Specialty Insurance Blog

Rating Lawyers is OK

The idea of rating lawyers on the quality of their service would seem to make all kind of sense.  Products, docs, and other professional services are rated by a variety of web-based services, so why would anyone object to a web site dedicated to rating lawyers?

A lawsuit against a lawyer rating site, Avvo.com, has recently been dismissed (see here, and order here).  It seems that two attorneys were not enthusiastic about their ratings and sued the site.  They lost.  The Avvo lawyer comments:

This is a huge win for our First Amendment rights to express our opinions as Americans…Keep in mind that this case was initiated by a sanctioned attorney that did not like having his recent misconduct brought to light.

For commentary prior to the suit see here and here, and for commentary after see here, here, here, and here.

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Are Intentional Acts Covered by an E&O Policy?

It should be obvious that intentional acts are not covered under a professional liability (E&O) insurance policy, but it is rare that a court rules on this question.  The intentional acts exclusion in an E&O policy will normally read something like this:

…based upon, arising out of directly or indirectly, or in any way involving
intentional wrongdoing, fraud, dishonesty, criminal or malicious acts by
the Insured

In a recent case summarized by Wiley Rein (see here) a court ruled that intentional acts are not covered.  In the case, a real estate appraiser had purchased an appraisers professional liability insurance policy and was facing lawsuits alleging a scheme to appraise property at higher than the true value.  The insurer provided a defense and was seeking a declaratory action on coverage based on intentional acts, while the appraiser claimed that the acts involved negligence (which would be covered).  The court ruled:

the insurer had no duty to defend or indemnify the appraiser because the factual allegations in all . . . of the underlying complaints would, if found to be true, demonstrate that [the appraiser] acted intentionally, but not that he acted negligently

On the question of defense, the court ruled differently:

an insurer ordinarily is entitled to withdraw from the defense of an insured when it becomes clear that no claim against the insured falls within policy coverage… however… an insurer's withdrawal must be accomplished in an orderly manner, in order to avoid prejudice to the insured and comply with the insurer's duty of good faith.

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Doing Good

Two recent articles, completely unrelated to insurance, are unusual in that they provide a positive perspective on our world.  The first, from Fortune, is an article on the work being done by Melinda Gates and the Gates Foundation (see here).

Would Buffett have given the Gates Foundation his fortune if Melinda were not in the picture? That's a great question, he replies. And the answer is, I'm not sure.

The second, from The Economist, measures our progress in terms of social conditions in poor countries; poverty alleviation; and the incidence of wars and political violence (see here).

Public attitudes generally seem to have become more pessimistic and inward-looking…  [But] the world seems to be in rather better shape than most people realise.

Worth reading.

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Update: Subprime Impact on Professional Liability

Subprime and related credit market losses will impact both the professional liability (E&O) and the directors & officers (D&O ) insurance lines, and underwriters will respond (and some have already) with all the normal moves following catastrophic losses: tighter underwriting, reduced coverage, and higher pricing.  For example, some underwriters of mortgage brokers professional liability insurance have already exited from this line.

The real question is whether the underwriting responses will be contained to those entities suffering the losses or will be more widespread, and what the order of magnitude will be.  Not everyone agrees on the answer (see our prior post), but it should be clear that the problem is still unfolding.

There are indications that the problems are spreading beyond the subprime mortgage segment (see here).

The credit crisis is no longer just a subprime mortgage problem…This collapse in housing value is sucking in all borrowers.

And AIG’s recent announcement that its auditors found material weakness in its financial reporting for valuing credit default swaps is disturbing (see here).

American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated

Are there other companies (other insurance companies?) with the same problem? (see here)  It sounds like it.

We are going to see more and more problems come to light like this,  said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. This is an indication that these large financial institutions do not have the risk management systems in place to give us accurate data.

Troubles that began a little over a year ago in an obscure corner of the financial system, BBB-minus subprime-mortgage-backed securities, have spread to corporate bonds, auto loans, credit cards and now — the latest casualty — student loans…Why has a crisis that began with loans to a limited group of home buyers ended up disrupting so much of the financial system? Because, ultimately, it’s more than a subprime crisis; indeed, it’s more than a housing crisis. It’s a crisis of faith. (see here)

How does all this impact the professional liability markets?  First, companies that were directly involved in the problems will get sued, such as mortgage brokers.  This is already happening: lawsuits are being filed at a record pace according to a recent study (see here):

The study found that virtually every participant in the subprime collapse is being sued

Second, as public companies suffer losses and their stock prices decline, shareholder suits and significant D&O losses can be expected (see here).

In early February, New York-based Advisen Ltd. estimated that write-downs of subprime exposures by 120 financial institutions exceeded $230 billion, and that D&O losses for these institutions could reach $3.6 billion.

If close to accurate, this will obviously impact D&O rates.

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Bermuda Insurance History

Bermuda has a long history as a center for insurance beginning with the early development of offshore financial companies (see our prior post).  Today, Bermuda is one of the leading centers, if not the leader, for international insurance and reinsurance.  In Risk & Insurance, Roger Crombie provides an entertaining chronology of Bermuda’s evolution in the insurance world (see here).  He begins with the suicide of a villain, Ivan Breuger, covers the development of the captive insurance industry starting with Fred Reiss, and ends with Bermuda as the most dynamic insurance market in the world.

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Are Intentional Acts Covered by an E&O Policy?

Importer Liability for Foreign Made Products

Liability for products manufactured in China may not be covered under a products liability insurance policy, and it may not even be possible for an injured party to pursue a claim against the manufacturer.  This shifts significant products liability exposure to the importer of foreign made products.

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There have been numerous reports concerning unsafe products, such as toys, food and drugs, from China.  A noted in a recent article in the Boston Herald (see here), it is virtually impossible to pursue a products liability claim against a Chinese manufacturer. 

• Every step in litigation can be an ordeal when the defendant is a Chinese company
• Chinese companies will assert that U.S. courts have no jurisdiction.
• It is illegal to take depositions in China
• Most Chinese companies have no assets in the United States, so they have no trouble ignoring a U.S.court order.

An article in FindLaw notes that the burden can and will be shifted to the importer (see here):

When a company sells its product to a retailer, it generally is required to provide proof of product liability insurance and to indemnify the retailer against any and all injuries that may result from the sale of the company's product. It thus assumes the risk if the product proves defective or dangerous.

Meanwhile, none of this risk can typically be passed on by the company to a China-based manufacturer. Typically, such manufacturers lack insurance and are unwilling to enter into an indemnification agreement. Moreover, even if such an agreement existed, enforcing it against a Chinese company would be virtually impossible.

The burden falls to the importer, who will be the target of any lawsuit.  The importer should take appropriate steps to be properly protected, as noted by McDermott Newsletters (see here):

Importers of Chinese goods should proactively assess the scope of their insurance programs and carefully negotiate insurance-related provisions in their contracts with Chinese suppliers.

The article points out that it is not just products liability insurance coverage that should be reviewed.  Products recall coverage should be considered as well.

Subprime Impact on Professional Liability

The subprime crisis has caused significant losses in some business sectors, notably financial institutions that have either directly or indirectly invested in subprime mortgages, and these losses are being felt in the professional liability and management liability (D&O) insurance markets.  However, a recent survey (110 respondents) concluded that these losses will have little impact on professional and management liability pricing (see here).

More than 90 percent of commercial banks, investment banks, mortgage lenders, real estate investment trusts and other companies in the financial services sector have renewed, or expect to renew, their D&O and E&O policies at the same or lower rates.

It is early days in the subprime crisis.  While we have seen many different types of companies report significant losses, bad news continues to spill out.  And it is not clear at this point whether subprime problems will spread in a material way to other sectors of the credit market, as some are predicting. 

Our perspective, at this early stage, is that the changes in the professional liability market are being contained to those types of entities directly impacted by the subprime losses, and that these entities will see a tighter market.  For example, we have seen markets pulling out of certain types of real estate E&O in certain territories, and markets that are not pulling out are tightening their coverage and increasing pricing.  Terms and pricing for other professional classes untouched by subprime problems have continued the soft market trend.  If the subprime problem gets significantly worse or spreads to other credit markets the professional and management liability market conditions will follow.

Two other recent articles comment on this question as follows:

Risk & Insurance (see here)

• Scott A. Schechter, a partner with Kaufman Borgeest & Ryan LLP in New York, says that over the next year or two, claims related to errors-and-omissions coverage are going to keep commercial litigation lawyers busy, and make some of them very rich. "I don't think anybody's saying the sky's falling on the D&O side of things, but E&O's quite a different matter," he says. "It's the great unknown."
• While there's no doubt that the subprime mess has increased the upward pressure on professional liability rates, it's also true that the industry as a whole is in healthy financial shape, coming off a record year in 2006 and another strong year in 2007. There's plenty of capacity in the marketplace and the competition among professional liability carriers remains healthy, says LaCroix.

National Underwriter (see here)

• An insurance analyst from Bear Stearns has tripled his prior estimate of potential losses to liability insurers stemming from the credit crisis—raising a $3 billion guess he published in September to $8-to-$9 billion.

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