.

Captive Insurance & Taxes

Owners of single-parent captive insurance companies have long had ongoing battles with the IRS over the deductibility of insurance liabilities, with current edge going to the captive owners.  That could be about to change in newly proposed IRS rules take effect (see here, here and here).  While it is clearly too early to accurately predict the outcome, comments from some experts include the following:

• there will be no tax advantages to establishing a captive arrangement over the use of simple self-insurance
• there's worry that the proposed IRS rules changes could make it more favorable for parent companies to set up their captives in Bermuda or the Cayman Islands
• this will force many companies who are seeking to achieve tax benefi ts from captive insurance companies to shift to an entirely offshore approach for their captives or to take other steps to avoid the effects of the changes

Brought to you by Tennant Risk Services.

Bermuda Market Shifts Focus

The Bermuda insurance market (see our prior posts here & here) continues to grow, and Bermuda insurers are shifting their strategic focus as the insurance market gets softer and property catastrophe capacity continues to increase.  According to a recent article in National Underwriter (see here), some of the major Bermuda insurers are acquiring companies or setting up specialty underwriting teams to more directly access various segments of the specialty insurance business.  Some of this is confirmed in the Bermuda Insurance Quarterly, and Moody’s makes an interesting point about the Bermuda insurers’ strategies:

those new insurers and reinsurers must now balance the near-term benefits of taking advantage of short-term opportunities with the need to establish long-term business strategies if their competitive position is to be sustainable

These strategic shifts will have an impact on your businesses as some of these markets begin to compete for the specialty insurance segments we all operate in.

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Brought to you by Tennant Risk Services.

Florida Homeowners – New Markets

The market is starting to work in Florida as a number of new insurers enter the homeowners insurance market in Florida.  According to an article (here), eight new insurers have been approved to write homeowners coverage:

• Homeowners Choice
• Privilege Underwriters Reciprocal Exchange (www.purehnw.com)
• American Keystone Insurance Co. (www.akicinsurance.com)
• Homeowners Choice Property & Casualty (www.hcpci.com)
• Olympus Insurance Co (www.oigfl.com)
• American Coastal Insurance Co.
• Landmark One Insurance Co.
• Modern USA Insurance Co.

Another article points out that homeowners should not expect rates to change much (see here) despite the lack of hurricanes over the last two years, but the review does not take into account the impact of these new entrants.

Brought to you by Tennant Risk Services.

The Mortgage Crisis & Lender Liability

The current crisis in the lending industry, and specifically in the mortgage and sub-prime segments, will have some impact on the professional liability insurance business.  Insurers could see claims from Directors & Officers policies and from professional liability (E&O) policies issued to mortgage brokers, escrow agents, appraisers and other real estate professionals.  The question on underwriters minds is the order of magnitude.

Bracewell & Giuliani LLP has written an article (see here) that predicts a perfect storm for lender liability.  While the article focuses on lender liability, to this we can add the smaller real estate professional should their prediction come true.  Key points:

• A perfect storm is brewing that threatens the entire mortgage lending industry
• Defaulting and troubled borrowers will increasingly take aggressive postures by challenging foreclosures through affirmative consumer claims

The article provides three examples of litigation, and goes on to state:

Each of these recent events demonstrates the increasing risk that financial institutions, lenders, mortgage servicers, and others involved in the residential lending industry will face significant criminal, administrative, and civil liability

Not a comforting perspective for real estate professional liability underwriters.

Brought to you by Tennant Risk Services.