Even though people talk a lot about the value of analytics for workers’ compensation, few have actually implemented them in ways that provide their full value.

To improve, insurers should draw on lessons from, of all things, supermarkets. Supermarkets and grocery stores have long automatically documented transactions at the register. When those transactions are analyzed in context with other data, such as inventory turns and factors such as season and weather, conclusions can be drawn about how buying behavior, and predictions can be made. Operational decisions spring from the analytics, such as diverting high-demand inventory to regions that are projected to need it. The result is increased sales and satisfied customers.

Like the supermarket industry, the workers’ compensation industry collects data continually. Bill review systems document medical bills received and recommend payment based on data analysis. Claims systems document medical bills paid, indemnity paid, work loss, legal actions and other factors, all related to the claim. Still more data is collected related to pharmacy, utilization review and other issues.

But, amazingly, the rich data is rarely converted to operational tools like those that drive supermarkets. Most in workers’ compensation neglect to use their data to identify opportunities to mobilize action early and limit, or even thwart, potentially high risk and costly situations.

As with supermarkets that anticipate demand, insurers should analyze all available data in real time, and alerts about workers’ compensation should be sent to appropriate persons to give them the jump on problems. Adjusters and nurse case managers should receive specific information regarding new conditions so they can mobilize action—when a known, high-risk condition occurs in a claim, that information should be automatically transmitted to an appropriate person. A simple example is when multiple prescriptions of opioids are found; a nurse case manager should be electronically notified and take action. 

Besides saving money, analytics can allow for a formal infrastructure for medical management, optimizing efficiency.

So, as unlikely a model as supermarkets might appear to be, workers’ compensation companies should learn a lot from them.

Think about the challenges that face those in charge of a nuclear aircraft carrier. It:

• Is manned by a bunch of 20-year olds.
• Has jets with engines that can suck a person into the intake if the person is too close.
• Has planes whose exhaust can severely burn a man or blow him overboard.
• Deploys jet fighters that reach 150 mph in 2 seconds during takeoff.
• Executes landings that essentially are controlled crashes.
• Must fuel aircraft with engines running.
• Handles all manner of explosive materials.

Yet, for all the hazards, accidents on flight decks are surprisingly rare. Because so many things could go wrong but almost never do, experts consider an aircraft carrier a “high reliability organization.” The clarity about individual responsibility and about how to function as a team is astounding.

Many of us have been involved in projects where the stakes have been high and we have had to prepare to an exceptional level and pay attention to every detail. But think of what is needed to enable this level of performance every day!

I have to admit I have not seen the level of high reliability you find on the flight deck of an aircraft carrier in very many mid-market businesses. Let’s face it. For businesses, the stakes are not as high as they are on a flight deck. But the principle is there for us to apply – clarity and preparedness escalates the predictability of success. And I’ve seen the principle work for units in a business that had really embraced continuous improvement.

Look at your business organization. Think about this outline of preparedness for each business unit (BU):

1. Prepare the description of the 3-5 most important functions of each BU (that contribute to key results for success).
2. What is necessary for each function to be performed optimally?
3. What should the measured results be for each results area (success criteria)?
4. What processes should be used to assure timely, accurate, high-quality performance?
5. How will customer satisfaction (internal & external) and targeted results be measured and achieved?

How high do the stakes have to get for us to shift into a higher mode of clarity and preparedness? As business leaders, we are the ones who get to make that decision.

If this is an area of leadership you would like to read more about, email me and I will send you my white paper on PERFORMANCE MANAGEMENT - Accountability Based Job Performance.

The “good health = lower cost” equation is an oversimplification of reality and needs to be better understood if we’re to address the causes that help drive up costs for workers’comp.

Yes, people with medical problems are generally more expensive to care for than those without the conditions, but consider the studies that found that:

• Reducing a significant risk factor did not produce lower costs or reduce absences. A successful weight-loss campaign did not produce any cost savings in the next two years, leading the authors to caution against expectations of a positive short-term return on investment.
• The length of absence because of an injury depends largely on the doctor.  A study found that 3.8% of physicians in Louisiana accounted for 72% of all workers’ compensation costs. Patients who chose—or happened to have treatment from—“cost intensive physicians” could expect to have five times higher costs, even after adjusting for age, sex, medical condition, and other factors.
• Individual beliefs affect the number of absences for back pain. Workers who have high levels of fear that work will lead to pain are absent more than workers with similar pain severity but low fear.
• Health improvement alone does not improve return-to-work following extended absence. European researchers found that improved health did not guarantee return to work, especially when certain psychosocial factors—like depression and low self-efficacy— and work factors were present.
• Companies that self-insure their workers’ compensation benefit have fewer employees who are injured. After controlling for a large variety of other factors, authors concluded that companies that directly manage their experience rating invest more effectively in prevention and reduce injury rates.

In sum: Health improvement may not save money or result in someone coming back to work if: a) they believe their work is harmful; b) they dislike or have conflict at work; or c) they choose a doctor who prefers longer, more expensive treatments.  Finally, a company’s commitment to prevention and safety today is driven in part by the financial risk it carries for injuries tomorrow.

Improving health is a worthy goal in itself, but, for a variety of reasons,cost savings will not be a certain result.

When we oversimplify the problem of health costs, we risk being disappointed when investments in health programs don’t bring the savings we expect. While there is no shortage of calls for programs that promote “health improvement,” that only gets us so far toward any goal of cost containment or absence reduction. Therefore, the right approach must reach beyond a condition-specific focus and provide personal expertise, aligned incentives, education, and support to the whole person and her or his family.

A weak economic recovery and regulatory issues are providing significant challenges to traditional business models in property and casualty insurance, especially in commercial lines. Carriers can no longer rely on investment income, and market-share consolidation should be a growing concern leading into 2014.

History tells us that the winners will be companies that are more progressive in their use of new operating models and tools, including advanced data and analytics.

Nigel Morris, managing director of QED investors and co-founder of Capital One, recently said: “In the late ‘80s and early ‘90s, Capital One was at the vanguard of a revolution deploying data-driven strategies in the credit card industry ... I believe that insurance carriers increasingly have the same opportunity to grow the size and profitability of their businesses by more specifically meeting their customer’s needs.”
 

The credit-card industry shows what might happen in P&C. During that time in the late 1980s and 1990s, new marketing and risk-assessment strategies fundamentally changed the credit-card industry. Technology and information-based companies like Capital One flourished and garnered significant market share while those that clung to traditional methods floundered. The agent of change? Analytics. In 1988, Capital One (originally Signet Bank) was founded because it saw an untapped opportunity to leverage credit-score and consumer-spending patterns to find the best risks within the subprime market and revolutionize the credit-card industry.

Similarly, Progressive Insurance pioneered the use of analytics, also leveraging credit scores, to insure nonstandard risks at profitable rates and shake up the auto-insurance market.

The adoption of sophisticated technologies essentially creates a perfect storm. Those who use the best analytics create positive selection, gaining profitable market share. Those who don’t use analytics suffer from adverse selection, ending up with poorer-performing risks because they are working with outdated pricing and risk-assessment strategies.

As Matthew Josefowicz, managing director of Novarica, wrote in a recent report, “The massive proliferation of easily accessible data combined with the increased power of modern analytical tools has the potential to transform the insurance industry dramatically over the next decade. The strategy and operations of insurers in the near future could be nearly unrecognizable to current market leaders.”

Data and analytics will only continue to evolve and change the way business is done, whether it’s in insurance, banking, healthcare, shopping or another industry; the accessibility to personal information is truly transforming the world we live in and how we do business.  In the insurance world, companies like Valen Analytics are creating solutions and providing insights to help drive overall success, for instance by helping carriers manage and segment their portfolios to drive underwriting profitability.

Valen’s 2014 Outlook: Commercial Lines report sheds light on the industry’s top challenges and offers information to help better prepare and adapt for 2014; it is available in full here.

I have unfortunately worked with the families, estates and partners of several agency owners who have passed away.  Most of the deaths occurred unexpectedly.  In all cases, the person who passed left the family, estate and partners with far more problems than necessary.  So, my question to you is this: If you passed away tomorrow, what problems would you leave behind?

One situation I absolutely dread is when I have to tell a family the agency is not worth anything near what the recently passed relative (usually the father) said it was worth.  Agency values are not what they once were. So, you may be telling your partners and loved ones that the agency is worth more than it really is, a practice that, while possibly innocent, is still cruel.

Get your agency valued using real world values so everyone’s expectations are realistic.  Put yourself in your family’s and partners’ shoes.  The income from the agency will be eliminated upon the sale.  Will the agency’s sale be enough to support their standard of living? 

You will uncover problems such as bad debt.  I have seen a number of agency owners die with sizeable accounts receivable that were quite old and totally uncollectible.  These debts may total 20 percent, 25 percent, even 30 percent of the agency’s commissions.  Even if an agency is worth some high multiple, those bad debts have to be deducted.

You will also find issues that you can address, sometimes rather easily. It’s horrible when a widow learns that her husband did not really own all the business on the books.  He always meant to get around to fixing his producers’ contracts but died before he did. As you get your agency valued, however, you can confront the issue and correct it. There have also been situations where all the important accounts are written by the deceased, and there is no one in the agency to take over those accounts.  Those key accounts most likely will not stay with the agency, so its value is not going to be what the estate may have thought.

Another example: keeping lousy books.  It is not imperative for an owner to keep good books and good data.  It is smart, and it is a good business practice, but it is not imperative.  However, if a person dies and the books are poor, the agency is not going to sell for full price.  Who will pay full price for an agency for which no one knows the true income and the true state of its balance sheet? 

Getting a valuation will force you to look at issues such as contracts and books—in time to fix any problems.

I know many readers are thinking these things never happen, but they do. How do you know you do not have similar issues if you have not had your agency valued by a competent appraiser? 

Two other issues to focus on:

Agency Ownership

Do you really own your agency?  I have seen a number of situations where the agency’s contracts were so poorly written that the agency did not clearly own the business on its books.  Maybe the owner knew this at one time and had forgotten because nothing bad had happened.  On a day-to-day basis, it didn’t really matter. But when the agency is being valued, especially when it is being valued because the owner has died, it does matter, and that is not when anyone wants to discover the problem. As more and more clusters develop and even age, this is going to be a bigger and bigger problem.

Buy-Sell Agreements

What happens when a person dies with a bad buy-sell agreement with his partner?  Unless luck and goodwill are in plentiful supply, nothing good happens.  The partner may have been the greatest, most unselfish person on earth, but is his or her family just as unselfish?  This is important because, at least for a time, the dead partner’s family will be partners, too.

For example, what happens when the surviving partner realizes the buy-sell agreement poorly defines value?  This may leave the door open for the dead partner’s estate to claim any amount of value. I have seen, more than once, claims of two times premiums!  It is not always that the other side is greedy; often, they are just uneducated about the insurance world. Combine that with grief and a feeling of immense vulnerability, and they may not want to settle for a reasonable value.

Another great example is where the agency’s balance sheet is poor and the estate’s trusted advisor discovers some rule of thumb that agencies are worth some multiple of commissions, but fails to understand that balance sheet deficits, especially trust ratio deficits, must be deducted.  If you have ever tried to buy out a partner at full price while the agency has a trust ratio deficit, you will know how difficult it is to make payroll and other payments.

The readers of this article have the opportunity to fix a wrong before the wrong occurs.  The pain survivors feel when a loved one or partner dies is already immense.  Why exacerbate it by leaving them a business in a mess?

If you own or manage an organization and have not experienced an employee claim, count yourself lucky—and know that the chances are very good that your luck will change.

Many employers purchase Employment Practices Liability Insurance (EPLI) because general business insurance policies exclude employment-related claims for issues such as discrimination, harassment and wrongful termination.  Many EPLI policies do not, however, cover commonly asserted claims such as wage and hour violations or statutory penalties. The issues are complicated enough that decisions on EPLI require the assistance of two experts: a knowledgeable and trusted insurance broker and an experienced employment defense attorney. The insurance broker will guide you through the various policy options available and provide a wealth of risk-management information.  The defense attorney will advise on the real-world impact a particular policy will have when an employment claim arises.

If you purchase EPLI, you should prepare for employment claims before they are even asserted, by following these steps:

• Select Defense Counsel in Advance. If you already use trusted employment law counsel, your carrier may allow you to designate your chosen law firm at the time the policy is purchased or renewed.  Some policies allow the insured to select its own counsel without such pre-designation.  Asking the right questions of your broker and specifying at the outset the employment lawyer you want is the best way to ensure that you get the defense counsel of your choice.  
• Train Staff on Claims Recognition. Train key personnel to recognize a "claim" as it is defined under the EPLI policy.  What constitutes a "claim" is generally defined broadly.  A “claim” may even include pre-lawsuit claims, such as a discrimination complaint filed at a governmental agency like the California Department of Fair Employment and Housing.  Even a "demand" letter from a threatening employee or lawyer may constitute a claim.  As policies change from year to year, the definition of a claim may also change.  Key personnel should know what to do when a potential claim is spotted, including the who, what and when of communicating with the insurance broker or carrier.
• Develop Protocol for Receipt and Processing of Claims. It is a good idea to have a specific person designated to whom all "claims" are promptly forwarded. The protocol should also include things such as identifying the name of the employee who received the claim and the date, time and how the claim was received.  It is critical to ensure that a potentially covered claim is properly and quickly processed. Communication problems can arise inside organizations because finance and operations executives, who were involved in buying the EPLI policy, tend to be knowledgeable about the terms of the EPLI policy, while human resources personnel tend to be the first to know that a claim has been filed.

• Be Thoughtful and Precise in "Tendering" Claims to the Carrier. Once a claim arises, carefully consider the requirements in the policy for tendering the claim.  This may involve discussions with legal counsel regarding the pros and cons of tendering a particular claim at all and will definitely include advice on how and what to communicate with the carrier. Careful consideration cannot result in much delay.  EPLI policies typically require very prompt communication of claims and potential claims.  Follow carefully the means and timing of "tendering," i.e., providing written notice to the carrier, as stated in the policy.   A copy of the lawsuit, administrative charge or “demand” letter should accompany the tender.  Follow up to ensure that the carrier has received the claim and accepted it.

  As a general rule, attorneys' fees and costs incurred to defend a tendered claim may not "count" against the insured's retention (deductible) until the date of tender.   If you incur attorneys’ fees and costs before the claim is tendered to the carrier, your company will likely have to pay those fees plus the full amount of the retention.  Worse yet, if a claim is not tendered in the manner and time frame required by the policy, the claim may be denied.  

The great majority of employers in California should at least seriously consider the addition of an EPLI policy, but not just any policy will do.  Without the expert guidance of a knowledgeable broker and employment counsel, you might be shelling out premium dollars that do not effectively achieve your risk-management objectives.  Once you have a policy, the development of effective protocols for handling claims is essential.  Those protocols will ensure that claims are not denied and that they are positioned to be effectively defended.

Employees of shipping giant United Parcel Service recently got an unexpected delivery. The company announced that it would stop offering health coverage to the spouses of 15,000 workers.

UPS’s workers and their families can thank Obamacare for this special delivery. And UPS isn’t alone. American businesses are discovering each and every day that the president’s signature law will raise health costs for them and their employees in short order.

In a memo explaining the decision to employees, UPS stated that increasing medical costs “combined with the costs associated with the Affordable Care Act, have made it increasingly difficult to continue providing the same level of health care benefits to our employees at an affordable cost.”

One day before UPS’s big announcement, the University of Virginia announced that it would cut benefits for spouses who have access to health care through jobs of their own. The rationale was similar.

Delta Airlines recently revealed that Obamacare will directly increase its direct health costs by $38 million next year. After taking into account the indirect costs of the law, the company is looking at a 2014 health bill that’s $100 million higher.

Increasingly, large employers who aren’t dropping spousal health benefits are requiring their employees to pay monthly surcharges in the neighborhood of $100 per spouse.

Many small businesses are dropping family coverage altogether because they expect that Obamacare’s new tax on insurers will be passed on to them in the form of higher premiums. One Colorado-based business received notice from its insurer that the tax would increase premiums more than 20 percent.

The story is similar in Massachusetts. One new report concludes that over 45,000 small businesses in the Bay State will see premium increases in excess of 30 percent. In all, more than 60 percent of firms in the state will see their premiums go up.

Last month in California, the largest insurer for small businesses — Anthem — declared that it would not participate in the state’s small-business health insurance “marketplace,” Covered California. Only two years ago, Anthem covered one-third of small businesses in California.

Anthem’s exit represents one less choice for consumers — and a sign that competition may not be as robust in the exchanges as the Obama Administration promised.

Small businesses are responding to these higher premiums by trimming their labor costs in other ways. That’s not good news for workers.

Seventy-four percent of small employers plan to have fewer staff because of Obamacare, according to a recent U.S. Chamber of Commerce survey. Twenty-seven percent are looking to cut full-time employees’ hours, 24 percent to reduce hiring, and 23 percent to replace full time with part-time employees.

One in four small companies say that Obamacare was the single biggest reason not to hire new workers. For almost half, it’s the biggest business challenge they face.

These findings are consistent with a recent Gallup Poll showing that 41 percent of small businesses have already stopped hiring because of Obamacare. Another 19 percent intend to make job cuts because of the law.

All this tumult in the labor market is fueled by more than the increase in premiums engendered by Obamacare. The law effectively encourages companies to cut full-time jobs.

Obamacare requires employers with 50 or more workers to provide health insurance to all who are on the job for 30 or more hours per week. The law originally called for this “employer mandate” to take effect in 2014, but the Administration decided in July to delay enforcement of the mandate until 2015.

Employers are responding by doing just enough to avoid Obamacare’s dictates.

Administrators at Youngstown State University in Ohio recently told adjunct instructors, “[Y]ou cannot go beyond twenty-nine work hours a week. . . . If you exceed the maximum hours, YSU will not employ you the following year.” A week prior the Community College of Allegheny County in Pittsburgh made a similar announcement.

Hundreds of employees at Wendy’s franchises have seen their hours reduced for the same reason.

Meanwhile, companies with fewer than 50 employees are thinking twice about expanding — and thus being ensnared by Obamacare’s requirement that they provide health insurance.

The cost of each additional employee could be staggering. A firm with 51 employees that declined to provide health coverage would face $42,000 in new taxes every year — and an additional $2,000 tax for each new hire. Providing coverage, of course, would be even more expensive.

Meanwhile, as private firms large and small grapple with Obamacare-fueled cost increases, one large employer — the federal government — has been quietly exempting itself from portions of the law.

Top congressional staffers like their current benefits under the Federal Employee Health Benefits Plan (FEHBP), wherein the government pays up to 75 percent of the premiums.

But the law requires those who work in lawmakers’ personal offices to enter the exchanges. And in many cases, staffers  make too much to qualify for health insurance subsidies through the exchanges. So they’d be facing a hefty cut in their compensation.

Fearing a mass exodus of congressional staffers from Capitol Hill, the Obama Administration fudged the law to permit lawmakers’ employees to receive special taxpayer-funded subsidies of $4,900 per person and $10,000 per family.

Yet only three months ago, Senate Majority Leader Harry Reid (D-Nev.) claimed that Congress wouldn’t make exceptions for itself.

President Obama no doubt knows that these congressional favors won’t go over well with ordinary Americans. So he’s called on his most popular deputy — former President Bill Clinton — to try to sell the law to the public once again.

But unless the former president can lower employer health costs with little more than the power of his words, his sales pitch will likely fall flat.

This article was first published at Forbes.com.

Confusion sometimes arises about the difference between "admitted" and "non-admitted" insurance carriers and about the consequences of the difference. The designation of an insurance company by a state’s Insurance Commissioner as “admit­ted” may seem to give the company a stamp of authority, but this designation is primarily an administrative one rather than a mark of quality or stability. Other factors should be more important in the choice of a carrier.

Let’s take a close look at what admitted v. non-admitted really means.

What is an “Admitted” Insurance Company? - An admitted carrier is often referred to as a “standard market carri­er.” To qualify as an admitted carrier, an insurance company must file an application with each state’s insur­ance commissioner and be approved. Approval requires compliance with a state’s insurance requirements, including the filing and approval of that company’s forms and rates. This process often takes a long time.

Once a carrier is licensed to transact insurance business in a certain state, the carrier is required to pay a portion of its income into the state's insurance guaranty association. One of the main selling points of being an admitted is that the carrier’s liabilities are backed by that state’s “guaranty fund.” If an admitted company becomes insolvent, the state will help pay off policyholders’ claims. 

What is a “Non-Admitted “Insurance Company?  - A non-admitted carrier is often referred to as an “excess and surplus line carrier” and operates in a state without going through the approval process required for admitted companies. Non-admitted carriers are not bound by filed forms or rates and therefore have much greater flexibility to write and design policies to cover unique and specific risks, and to adjust premiums accordingly. When standard markets can’t or won’t write a risk, or when an admitted carrier cannot offer the appropriate terms, the non-admitted market is available to fill this gap.

Non-admitted insurance carriers are regulated by the state Surplus Lines offices, but regulation is far less invasive than for the admitted markets. The most obvious difference between admitted and non-admitted is that purchasers of non-admitted policies do NOT have the protection af­forded by the state’s guaranty fund. Each state does charge taxes for non-admitted insurance, and agents must be licensed in surplus lines to sell non-admitted insurance.

The designation as “non-admitted” should not be taken as an indication that these insurance carriers aren’t legitimate or financially stable. In fact, to sell surplus lines insurance, non-admitted insurance companies have to set aside a large monetary reserve or secure adequate re-insurance.

Insolvency - When an insurance commissioner determines that an insurance company is having significant financial difficulties, the insurance company will go through a process called “rehabilitation.” The state’s insurance commissioner will make every attempt to help the struggling company regain its financial footing. If the company cannot be rehabilitated, the company is declared insolvent, and the court will order liquidation.

Liquidation of an Admitted Carrier - If the carrier to be liquidated is an admitted company, the processing/pay­ment of existing and future claims is taken over by that state’s guaranty fund. However, the guaranty fund’s obliga­tions are limited by regulations and will only pay claims up to that state’s cap.  In some cases, if insureds exceed a certain revenue threshold they may not quality for any guaranty fund coverage. 

Depending on the state, guaranty funds usually provide only $100,000 to $500,000 of protection per policy even if the policy had a much higher limit. Most states are at $300,000. In addition, if several liquidations take place in one state, the state’s guaranty fund may be depleted. Policyholders often only receive pennies on the dollar of their true loss amount from a guaranty fund.

While state guaranty funds try to pay claims as quickly and efficiently as possible, payments are often slow.

In sum, although the guaranty funds provide some level of comfort if a carrier becomes insolvent, in reality, policyholders can be left with little or no assistance.

Liquidation of a Non-admitted Carrier - If a non-admitted insurance company goes “belly up,” the liquidator/receiver collects the assets of the company, determines all the liabilities/creditors outstanding, develops a plan to distribute the company’s assets and submits the plan to the court for approval (much like a typical bankruptcy pro­ceeding). In most cases, the insurance company’s estate will not yield sufficient money to pay the company’s cred­itors (including their policyholders' claims) in full. Policyholders often have to fund defense and settlement payments themselves before they can request reimbursement from the estate. Usually, the policyholder will have to wait patiently and will,  again, only get pennies on the dollar.

The largest surplus lines writer in the U.S. is Underwriters at Lloyd’s, London. In 1925, Lloyd’s created the Lloyd’s Central Fund, which pays claims in case any underwriting member should be unable to meet his or her liabilities. Unlike the guaranty funds, the Central Fund does not have a cap. The only cap for the Central Fund is the policy limit. (Illinois, Kentucky and the Virgin Islands are exceptions because Lloyd’s is admitted there and is subject to the state guaranty funds.)

Bottom Line - The choice between admitted and non-admitted insurance companies is something that needs to be considered, but examining the financial strength of the individual providers, the breadth of coverage and competitiveness of terms is more important. The priority should always be to seek a high-quality provider, regardless of whether the company is admitted or non-admitted.

Having marked another grim anniversary of 9/11, many companies have either bought insurance against terrorist acts or are considering doing so. But the issues related to coverage are more complicated than people realize.

Just because acts meet the common-sense definition of terrorism and are generally referred to as terrorist acts doesn’t mean they’ll be treated that way under a federal program known as TRIPRA, which is generally seen as terrorism insurance. To meet the standards under TRIPRA, the acts have to be officially certified as terrorist acts by the Secretary of the Treasury, in conjunction with the Secretary of State and the Attorney General. (TRIPRA stands for Terrorism Risk Insurance Program Reauthorization Act; it is the 2007 continuance of a program initially instituted in 2002 and known then as TRIA, for Terrorism Risk Insurance Act.)

The designation is important because a business damaged in what is officially certified as an act of terrorism can only collect on a claim if it has purchased terrorism insurance under TRIPRA, which is a reinsurance program designed to pool the risks from terrorism.

Reports following the bombings at the finish of the Boston Marathon in April say that few of the stores that were damaged carried terrorism insurance. Many of these claims are now in limbo because the bombings have not been certified as terrorist acts, but President Obama did use that term in a speech. His pronouncement will be part of the process that insurance adjusters will use to accept or deny coverage requests by the injured parties under various parties’ liability insurance as well as the physical damage and business interruption claims filed by the businesses that were affected by the bombing but that didn’t carry terrorism insurance. (According to an article in Insurance Journal, 207 property/casualty claims were filed related to the Boston bombings; 84 have been settled for a total of $1.2 million, and 76 have been closed without a payment.)

Where does this leave the agent and broker trying to take care of a client?  As is human nature, all of us in the US have become rather complacent about the prospects for acts of terrorism, and many clients may discount their exposure to this type of event.  Well, as a producer, your job is to identify risk and offer solutions.

Offering TRIA/TRIPRA coverage on a “sign here” basis is not good enough.  You should also investigate stand-alone terrorism coverage.  There are a number of markets that offer this coverage.  You need to offer both types of risk transfer in writing – get a quotation for the stand-alone coverage for property and casualty losses.  The marketplace provides more options for property risk than the casualty risk in stand-alone terrorism coverage, but it is still available for both areas.

Quite recently, several respected organizations and publishers within the insurance industry have put out very well-written articles providing information regarding TRIPRA and the terrorism marketplace, in general.

The first is an Insurance Journal article that outlines the issues and concerns surrounding the congressional debate that will need to take place within the next year, as the TRIPRA legislation expires at the end of 2014: Demand, Rates for Terrorism Insurance Coverage Remain Steady: Marsh.

Next is an article written by the Insurance Information Institute that provides an overview of terrorism issues and concerns and also speaks to the current legislation and reauthorization efforts: Terrorism Risk and Insurance.

Last is the 2013 Terrorism Risk Insurance Report researched and written by Marsh USA: 2013 Terrorism Risk Insurance Report (registration required).

To help you navigate the issues (and to demonstrate their complexity), here is a summary of how insurance for terrorist acts is handled:

• If the insured purchased Commercial Property Coverage on a Special Form basis and Commercial General Liability Coverage, and the act is deemed a terrorist act, then:
  • If the loss is not “Certified,” there will be no coverage response even if the insured accepted the “TRIA” offer.
  • If the loss IS “Certified,” there will be no coverage response if the insured did not accept the “TRIA” offer.
  • If the loss is “Certified,” and the insured accepted and paid for the “TRIA” offer, coverage should respond.
  • Stand-alone terrorism coverage would respond, whether “Certified” or not.
• If the loss is not deemed to be a terrorist act, then:
  • Coverage should apply under the Property Coverage form as an act of vandalism, fire, explosion, etc.
  • Coverage should apply under the Business Income and Extra Expense Coverage form for those that experience a covered direct physical loss.
  • Coverage should apply under the Business Income and Extra Expense Coverage form under Civil Authority for the period that the City of Boston shut down access to the immediately surrounding area.
  • If the Commercial Property / Business Income policy includes a manuscript endorsement, Ingress / Egress, then coverage should apply if there is a lack of access to or from the business.
  • Coverage will not apply to the general economic downturn experienced by businesses in geographic proximity during the aftermath of this event.
  • Coverage should apply under the General Liability policies for those entities that are sued as a result of the wrongful deaths and injuries that were sustained.

There are separate exclusions that apply to nuclear, biological, chemical and pollution-related events that could also remove coverage.

As you see, the issues are complicated and need to be considered carefully. Send me an email if you need more information.

Misunderstanding the language contained in the self-insured retention ("SIR") in an insurance policy can cost policyholders millions of dollars.

SIRs, which appear in many liability policies, are similar to deductibles but require the insured to bear responsibility for a certain amount of the loss (including damages and defense costs) "before there is any coverage under the policy."¹  (A deductible is generally a sum the insured "'must pay before the insurer owes its duty to indemnify the insured for a covered loss'" and generally refers "only to the 'damage for which the insured is indemnified, not to defense costs'").²   The language of the SIR, which varies from policy to policy, ultimately controls when and how an insured's coverage is triggered.

Some policies contain language that preclude anyone other than the named insured from satisfying the SIR—which can catch companies by surprise.

In a 2010 case, Forecast Homes, Inc. v. Steadfast Insurance Company³  ("Forecast"), a housing developer faced a construction defect lawsuit filed by several homeowners.⁴   The developer argued that its subcontractors' insurer, Steadfast, should provide coverage for the lawsuits, pursuant to contracts that required the subcontractors to provide additional insured coverage for the developer.⁵   But the courts disagreed because the named insured subcontractors, who were not parties to the construction defect lawsuits, did not satisfy the SIR in the Steadfast policies, a prerequisite for coverage.⁶   And, the developer could not satisfy the SIR itself as an additional insured.⁷

There were several Steadfast policies invoked in this lawsuit, but these policies contained essentially two versions of the SIR.⁸   Version one provided that "you [the named insured] shall be responsible for payment of all damages and defense costs for each occurrence or defense, until you have paid [SIR] amounts and defense costs equal to the [p]er [o]ccurrence amount shown in the Schedule[.]"⁹   Version two contained this same language but added explicit language precluding anyone other than the named insured from satisfying the SIR.¹⁰   The court held the plain language of version two clearly barred the additional insured developer from satisfying the SIR.¹¹   But the court also found that the less explicit version one precluded anyone other than the named insured from satisfying the SIR, relying on the section providing that "you"—defined as the named insured—are responsible for payment of defense and damages until the SIR is satisfied.¹²   Developer Forecast Homes, to its surprise, could not satisfy the SIR to trigger coverage as an additional insured.

Under different language, though, courts have allowed insurers, additional insureds, or others to satisfy the SIR.  For example, in National Fire Insurance Company of Hartford v. Federal Insurance Company ("National"),¹³  National Fire Insurance Company of Hartford ("NFIC") paid its policy limits to settle a suit on behalf of its named insured (a restaurant) and its additional insured (a hotel).¹⁴   NFIC then sought reimbursement from the hotel's insurer, Federal Insurance Company ("Federal").¹⁵   Federal argued that it was not obligated to pay a portion of the hotel's defense or indemnity because the hotel had not satisfied the $250,000 SIR, and the SIR could not be satisfied through NFIC.¹⁶   The court disagreed.¹⁷

Similar to version one of the policy at issue in Forecast, the Federal policy provided "[w]e have no obligation or liability under such Coverages unless and until the applicable [SIRs] . . . . are exhausted by payments you make . . . .  You must pay all [SIR] expenses."¹⁸   But the Federal policy at issue in National contained language that "'bankruptcy, insolvency or the financial impairment of any insurer or any other person or organization does not relieve the hotel of its obligation to satisfy the SIR," unlike the language in Forecast that referred "only to the insured's own bankruptcy or solvency."¹⁹   The language in National, combined with the absence of explicit policy language prohibiting another insurer from satisfying the SIR, compelled National to find that there was no bar to NFIC satisfying the SIR in the Federal policy on behalf of the hotel, the named insured.²⁰

What does this mean if you are an insurer considering settlement?  And how can insureds use this information to facilitate settlement or avoid future disputes?

• Know your policy language ahead of time.  Make sure you look at your policy and other potentially relevant policies before entering settlement negotiations and understand exactly who can satisfy the SIR.  If the SIR must be satisfied by the named insured and you are an additional insured, make sure that topic is part of the negotiations.  If the named insured is not a party to the action, consider whether you have grounds to bring the named insured into the action.  If the SIR can be satisfied by other insurers or co-defendants, then you have more flexibility in negotiating.
• Consider sharing your knowledge.  Knowing how to satisfy the SIR not only protects you in settlements but may help facilitate settlements.  For example, if your insurer is reluctant to contribute because it is taking the position that other insurers should be at the settlement table, look at the relevant policies and determine whether the other parties can satisfy the SIR in these other policies.  If so, pointing this out to the insurers and increasing their comfort level with their chances for contribution may compel the insurers to tender additional policy funds that allow for settlement. 
• Spell it out.  Think about potential coverage disputes and explicitly state relevant terms that could help resolve any disputes that have arisen or may arise.  For example, if the named insured is required to satisfy the SIR and, in fact, does so, state that in the mediation or settlement briefs, or otherwise memorialize it, so that the issue is clear and does not lead to disputes.  Understanding the disputes that may arise can help insureds create records that will allow for quick resolution or avoid the disputes altogether.

These recommendations are particularly important to insureds in the construction industry, where contractors frequently require subcontractors to name them on their insurance policies as additional insureds and are frequently contractually required to name others on their own policies as additional insureds.  Similarly, these recommendations are also important to corporations that face large-exposure lawsuits that exceed the limits of their primary coverage and need to trigger coverage under their excess policies to resolve matters.  In these circumstances, knowing who can exhaust an SIR can be critical to securing potentially millions in coverage. 

For all insureds, arming yourself with knowledge ahead of time can help you to develop strategies and create records that maximize coverage, facilitate resolution of current disputes, and eliminate potential future disputes.

¹ Hon. H. Walter Croskey, Hon. Rex Heeseman and Christina J. Imre, California Practice Guide: Insurance Litigation (The Rutter Group 2013) ¶7:384.

² Id.; see also Forecast Homes v. Steadfast Insurance Co. (2010) 181 Cal.App.4th 1466, 1474 (internal citations omitted, original italics).

³ (2010)181 Cal.App.4th 1466.

⁴ Id. at 1470.

⁵ Id. at 1469-1470.

⁶ Id. at 1470.

⁷ Id.

⁸ Id. at 1470.

⁹ Id. at 1471.

¹⁰ Id. at p. 1472.

¹¹ Id. at 1476-1478.

¹² Id. at 1480-1481.

¹³ (2012) 843 F.Supp.23 1011.

¹⁴ Id. at 1012.

¹⁵ Id. at 1012-1013.

¹⁶ Id. at 1016.

¹⁷ Id. at 1017.

¹⁸ Id.

¹⁹ Id. at 1017, italics added; Forecast, supra, 181 Cal.App.4th at 1472.

²⁰ National, supra, 843 F.Supp.23 at 1017.