Tag Archives: personal liability

Why Insurance WILL Be Disrupted

As it’s Pantomime season, can I start this with “Oh, Yes It Will”? (For those not familiar with Pantomime, check out some of the history here.)

I write in response to a great post from Nick Lamparelli on why insurance will not be disrupted (here). He takes a really interesting position. But I sit on the other side of the fence and believe insurance will, is and can be disrupted.

In answer to Nick’s six points as to why insurance will NOT be disrupted, here’s my perspective:

1. He writes: “At the core, insurance customers are leasing the potential to access capital…. How do you make a big pile of money irrelevant?” But this will vary from line of business to line of business. Where there are person-to-person (P2P) and other self-insurance approaches, why do I need capital? I will self-insure.

2. He writes: “Peer-to-peer providers just won’t be able to get sufficient scale to efficiently use capital to cover risk.” But isn’t this more about how they enable distribution and connections and pools of risk?

3. He writes: “IoT [Internet of Things] devices [and other new technologies] will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive.” I agree on this – it’s more evolution, not revolution. The revolution comes if the carriers actually do something with the technologies and create better products that are truly personalized. Note that we are still thinking in a product mindset, and I suspect this will change.

4. He writes: “I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat.” Like Nick, I think there will be evolution. But I think the change with autonomous vehicles is not only to move from personal insurance to product liability (or a mix with a flex of product and personal liability, e.g. the manufacturer will provide the base layer of cover, but after that you have the flex options to add extras). To me, the issue is more about distribution of the product. I envisage that next you will buy insurance to cover a journey, instead of buying insurance once a year through a price comparison/aggregator site. Equally, the big auto insurance carriers Nick mentions will need to look for new sources of income and value-added services, be it breakdown or otherwise to drive revenue and profit. I suspect these will be more often from outside our standard world. The car will be the most connected thing we engage with, and that alone brings a whole host of exciting opportunity. If we do go for autonomous cars in scale and get them right, then the disruption could be that product liability (PL) dramatically reduces to being a capacity provider only to a new distribution channel (auto providers?). Or the CL carriers and reinsurance providers actually take prominence (higher likelihood in my view).

5. He writes that regulators could stomp on innovation. This is a tough one, but I think the consumer will always win. Regulators’ views will be driven by what’s best for the customer. Equally, smaller, nimbler insurers that can turn on a dime will be better-equipped to manage through regulation changes, as opposed to large, legacy-laden carriers that will be too slow to react and catch any positive outcome.

6. He writes that there is very little that technology can do to disrupt insurance for natural catastrophes, which is his area of expertise. I reply: OK, you win. Not many seem to be tackling this, if any at all. However, how we manage in advance, or the ensuing events, how we handle the supply chain and how we treat return to pre-loss will improve, again as natural evolution rather than as disruption. You could argue that crop insurance has changed dramatically over the years with better weather data. Some pay out proactively based on weather data, without ever the need for a claim. This to me is revolutionary and goes back to the point that customers come first.

I’m 100% with you and Paul VanderMarck, chief strategy officer at Risk Management Solutions – customers and better outcomes will ultimately win. However, on the race to this end, there will be many who change and challenge our thinking. To me, this is why there are so many new entrants and existing carriers investing heavily to understand what, why and how we can disrupt. Have a look at some of the work from CB Insights, which gives a fascinating view on the state of the market. See here for some of the great work Matthew Wong and team are doing.

Separately, I think we have jumped on the “disruptor,” label, as, like any industry, we need to be able to offer up the opportunity for the next unicorn (Zenefits, Oscar etc.) and to attract the right attention, from both inside and outside the industry, along with the appropriate talent and thinking!.

Either way, for me it’s an exciting time out there in insurance, and we must continue to evolve, revolve, pivot, disrupt – whatever we call it. Sitting still is not an option!

Why Private Firms Should Buy D&O

It is a fact of doing business in the U.S.: Lawsuits happen!

Regardless of whether the action has any merit, lawsuits are expensive to deal with, damaging to reputations and draining to a business and its management. Small to mid-sized private companies can specifically attest—litigation is never a small or inconsequential matter. Any business, regardless of the sector it is in (manufacturing, service, agricultural, transportation, energy, technology), can find itself embroiled in a dispute. Disputes can arise from relationships gone sour with shareholders, competitors, regulators, creditors, or even a random third party.

Directors, officers and company (“D&O”) liability insurance for privately held companies can be a lifesaver in the event an unexpected lawsuit or dispute arises. When a business and its management team are placed in an adversary’s crosshairs, a D&O policy can step in to respond right off the bat. This response would include providing a defense, including the engagement of skilled legal counsel who will guide the D&Os through the process. In addition, when coverage applies, the D&O policy would fund the settlement of a lawsuit, or pay a judgment if the case were to go to trial.

Originally, D&O coverage was designed to protect only the individual directors and officers from lawsuits brought by outside shareholders who are not involved in the management of the company. However, D&O products have evolved considerably over the past 20 years and now cover the entity as well as the D&Os for a wide range of management decisions and claims from shareholders, as well as clients, competitors, vendors and creditors.

A disturbing fact for members of the company’s board of directors is that D&Os can, and usually do, get personally named in a lawsuit asserted against the company. The claim seeks personal liability against the D&Os. The more closely held a company is, the fewer owners/D&Os there are to sue, so the exposure to the personal assets of those principals is even more pronounced.

D&Os know that, in most states, a corporation is required to indemnify its D&Os for personal liability, if it arose from the execution of their corporate duties. If the corporation is on financially sound footing, the D&Os’ personal assets will usually be protected. However, situations often arise where the company cannot or will not defend a D or O, compelling them to defend themselves. Such cases can be when the company is not on solid financial footing or when it becomes insolvent. As troubling as it may sound, in tough financial times, the D&Os could find themselves paying for their own defense and settlement of a lawsuit out of their own pockets.

When a lawsuit hits, the financial advantages of having D&O coverage is readily apparent. What isn’t evident from reviewing policies is something we’ve witnessed over the course of many D&O claims. When serious accusations of wrongdoing are leveled at a member of management and there’s no D&O coverage to fall back on to fund the claim, the financial burden of a dispute can tear a management team apart. For example, suppose you are the officer who is the target of certain allegations. How quickly do you think your colleagues will rally around you when your alleged error or omission is the cause of significant financial hardship to the company?

Without D&O insurance in place to shoulder the financial and legal burden of a claim, infighting can erupt rather quickly when the company’s financial resources are placed in peril. When accusations fly, and salaries and bonuses might be affected, such situations often change the way people behave toward one another. As opposed to circling the wagons, executives may play the blame game.

In contrast, if D&O insurance is in place, there may not be such a panic, and finger pointing may not be as fierce or important. Accordingly, we believe that one of the great hidden benefits of D&O insurance is that it tends to defuse internal turmoil and helps maintain management cohesiveness during what is surely a trying time. When D&O insurance is in place and coverage has been accepted, the management team will be able to easily maintain a “stick together” attitude and an “us against them” mentality.

To summarize: We believe D&O insurance is imperative to carry for private companies and their principals.  D&O coverage acts as a solid backstop to mitigate or solve what could be the devastating financial impact of unforeseen business litigation. Litigation can happen at any time from within or from outside any organization.  In a society as litigious as ours, not having D&O insurance creates a serious exposure to the business itself, as well as every member of a company’s management team personally.

Make sure your private company customers, no matter what size or industry, carefully consider the purchase of D&O insurance to ensure that the company, as well as their personal assets, are protected.

Many Agents Expose Themselves to Dangers

Many insurance agents are confused about their role, which brings about misplaced loyalties and greater E&O exposures.

Let’s start with a question: Does the agent owe the policyholder the common law duty of good faith and fair dealing? Most insurance agents would respond with a resounding “yes” – but they’re wrong.

The duty of good faith and fair dealing is a non-delegable duty that applies only between the parties to the contract, and the parties are the insurance company and the insured – not the agent. Put simply, the agent is not the agent of the policyholder. The duties of good faith and fair dealing belong to the insurance company, not the agent.

So what duties does an insurance agent owe to the policyholder/applicant? Under common law, there are really but two:

  • Use reasonable diligence in attempting to place the requested insurance.
  • Inform the client promptly if unable to do so.

That’s it!

Some states may provide for a “special relationship” to have been created, which may provide for some additional duties. However, such a relationship is state-specific, requires some acts of commission to create and is beyond the parameters of this article.

Under statutes, there is really only one duty: Refrain from deceptive trade practices.

Every agent knows that the insurance code has a lot of pages devoted to prohibited practices. However, a careful review of the NAIC model law (upon which all states base their deceptive trade practices code) finds that all deceptive trade practices applicable to an insurance agent involve commission of an act, not the omission of an act. Under the model law, doing something incorrect is worse than not doing anything. Insurance agents may assume some duties that are not imposed upon them by law, thinking that they have such duties. If duties are “assumed,” even through ignorance, the law will hold agents to a professional standard for those assumed duties. If you make yourself out to be a coverage expert, the law will hold you to that expert standard.

Some 90% of E&O suits against agencies could be prevented through careful attention to practices and procedures.

By contrast, the duties owed by the agent to the insurance company are many. As a fiduciary of the principal, the agent owes the company:

  • Loyalty
  • Utmost good faith
  • Candor/full disclosure
  • Refraining from self-dealing
  • Integrity, skill and care
  • Fair and honest dealing
  • Duty to follow instructions

Something many insurance agents may not have considered: Your responsibility to not breach your fiduciary duties to the insurance company are the largest part of your professional/ethical responsibilities as an agent.

(It is not a two-way street. The insurance company is NOT a fiduciary of the agent. In other words, an agent acts on behalf of the insurance company, but the insurance company does not act on behalf of the agent. Under common law, the insurance company only owes the agent: indemnification, payment of compensation and fair dealing.)

Some confusion may occur about agents’ responsibilities because of two issues: vicarious liability, which holds that a principal may be held liable for actions by its agent, and the legal maxim that a wrongdoer is ultimately responsible for his own wrongdoing. If an insurance company is held liable for the wrongdoing of its agent (vicarious liability), the insurance company can seek recovery from the agent, (holding the wrongdoer ultimately responsible).

If the insurance company is held vicariously liable for the agent’s wrongdoing, a decision to seek recovery from the agent may depend on:

  • What did the agent do wrong?
  • What recovery did the insured get?
  • What recovery is available to the principal (the insurance company)?
  • What was the agent’s thinking?

A common misconception is that all one has to do to avoid personal liability is to establish a corporation or limited liability entity. That is incorrect because:

  • Professional liability is personal liability.
  • Fiduciary liability is personal liability.

Summary

Insurance agents may assume many duties not imposed upon them by law. Assuming those duties holds the insurance agent to a professional standard not otherwise imposed.

The majority of an agent’s duties are owed to the insurance company, and it is the company’s vicarious liability for the actions of the agent that may ultimately get the agent sued. In other words, the biggest E&O exposure an agent may face is ultimately an action brought by the insurance company because of a wrong action or breach of fiduciary duties. Knowing this makes it all the more important that the agent fully understand and trust the insurance company before assuming the responsibilities and duties imposed upon agents.