Tag Archives: underwriters

Outlook For The Private Directors & Officers Marketplace

Private Directors and Officers Liability (D&O) policies are generally combined policies including D&O and Employment Practices Liability (EPL). Although they are typically marketed as Directors & Officers policies, and there are definitely D&O claims, claims frequently come from the Employment Practices Liability side of the form. Private Directors & Officers carriers find it challenging to cope with the high frequency of Employment Practices Liability claims that come with this line of business.

The premiums associated with these policies have been creeping up over the past few years, and now is an appropriate time to investigate and report on the causes. Rather than give you generalities that claims are frequent, here is some of the data that supports what the insurers are telling us.

2012 EEOC Complaints
Top Five States Total Complaints Percent Change Since 2010 2010 Total Complaints Total Population 2010*
Texas 8,929 -4.1% 9,310 25.1 million
Florida 7,940 2.1% 7,779 18.8 million
California 7,399 3.3% 7,161 37.3 million
Georgia 5,903 2.3% 5,771 9.7 million
Illinois 5,490 3.8% 5,288 12.8 million
Year Total Total Complaints – All 50 States
2012 99,412
2011 99,947
2010 99,992
2009 93,277
2008 95,402

* The population totals are included to show that the highest volume of claims generally come from the largest states.

The Equal Employment Opportunity Commission (EEOC) isn't the only regulatory body bringing employment actions against employers — state agencies like the California Department of Fair Employment and Housing (DFEH) are filing cases as well. In its 2010 annual report, the California DFEH notes that they filed between 17,500 and 20,000 cases each year between 2007 and 2010 (2011 and 2012 numbers are not yet available). The department also estimates that the average post-accusation case settled for more than $40,000.

Let's put this into perspective. The Betterley Report: Employment Practices Liability Insurance Market Survey 2012 (December 2012) estimates the total Employment Practices Liability market at around $1.6 billion in premium. Just for discussion purposes, let's assume that the Department of Fair Employment and Housing estimate is applied to all claims. At $1.6 billion in total premiums collected, the insurance marketplace could handle 40,000 claims and break even (40,000 claims X $40,000 average settlements = $1.6 billion). Considering we know there are more than two times that many EEOC complaints, plus tens of thousands of other state agency claims, we know that the volume of insured claims exceeds 40,000 per year.

Since we know that there are more than 40,000 claims a year, the second half of the debate is what these claims cost. The Department of Fair Employment and Housing has their estimate for out of court settlements at over $40,000. Jury Verdict Research, a publication that puts out jury trial settlement trend data, indicated in its 2011 report titled, “Employment Practices Liability: Jury Award Trends and Statistics,” that the average awards range from $600,000 for discrimination claims to as much as $790,000 for wrongful termination claims. Their median award range is from $200,000 to $260,000 based upon their research. This data implies that the average claims are going to be far greater than $40,000 to settle on a nationwide basis. These reports only show us awards, which do not include the defense costs paid to get to the award stage.

If we take this one step further and assume that the average claim will cost approximately $120,000 — though the Jury Verdict data tells us it's higher — then the amount of claims the insurers could handle in a year, and possibly break even, is more like 13,333 claims per year ($1.6 billion total annual premium divided by $120,000). If we factor in underwriting expenses and other transactional costs, then even less money is available for defense costs and settlements.

So, what's the bottom line? The insurers have been struggling to make a profit on this line of business for many years. While competition for market share has continually lowered the premiums they could charge and still write business, we've gotten to a crossroads and blown right through the stop sign. The pricing has been creeping up over the past three to four years, and we are still far from a corrected market. The dilemma for insurers has been how to adjust their pricing and terms in a way that still provides a valuable policy for insureds. The responses have varied from insurers pulling out of a specific region (like southern California), gradual elevation of retentions, increasing premiums, reducing limits available and declining risks with specific employee count ranges.

Bertrand Spunberg, Senior Vice President, Hiscox USA: “We have strived to maintain 'sustainable underwriting' since we opened up in 2009, even when the market was still very soft. That discipline is now starting to pay off as other insurers are adjusting their rates and retentions up to a point that's more comparable to what we have been all along. We are seeing some insurers revising their appetites or pulling out of jurisdictions and segments altogether. Other carriers are taking a portfolio view of the business, making them more prone to declining rather than underwriting around account-specific exposures. This creates an environment that is increasingly difficult to navigate for both insureds and brokers. EPL claims have been leading the way, but we are also seeing D&O claims arising from financial issues, such as bankruptcy. In response to that, we have seen insurers indicate that they would be looking to limit or even remove entity coverage.”

Mr. Spunberg's comments should serve as a warning to all brokers. While pricing and retention changes are typically obvious changes to renewal terms, you need to pay extra attention to any other changes in coverage terms. On some policy forms, the inclusion of entity coverage may only be signified by an “X” in a box on a declarations page or quote letter. It could be easy to miss the removal of this subtle notation. Also watch out for changes in endorsement numbers and titles. You may find an insurer substituting an endorsement with the same title as previous years but adding a new clause that removes or restricts coverage from what you've come to expect.

Steven Dyson, Executive Vice President, ERisk Services, LLC: “We track a lot of data on our insureds and claim performance. Rather than penalize all insureds in every state, we have evaluated where our claims are coming from and adjusted our rates in a targeted fashion. Difficult venues like southern California, Illinois, southern Florida and metro New York, are getting more rate adjustments than less litigious parts of the country. We drill down to the county level when evaluating the performance of our book and adjust accordingly.”

As brokers, we appreciate ERisk's targeted approach. As insurance professionals, it can be a difficult message to give to insureds that an underwriter is penalizing them for the poor performance of another risk, or that the underwriters may have misunderstood the risks of the businesses they underwrite.

No insured likes to see their premiums rising. It helps when underwriters are doing their best to stabilize the marketplace and articulate the logic behind rate changes.

Joseph Casey, President, ACE Westchester: “At Westchester, we have seen a significant increase in the number of Private Company D&O submissions, apparently based in part by some markets reacting to an increase in Employment Practice Liability claims. The increase in EPL litigation and the corresponding rise in defense costs require, more than ever, greater underwriting discipline. However, the right carrier, with an expertise in EPL and a flexible approach, has the ability to look at the type of company, the jurisdictions in play and other factors unique to the insured, and provide suitable coverage.”

Our wholesale-dedicated markets like ACE Westchester and ERisk are less prone to some of the broad brush underwriting approaches taken by many of the standard markets. The wholesale markets are always looking for a way to differentiate and uncover risks that are neglected or underserved by the standard markets. When the retail-focused markets head out the door, our markets are usually running in; that appears to be what we are currently experiencing. We've had a sustained period of underpricing in the private D&O/EPL area as insurers compete for market share. With the loss frequency where it is and expenses rising, it is indeed time to reevaluate. While the wholesale markets are noticeably more competitive in a challenging market, they also do a great job when things are going smoothly.

Navigating School Board And Educators Legal Liability Policies

Brokers who place School Board and Educators Legal Liability insurance are beginning to notice that the marketplace has gotten more difficult. Layoffs from budget cuts have triggered an increase in Employment Practices Liability (EPL) claims, while the tough job market has led to an increased amount of “failure to educate” claims.

The very public proceedings involving Penn State University have recently reminded us that sexual abuse and molestation are critical claim issues for schools. Any article written about a class of business that touches Personally Identifiable Information (PII) and doesn't mention Cyberliability fails to address another major source of trouble.

Based on these and other factors, insurers are either non-renewing business or re-underwriting their book, which leads to a restriction in terms.

The typical School Board or Educators Legal Liability policy is designed to protect not only teachers, but also school board members, administrators, volunteers, student teachers and various other members of the educational staff. In a standard policy, the definition of “Wrongful Act” includes coverage for an actual or alleged breach of duty, neglect, misleading statement and other errors or omissions of an insured educator in their capacity or scope of employment on behalf of the educational institution. Most policies also include coverage for Employment Practices Liability (EPL) claims, which tend to be the most frequent cause of loss.

Typical allegations found in claims include:

  • Failure to educate
  • Failure to supervise a classroom
  • Loss of accreditation
  • Employment-related lawsuits claiming sexual harassment, wrongful termination or discrimination
  • Misstatements, misleading statements, breaches of duty, neglect, errors or omissions made by a paid or volunteer board member who assists the school in making critical decisions about operations and economic survival
  • Failure to respond to or prevent bullying activities of the students

Market Commentary
Below are examples of the additional claim scenarios that insurers are seeing in this class of business.

“We are seeing the severity of educators' claims increase dramatically.” — Stephanie Gardner, RSUI

“The biggest issue that we have seen regarding Educators Legal Liability is on the EPL side. This has historically been a frequency-driven class and we have seen an even larger increase in frequency. We have also seen frequency develop into severity, which we had not seen to this extent before. There doesn't seem to be any new trend in the type of EPL claims, just more of them. I believe a lot of this is just a function of the economy and the pressure on school districts to reduce their budgets.” — Matthew Cibulskas, Westchester Specialty

“Bullying claims are being litigated under a 'failure to supervise' accusation. The financial damages to the parents are that they had to pay private school tuition because they had to leave the public school system after nothing was done to stop the bullying. And redistricting claims — many institutions have budget issues and, as a result, are closing schools and consolidating. This has triggered a lot of claims against the school boards.” — Steve Krusko, AIG

“I have seen issues with the for-profit educational segment regarding the federal tuition funding (loans/scholarships) as well as issues with dismal graduation rates and failure to educate allegations.” — Roy Huelsebusch, Crum & Forster

“Unfair competition and misrepresentation during the admissions process, as well as admissions to programs that don't have full accreditation yet (nursing programs seem to be frequent offenders here). Regulatory interest — a high percentage of tuition comes from Pell Grants so state Attorneys General have been pursuing litigation for unfair/deceptive trade practices.” — Rob Faber, AIG

If there was just one area of concern, underwriters could manage that risk with exclusions, sublimits, higher retentions or other means of mitigation. However, with severity increasing and claims coming from many directions, the marketplace has to respond. Underwriters can either withdraw from the marketplace or attempt to work around the hot spots. As mentioned earlier in this article, many insurers have moved away from this class while others are indeed revising their pricing, retentions and coverage terms.

With many schools having renewals on or around July 1, now is the time to formulate your renewal strategy, communicate the conditions of the market to your insured, and begin discussions with your current and prospective insurers.

What The Insurance Industry Needs To Know About Epoxy Water Pipe Liner

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Recently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. This method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many epoxy failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

  • The potential for epoxy liner failures may be high in galvanized steel potable water systems.
  • There is no reliable way to inspect the adhesion of epoxy inside a pipe.
  • If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
  • Epoxy liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a “new” system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner “solution” as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy “solution.”

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don't know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation … this can become a huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The epoxy liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then “cured in place” either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the epoxy lining system are associated with the planning and quality of the preparation as well as training of the applicator personnel.

 

The Anatomy of an Epoxy Failure: The following photographs demonstrate the progression of an epoxy failure where the surface has been improperly prepared.

Single Crack Allows Water To Enter

Multiple Cracks Form Due To Underlying Corrosion

Cross Section of Coating Breach, Pitting Continues

When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at it's weakest — pitted areas and threads.

Pipe threads are especially vulnerable: The photo below shows corrosion in steel pipe near pipe threads. Sandblasting with epoxy would weaken the threaded area further. A crack in the epoxy at this location would allow the corrosion to continue unknown to the residents. In many cases the existing pipe is better off left alone until a full re-pipe can take place.

Corrosion In Steel Pipe Near Pipe Threads

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service2 3 4. While epoxy is tested safe to drinking quality standards by independent studies1 and national water quality standards6, any such “certification” is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression7 of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers3, The American Water Works Association9, the American Society of Testing and Materials10, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.3 Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.10

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.7 The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn't re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.5

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.6 The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

1 Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

2 Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

3 PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

4 INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

5 Canadian law suit brought against the epoxy applicators.

6 Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

7 Layman's Guide to Epoxy Paint / Coating Failures.

8 NSF/ANSI Standard 61 Drinking Water System Components.

9 AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

10 ASTM F2831 – 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

Disclaimer
Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.

Video Verified Alarms And Priority Response – How Does It Work?

Traditional burglar alarms have lost much of their value as a tool for loss control, but video alarms are taking their place. Police response to burglar alarms is degrading and in many cases police departments have stopped responding to traditional alarms unless they are verified.

Millions of traditional alarm systems have created an enormous problem, wasting shrinking police resources on millions of false alarms. It is a big concern that has the attention of national law enforcement leadership.

International Association of Chiefs of Police (IACP) president, Chief Craig Steckler specifically addressed false alarms as a key issue in his inaugural address of October, 2012, “According to studies, last year there were more than 38 million false alarm calls in the United States. In many agencies alarm calls were the number one call for service, and statistically, these calls often account for nearly ten percent of all the calls for service the agency handles on an annual basis. Additionally, every study of the issue continually finds that 95 to 99 per cent of all alarms are false.” Chief Steckler bluntly states, “We must take a critical look and unbiased look at false burglar alarms, and determine whether in the new norm, this type of call (police responding to alarms) is truly a prudent use of severely limited resources.”

Chief Steckler is not exaggerating. Police consider traditional burglar alarms an enormous waste of resources. Officers no longer make arrests, and alarm companies focus on selling deterrence instead of apprehensions. From the police perspective, many simply no longer care.

The situation has degraded to the point that many major cities like Las Vegas, Salt Lake City, San Jose, and Milwaukee stopped responding to traditional burglar alarms altogether. This trend is gathering momentum. The public/private partnership of the police/alarm company/insurance industry has atrophied, and neither the police nor underwriters find effective loss control in traditional burglar alarms.

In contrast, this video underscores the value that law enforcement places on video verified alarms to combat property crime. The president of the National Sheriffs Association describes Priority Response and how effective they are at delivering arrests. There are many actual video clips of real burglaries in the video itself.

Response Differentials
Video verified alarms are an increasingly important evolution to combat property crime. They continue to deliver priority police response and lead to arrests. The reason is the video verified alarms mean that police respond faster to the alarm, making arrests and reducing claims.

The “response differential” between a traditional alarm and a video verified alarm is significant. The following chart illustrates the differences in different sample cities across the USA: large and small, east and west, north and south. The key issue is that video verified alarms deliver police response faster, around 15 minutes faster in many jurisdictions. Those 15 minutes makes a big difference in reducing claims for property crime.

Jurisdiction Video Alarm Traditional Differential
Boston, MA 7:38 21:00 13:22
Charlotte, NC 5:10 13:30 8:20
Chula Vista, CA 5:05 19:18 14:13
Watertown, MA 4:00 23:00 19:00
Fairfax County, VA 6:00 18:02 12:02
Salinas, CA 2:54 39:25 36:19
Amarillo, TX 10:06 19:24 9:18

Real Examples Of Alarm/Police Interaction
Perhaps the most effective way to illustrate the value of video verified alarms is to show 4 actual examples of real events with different outcomes based upon the alarm and jurisdiction. This is what the alarm business really looks like from the police side of things. Two of these examples lead to arrests. Insurers must realize the importance of central station dispatchers using video to become virtual eyewitnesses to a crime in progress.

All of the examples are not positive. In the final alarm, the 911 call taker says to the central station operator: “This doesn't meet our criteria for response,” meaning that the municipality won't respond to the alarm without the video verification. The central station operator sounds a bit stunned on the phone. But this is the scenario that is happening increasingly around the country. This last example is what insurers are trying to avoid by promoting video verified alarms to their policy holders.

Now What?
We need a strong public/private partnership to combat property crime. Underwriters must answer the question, “How can we encourage policyholders to use video alarms and police response to reduce losses?”

One answer would be to join the Partnership for Priority Video Alarm Response (PPVAR), a nonprofit public/private partnership based in St. Paul, Minnesota. The organization brings together alarms companies, insurers, and law enforcement to promote Priority Response and Video Alarms to reduce property crime and insurance losses. The PPVAR board of directors includes law enforcement, alarm companies and the National Insurance Crime Bureau (NICB) that is supported by 1,100 property/casualty insurance companies.

To further strengthen leadership from the insurance industry, the PPVAR recently added Verisk Crime Analytics Vice President Anthony Canale to its board of directors. There are now two strong insurance organizations to help build the partnership with law enforcement and the alarm companies. Verisk owns and operates national crime databases that provide services to the construction, retail, transportation, manufacturing and insurance industries.

“Our involvement with the PPVAR fits with the mission of Verisk Crime Analytics to use data and analytical tools to support public safety operations and to help our clients reduce the impact of crime,” said Canale.

As the successes grow, the PPVAR is expanding its membership in the insurance industry — individual insurance companies joining the partnership and embracing the message. The PPVAR welcomes additional insurance companies and associations to work with us to help use video alarms to reduce claims and losses.

Resurrecting "Modern" Loss Control from the Past

Once upon a time, alarms detected burglars, officers responded and police made arrests. Underwriters depended on “loss control with a badge.”

In fact, underwriters created the security industry in the early 1900s when they wired a problem Boston bank that then alerted the nearby telegraph office of a burglary. Police arrested the burglars and prevented a large claim.

Underwriters built upon this success and pushed policy holders to install burglar alarms because they worked — police made arrests and lowered claims. The alarm/police response concept worked so well that underwriters soon mandated that all high-value policy holders such as banks and jewelry stores install UL certified intrusion alarms before issuing a policy. They also created alarm discounts in their policy contracts to encourage their other commercial and residential policy holders to install burglar alarms.

This historic police/alarm/insurance model boosted profits through the 1970s, but the partnership lost its value, deteriorated and died. Before we resurrect this partnership and reconsider the “alarm discount,” we need to understand what happened.

Background
What caused “loss control with a badge” to fade?

From the underwriter’s perspective, the unprecedented bull market of the 1980s meant that profitability shifted away from loss control to a focus on collecting premium and driving investment-income. At the same time from the alarm perspective, the digital phone dialer appeared and opened a new mass market for inexpensive burglar alarms. The installed base of traditional alarm systems exploded into the tens of millions, creating a tsunami of false alarms for law enforcement that eroded value. With a staggering false alarm rate of over 98%, police now considered traditional alarms a waste of resources and response decayed. Officers no longer made arrests as alarm companies focused on selling “deterrence” instead of apprehensions. From the police perspective, they simply no longer cared.

The situation degraded to the point that major cities like Las Vegas, Salt Lake City, and Milwaukee stopped responding to traditional burglar alarms altogether. This trend towards declining alarm response continues to be an issue. The police/alarm/insurance partnership had atrophied and neither the police nor underwriters saw value in traditional burglar alarms.

The Problem
Before we consider the solution, let's look at how traditional alarms are viewed by police. When hit with budget cuts, Detroit Police joined the growing trend and decided to end response to traditional alarms because there simply weren't enough officers to go around anymore. Traditional alarms no longer delivered.

On August 16, 2011 in a Detroit Free Press feature article, Detroit Police Chief Ralph Godbee Jr. declared that any triggered alarm will require a verified response before dispatch sends a cruiser to the location. Godbee cited a US Department of Justice report supporting verified response as a reliable practice towards eliminating waste and improving public service. Abandoning traditional alarms, Chief Godbee sees video verified alarms as the solution to more effective policing — using video to verify that the alarm is an actual crime. Detroit Police Commander Todd Bettison stated, “Our main goal is to respond to crime, and if we can utilize modern technology, then so much the better. We feel very passionate about this. We've been looking at this for a long time and from what we've observed this is definitely the way to go.”

One program developed by the security industry to address this “false alarm problem” was to transform false alarms into a municipal revenue stream — creating city ordinances mandating false alarm fines and permits for burglar alarms.

While filling the city's coffers with false alarm fines may placate city councils, this approach does very little to increase arrests and address the need for effective loss control. In any case, in many jurisdictions this program is simply overwhelmed by draconian budget cuts that are decimating the ranks of law enforcement.

The recent Department of Justice publication, “The Impact of the Economic Downturn on American Police Agencies” stated that at least 10,000 officers had been laid off in 2011. In the last two years, the San Jose Police Department has reduced its officers by 20% — forcing them to reconsider alarm response.

In a memorandum sent to the City Council's public safety committee in December 2011, police Chief Chris Moore wrote that, “the primary purpose of police is to respond to reported crimes, preventive patrols and community policing, and the practice of responding to all audible alarms does not accomplish any of those goals.” Chief Moore further underscored just how ineffective traditional alarms were at delivering apprehensions: “In 2011 San Jose had 12,450 alarm calls and of those there were only 2 arrests.”

These statistics are not unique. According to the Las Cruces Sun-Times, Las Cruces, New Mexico is moving towards verified response after reviewing that in 2011 a total of 12,970 alarm runs resulted in only 2 burglars being arrested. In light of such statistics, San Jose, California went forward and implemented a verified response policy on January 1, 2011. City leaders say the new policy will allow police to focus on high priority calls and perhaps even reduce those response times.

This is the real benefit of verified response to underwriters — policy holders who use video verified alarms actually get faster response for more arrests. Police attention is focused on crimes-in-progress instead of on false alarms.

Most underwriters are not aware that police don't respond to traditional alarms in many areas of the country. Politicians avoid public outcry, and degraded alarm response policies are often presented in “politically friendly” code but the result is the same — no police response and higher claims.

“Broadcast and file” is one example of a “friendly” sounding non-response policy that is popular in Colorado and the West. For many large Colorado cities like Denver, a “broadcast and file” policy means that alarms are simply broadcast over the radio and an officer responds if he feels like it, and has nothing else to do. It is “voluntary response.”

The majority of the time this means no response at all. In contrast, video verified alarms still receive mandatory dispatch in “broadcast and file” jurisdictions and deliver real value and arrests. Many police departments have simply relegated traditional alarm response to such a low priority that the response time is measured in hours not minutes.

Underwriters have not been totally ignorant of this trend towards degraded response. Large companies like State Farm and Allstate have already eliminated the “alarm deduction” in Florida and underwriters are moving to remove it from their contracts nationwide because they can no longer afford what has become a “marketing device” that has no impact on reducing claims.

The Solution
The alarm industry and law enforcement have a solution — new technology and updated policies. Video verified burglar alarms have resurrected the police/alarm response model. Police are making arrests again and changing the paradigm. The June 2012 cover story of SDM Magazine, “Does All of This Stop Crime?”, cited examples of amazing arrest rates using video alarms. Universal monitoring, an alarm company in Charlotte, achieved over 60% arrest rates on their monitored video alarms in a one year period. F.E. Moran, an alarm company in Illinois, delivered 129 arrests for 136 incidents using video alarms protecting commercial property — over a 95% arrest rate!

The March 2012 issue of IACP (International Association of Police Chiefs) Police Chief Magazine documents a case study of this new approach at Detroit Public Schools in an article entitled, “Arresting Results: How One District Achieved a 70 Percent Closure Rate with Video Alarms.” Detroit Public Schools installed video intrusion alarms in 30 vacant schools that were targets of vandalism and copper theft. During the 2010/2011 school year, there were 101 burglaries in these facilities. According to the report, the police closed 70 incidents with arrests of 123 people — a 70% arrest rate.

From an underwriter's point of view the results change the game — a few thousand dollars for video alarms saved millions in damage for Detroit Public Schools. In fact, Detroit officer John Greene made over 150 arrests using video intrusion alarms and was named officer of the year in Police K-9 Magazine.

These results are not unique — video intrusion alarms are delivering arrests across the country, saving insurers millions.

In February 2012, the Los Angeles County Sheriff's Department, speaking of their new Priority Response program, announced initial arrest rates of 19% for video intrusion alarms. In contrast, the 2011 burglary arrest rates (without alarms) in Dallas and Minneapolis were 5.2% and 7.3% respectively. Even more worrisome, a study by the San Bernardino Police and Sheriff in 2007 reported an arrest rate of 0.08% for traditional alarms. For San Jose it was less than 2 arrests for every 10,000 alarm runs in 2011.

It is ironic that insurance companies continue to offer costly “alarm discounts” in cities that no longer respond to alarms that no longer deliver arrests.

An underwriter knows that putting one burglar in jail prevents an additional 30-50 burglaries they would have committed on the street (as well as eliminating the cost of the entire claims process incurred by the company). A single site in Chandler, Arizona protected with video intrusion alarms resulted in over 40 arrests in 4 months according to an article in Modern Contractor Magazine.

While response to traditional alarms is decaying, video verified alarms are transforming security and providing new value to law enforcement and underwriters. Alarm monitoring companies are even sending video clips of the intruders to police cell phones, making them even more effective. This is making a dramatic difference in combatting property crime, a paradigm shift for police and sheriffs. Video alarm technology and Priority Response has created an inflection point in an insurance market demanding the return to modern loss control.

It is also a new world for law enforcement. Both police and sheriffs embrace solutions that deliver arrests and make them more effective. Law enforcement sees video intrusion alarms as a fundamental paradigm shift and they want to encourage them, so much so that they are directing the 911 dispatch centers to create special dispatch codes that designate video alarms for high-priority response. In essence, the 911 operators treat video verified alarms as a crime-in-progress, not just an alarm.

Priority Response to video alarms means that the historical police/alarm concept has value for underwriters and works again protecting property and reducing losses. Police respond to video alarms and make arrests that reduce claims. Law enforcement is being proactive, encouraging their citizens to help them protect their property. Chief Steve Dye, of Grand Prairie, Texas recently announced a Priority Response policy on a televised newscast and sent flyers in the water bills of Grand Prairie property owners encouraging them to upgrade to video alarms. Sheriff Larry Amerson of Calhoun County wrote a letter to his constituents, “We believe that video alarms offer enhanced protection to you and help us in our efforts to keep Calhoun County citizens safe and protect their property.”

Law enforcement is making arrests again, and it matters. The National Sheriffs Association even officially endorsed the video alarm manufacturer, Videofied, the first endorsement of a burglary alarm by national law enforcement — because they deliver more arrests.

It is a new world for underwriters. Loss control matters again. It's a world that is ripe for the rebirth of the police/alarm/insurance partnership. Underwriters need loss control — the stock market crash and economic downturn have radically impacted the insurance business model and profitability. Pat Speer, editor of Insurance Networking News, spoke of alarm systems in her January 2012 column, “Is Loss Control a Lost Art?” She concludes her article with, “Given the cost dynamics of the industry's long history of successful loss control initiatives, holding clients contractually accountable for known risk management prevention efforts is just logical. Isn't it?”

Underwriters are again forced to price policies that depend upon loss control for profitability. To strengthen the point, the downturn has created new crime categories, such as copper theft, that leave insurers with expensive property claims 20 to 30 times greater than the scrap value of the stolen copper — recovery is impossible when stealing $1,800 of copper creates a loss of $85,000 for broken plumbing, wiring and HVAC. CBS News recently reported on copper theft at a dental office in Sacramento where thieves caused over $10,000 in damage for $200 of copper.All this pressure on profitability comes at a time when the premium base is actually shrinking. With the proverbial financial gun to their heads, underwriters are looking to resurrect “loss control with a badge.”

Reconsidering The Alarm Discount
Underwriters are becoming educated. Experience has taught them that video surveillance is not loss control. Most surveillance is NOT monitored in real time. It is true that high definition CCTV surveillance cameras and a video recorder can document a theft in high resolution for later review by the business owner. This may be interesting for a television audience, but for the underwriter the crime has already happened, the building is damaged and the crook is long gone with the loot.

Movie-quality video without real time monitoring and immediate police response is a solution, but for other problems. Video quality is not the key issue — once the monitoring operator can tell that there is an actual crime and sends the police — that is enough. There are hundreds of video clips of arrests on YouTube taken outdoors and in difficult low-light conditions that prove the point.

“Adequate video quality” means affordability and the good news is that video intrusion alarms themselves are now the price of a traditional system and much less expensive than a high definition surveillance system. Police don't need Hollywood quality to make arrests — what they need is instant notification of a crime-in-progress.

Underwriters know they must answer the question, “How can we encourage policy holders to use video alarms and police response to reduce losses?”

One simple approach is to review the existing alarm discounts and limit them to video intrusion alarms that deliver Priority Response. Practically speaking this means working with an alarm company as a partner that provides video verification services. Effective loss control means that video clips of the burglary are sent to a monitoring station where they are immediately reviewed and dispatched as crime-in-progress.

A longer term approach being coordinated by the PPVAR (Partnership for Priority Video Alarm Response) is to bring the insurers, law enforcement and security companies together to begin to develop guidelines and standards that could be used by underwriters for specific markets and applications. The board of the PPVAR is composed of representatives from the Police, Sheriffs, the National Insurance Crime Bureau, and the Alarm Industry. This security/insurer/law enforcement working group will analyze loss data for specific applications, such as construction, and create guidelines for minimum requirements needed to actually bring the police and stop the losses — an updated reincarnation of certificated alarm systems.

In any case, the alarm industry and the PPVAR are reaching out to insurance industry associations including the CPCU (Chartered Property Casualty Underwriters), the NICB (National Insurance Crime Bureau), ISO (insurance Services Corporation), PIAA (Professional Insurance Agents Association), and others to educate them and solicit their support as we attempt to resurrect the partnership that worked so well in the past — security companies installed alarms, police made arrests, and insurers reduced loss.

Additional Resources
For more information on the PPVAR: www.priorityresponse.info
CPCU webcast training is available at www.cpcusociety.org/page/184331/
NICB 6 minute video overview: www.ijmag.com/LossControl