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A recent study found that since passage of the Sarbanes-Oxley Act, dismissals of class action securities suits have declined by one third. Despite fewer dismissals, average settlements are down 15%.
A punitive damages judgment against Ford Motor Company arising out of an allegedly defective Ford Bronco has been reduced from $290 million to $23.7 million. A California appeals court applied the reduction after the U.S. Supreme Court found the original award to be excessive.
According to a recent report in the National Equipment Register, Texas, North Carolina, Florida, California, and Georgia were, in that order, the states with the most equipment theft in 2003. Between them, these five states accounted for about one-third of all such losses in the United States. Tractors are the most common type of equipment stolen.
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| Additional insured endorsements revised |
In what will undoubtedly result in changes to contractual risk transfer strategies, the Insurance Services Office (ISO) has announced major revisions to its widely used additional insured endorsements for commercial general liability policies. ISO is an insurance industry group that promulgates standard insurance forms. ISO files these forms with the various state regulators. Many insurers use these standard forms for convenience and certitude (the language tends to be well tested by the courts).
Ten existing forms are revised and a new one added. The revised forms restrict the scope of coverage to an additional insured. In its filing memorandum, ISO states that courts have interpreted some of the current endorsements to provide liability for an additional insured's sole negligence. ISO specifically identified the phrase "arising out of" as a source of problems for insurers because of court interpretations.
ISO says that the original forms never were intended to provide such broad coverage. Protection for vicarious (arising out of a responsibility for actions of another) and contributory negligence are all that insurers provide to additional insureds, according to ISO. The new forms attempt to make clear that only such liability is covered. Sole negligence of the additional insured is specifically excluded.
To prevent a "back door" approach, ISO also plans to introduce an endorsement to amend the insured contract provision in general liability policies. That provision provides coverage for liability assumed under certain types of contracts. A strongly worded hold harmless/indemnity agreement could trigger protection for sole negligence under the insured contract provision. Not if the new endorsement called, CG 24 26 - Amendment of Insured Contract Definition is used, however. The new form specifically excludes sole negligence of the additional insured from coverage under the insured contract provision.
Many industries such as construction, retail, and government rely heavily on contractual risk transfer and indemnification for protection from losses caused by subcontractors, vendors, and suppliers. The revised forms will weaken protection in most cases. Those who rely on such protection should look carefully at the wording of the new forms and work with their insurance professionals to assure that their risk transfer strategies remain sound and practical. Those who are accustomed to providing additional insured status to clients or customers should review indemnity provisions carefully. You may be assuming liability far beyond what your insurance will cover.
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| Property insurance premiums drop - for some |
According to a report from the Risk and Insurance Management Society (RIMS), the cost of property insurance dropped 8.8% in the fourth quarter of 2003. This information came from insurance buyers renewing their property insurance policies during that period who participated in the RIMS Benchmark Survey.
According to the RIMS press release, this is the first decline in cost of any major commercial insurance line noted in the survey in over four years. Other information gathered in the survey also provides hope for insurance buyers, says RIMS. While overall premiums continued to rise in other lines, the rates of increase slowed dramatically for many types of coverage. According to RIMS, directors and officers liability insurance rates of increase slowed to 17% during the fourth quarter from 75% in the third quarter and 200% last year. Excess liability rate increases slowed in similar fashion.
There is other hopeful news in the survey. RIMS reports that "policy counts" are down for directors and officers liability and excess liability. The term refers to the number of policies needed to reach a desired level of insurance coverage. RIMS considers policy counts to be a "leading indicator" of future directions of rates for a specific coverage. Experience has been that when policy counts decline, rates will follow shortly thereafter.
One line of coverage where rate increases have continued is fiduciary liability. Even here however, the rate increases are holding steady and not accelerating.
Although the news is mixed, there is some hope for those who have suffered insurance "sticker shock" in some lines recently. Troubled lines of insurance such as workers compensation and auto liability may require considerable time before rates stabilize or turn downward.
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| Directors and officers liability suits anticipated |
A survey of 300 privately held companies revealed that 37% expect suits against their directors or officers in 2004. Impulse Research Corp. conducted the survey in November 2003. The Chubb Group of Insurance Companies sponsored the study.
Survey participants viewed customers as the most likely source of suits. Vendors were the next most likely group in the minds of those surveyed. Shareholders were a distant third in the eyes of the responders. Presumably, this survey was confined to D&O claims only and did not include employment practices liability coverage, which often is added to D&O policies.
Many of the responders attributed their concerns to the Sarbanes-Oxley Act, which sets standards for corporate governance for publicly traded companies. The privately held firms believe that courts are applying some of the same standards to privately held and not-for-profit companies. Some legal authorities believe that the existence of the standards are likely to encourage more lawsuits.
More than a third of those surveyed said that they are implementing risk assessment and control procedures within their organizations. Many indicated that they are also reviewing their insurance coverage needs carefully.
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| Business income insurance for unprofitable companies |
Business income insurance is not "profit" coverage. Instead, it pays for continuing expenses and net loss of income when a business is unable to continue operations due to an insured loss. Even if the business is losing money, the coverage is important.
Businesses sometimes lose money. Usually (hopefully) this is a temporary condition. Some businesses lose money for many years but continue to grow and eventually become profitable. It is important, in such cases, to keep the business in operation until profitability returns.
If the business is in an unprofitable state at the time of a loss, the business income insurer will consider that factor. There will still be an insurance settlement, however, in most cases. This settlement may be crucial to keep the business going and finance its recovery.
For example, consider a business that grossed $5,000,000 last year and has a net loss of $100,000, on $5,100,000 of total expenses. An accident occurs that forces a one year shut down. The insurer will calculate the continuing expenses while the business is closed (with input from the insured). Assume that the continuing expenses are $3,000,000 (after removing such items as non-continuing payroll, raw materials not needed, etc.). The payment from the insurer for the interruption period would be $2,900,000 (continuing expenses of $3,000,000 less the $100,000 projected net loss).
Without the business income coverage, the loss might permanently close the company. With business income coverage, the company can resume operations and be positioned to become profitable. Extra expense coverage is another needed protection. This coverage pays for extraordinary expenses beyond normal operating expenses needed to get the business up and running as soon as possible. For those businesses that could not withstand a significant shutdown, such as a daily newspaper, this coverage is critical.
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| The art of the application |
Applications for insurance must be complete and accurate. If they are not, big problems can arise when claims occur. This is especially true in certain lines of insurance such as directors and officers, professional liability and fiduciary liability.
Misrepresentations or omissions can be grounds for denial of coverage. In these days of corporate malfeasance and accounting scandals, insurers are more inclined to look for such items in an application when a claim alleging any form of impropriety emerges. Denial or litigation can result even if the misrepresentation or omissions cannot ultimately be proven. This can cost money, time, and grief to all concerned.
Most omissions are the result of carelessness in completing the application, such as answering data-oriented questions from memory without making a diligent review of records. Without a review of claims information, pending litigation or prior incidents might be forgotten and omitted. Sometimes, a question is vague and needs clarification but the person completing the application is too busy to inquire.
Carelessness can be costly in other ways - not just in terms of possible claim problems. For example, many application forms ask for annual revenues. A revenue collection agency completing an application for liability insurance did not understand that the underwriter used operating revenues to calculate premiums. The agency reported the revenues it collected and passed along to a bond trustee, rather than its operating revenues, which were less than five percent of the pass-through funds. As a result, the agency could have paid premiums twenty times higher than the exposure justified.
When completing insurance applications, be sure that you are accurate, honest, and diligent. Your insurance professional can be a valuable resource. Do not be reluctant to ask for help.
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| Pollutant cleanup levels rise, enforcements drop |
According to estimates by the Environmental Protection Agency, total pollutant cleanup resulting from enforcement actions rose to 600 million pounds in 2003. This represents a substantial increase from the estimated 260 million pounds the year prior. Cleanup includes reduction, treatment and management of pollution.
Despite the increase in pollutants remediated, enforcement costs paid by polluters declined almost $1 billion from the prior year. In addition, the number of criminal enforcement cases declined slightly from 2000 to the past year. Even more significant, the number of cases in which the government actually brought charges dropped from 360 in 2000 to 247 in 2003. Fines also dropped from $122 million in 2000 to $71 million in 2003.
The full report is available at www.epa.gov.
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The hysteria and explosion of litigation surrounding the "toxic" mold issue has insurers looking for cover. In some industries, the coverage has all but evaporated. What happens if the mold scourge strikes your business? Spores are everywhere. Could it happen to you?
Providing that mold occurs because of a covered peril, you should have coverage in property insurance policies. For example, if water from a burst pipe or water used to extinguish a fire later results in mold because of remaining moisture, coverage may be available, according to several courts that have reviewed the matter.
A big part of the mold litigation epidemic relates to bodily injury claims resulting from the so-called "toxic" effects of certain types of mold. So, what about coverage for claims from persons claiming injury from mold on your property? Is mold a pollutant, and therefore excluded?
A number of courts have refused to allow an expansive interpretation of the general liability policy's pollution exclusion. These courts have held that the exclusion applies only to environmental degradation and mandated cleanup. One court found that the exclusion "should not reflexively be applied to accidents arising during the course of normal business activities simply because they involve a discharge … of an irritant or contaminant." Several courts have made similar rulings in so-called "sick building syndrome" cases.
However, some courts have held the exclusion to be more absolute. At least one sick building case, and other cases involving the release of airborne contaminants went the other way. The court found no coverage.
Partly because of some of the court interpretations in favor of the insured, many insurers have started to endorse mold exclusions to their policies. Whenever possible you should try to avoid these exclusions.
The moral of this story is this: if you have a mold claim, do not assume that you have no coverage. Consult with your insurance professional and legal counsel, if necessary. On the other hand, if you know that the nature of your business likely could result in a mold exposure, look into specific coverage to remove uncertainty, especially if your insurer attaches a mold exclusion. Even if your normal activities do not appear to present a mold risk, consider the peril as part of your risk assessment for new or unusual activities. This would apply, for example, if your company decided to build a new structure.
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