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ADP Employer Services reports that out of 3.8 million full background checks performed on behalf of employers, prior to hiring, 10% showed a prior workers compensation claim. The data are for the calendar year 2003. In 2002 the number indicating prior claims was 9%. A sign of the times? - 44% of credit record checks showed a judgment, lien, bankruptcy or reporting to a collection agency. The prior year level was 24%.
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| What to do if your insurer fails |
Press coverage of insurer insolvencies has made most of us aware of the risks of weak insurers. Articles advise on ways to track insurer strength through rating agencies and other sources. Despite the warnings and precautions, however, insurer insolvency could affect your company. Some insurers have declined from good ratings and failed quickly. Delayed manifestation claims are also of concern since they may be covered by insurers your company no longer uses.
Here are some strategies to consider if you find that a claim against your company may be the responsibility of an insolvent or borderline insurer.
- First, determine if the company is actually in liquidation. Some companies that are in financial trouble try to meet their obligations, just as some people with credit problems try to work them out. In this case you should contact the company directly.
- Promptly notify liquidators of your claims to preserve your rights. There often is a "filing deadline" by which all creditors must submit their claims against assets. Although liquidators are supposed to notify policyholders, their failure to do so does not preserve your rights in most states. The liquidator likely will be the state insurance commissioner in the state of domicile for the insurer.
- Notify state guarantee associations. This is a separate source of funds. Guarantee associations are funded by fees charged on each policy written in the state. Usually you would apply to your own state association although in some circumstances you may apply to the association in another state. Guarantee association maximum recoveries are limited and range from $50,000 to over $1,000,000. Most are about $300,000. There may be other limitations to recovery as well.
- Notify excess or umbrella insurers in the case of liability insurance. Depending on how the coverage was structured, excess or umbrella liability policies may "drop down" to cover the claim (after a "self-insured retention"). Be warned, however, that in most cases an excess insurer does not have to drop down according to court rulings.
- Be prepared to negotiate. A liquidator or guarantee association is like an estate executor or mediator or combination of both. Both are trying to interpret laws and rules and are dealing with limited funds. Make sure your position is presented well.
- Consult your attorney and insurance professional. It is important for you to actively pursue recovery from a financially troubled insurer. However, it is equally important to know the laws and procedures. Professional help is a good idea.
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The National Flood Insurance Program (NFIP), through which much of the nation's flood insurance is written, is a federal program that must be renewed by Congress each year. Sometimes that can pose a problem, such as in 2002 when Congress adjourned without reauthorizing the program. Fortunately, Congress upon reconvening acted swiftly to reinstate the program.
Loss of this protection could jeopardize many property transactions. Some lenders, depending on the exposure, require this coverage. However, its existence also can cause problems such as encouraging building in flood-prone areas.
This year, the insurance agents and brokers professional associations are supporting reauthorization with reform. Their proposals include:
- Tightening construction requirements to minimize potential damage
- Funding loss mitigation efforts such as buying out flood-prone properties or strengthening existing ones
- Stopping abuse by multiple claimants by increasing rates or reducing coverage
- Mandating full disclosure of flood histories
- Amending the reauthorization provisions to five years instead of one
The NFIP is self-supporting but has endured some operating losses. These proposals would help strengthen the program financially, according to those supporting the reforms.
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| Agreeing on values can save you money |
One of the first questions an insurance buyer has to ask is "How much is enough?" In property insurance the answer can be critical.
It would be tempting to cost conscious insureds to try to save money by underreporting property values. Indeed, some may reason that a total loss is unlikely, so they should insure only to the level of what they see as a probable partial loss.
Insurers base their rates (usually an amount per $100 of value) on comparing known losses with total property values at risk. They then apply the rate to an insured value to get a premium. If an insured could "game the system" by underreporting property values, the system would be in jeopardy.
As a result, insurers use a concept called "coinsurance." When coinsurance applies, the insurer values the total property after a loss. If the value of the total property is less than reported by the insured when buying the coverage, a penalty applies. Loss payment is proportionate to the ratio of the reported value to the actual value. In other words if the insured reported a $60,000 value on a total property worth $100,000 only 60% of the loss would be paid by the insurer.
What if the insured unintentionally underreports values? Not everyone is capable of appraising property. The coinsurance penalty still applies, however, despite honest error. But, there is a way to avoid the possibility of only partial coverage of a loss. It is called an "agreed amount" or "agreed value" clause. Usually it is an endorsement to the policy.
With an agreed value provision, the insurer and the insured agree that the values reported are sufficient. The agreement waives the coinsurance provision.
To obtain the agreed value provision, the insured must submit a Statement of Values (SOV) and the insurer must accept it. The SOV usually expires after a year. So, if a policy is multi-year, the SOV must be renewed annually. If the SOV expires, the policy reverts to the coinsurance provision. Usually, however, the SOV is concurrent with the policy itself.
Agreed value is a great way to ensure that property losses will be covered fully. Your insurance professional can help you with the details of establishing values and avoiding coinsurance penalties and can determine if coinsurance is best for you.
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| Cost analysis model for safety |
A long-time criticism of the safety profession is its failure to build a business case (read: bottom line) for its points of view. An article in the April 2004 issue of Professional Safety, the journal of the American Society of Safety Engineers offers a model for building just such a case.
The model is called COS (cost of safety). The COS model evaluates trends over time. Its roots are in the quality management literature. The model includes four cost groups: prevention, detection, internal failure, and external failure.
The first two groups (prevention and detection) are where the safety professional would like to spend money. They are proactive measures taken to minimize failures. Examples include product design, engineering measures, inspections, monitoring, education, and similar activities.
The second two (internal and external failure) are what the safety professional might like to characterize as the result of not enough attention to the first two. Examples include workers compensation costs, retraining, warranty costs, product recalls, fines, damage to reputation and similar results. Another term might be "losses."
Presumably (although not in all cases as the authors point out) the cost of failures declines as the cost of prevention and detection rises. The objective of the COS model is to determine the "equilibrium" point where the cost of prevention and detection meets the cost of failure on a graph. The result is a budgeting tool for justifying levels of expenditure for prevention and detection activities.
This approach, in the words of the authors, "minimizes accidents (failures) to the point that an organization spends only what is necessary to minimize overall costs associated with safety." As noted in the article, this approach may be in sharp contrast to the prevailing philosophies in the safety profession. It also notes that such lofty sounding goals as "zero accidents" (or "defects" in the quality lexicon) may sound appealing but are achievable often only at significant cost, if at all. The model attempts to strike a sort of balance between the cost conscious business executive and the humanitarian orientation of some in the safety profession.
The article is thought-provoking at the least. It is available on the ASSE website at www.asse.org/ps0404behm.pdf. To read this file you will need to have Adobe Acrobat Reader on your system. If you do not have this program you can get it at www.adobe.com. Click the button that says "Get Adobe Reader."
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| Computer virus causes "accidental" damage to property |
In Lambrecht & Associates v State Farm Lloyds, the Texas Court of Appeals found that a hacker's intentionally released virus resulted in property damage and was an "accident" - at least from the point of view of the insured.
Lambrecht is an employment agency. It depends on its computer system to conduct business. As a result of the attack, Lambrecht lost business contacts and stored electronic information. Ultimately, Lambrecht had to replace its server, operating system, and software. It also had to manually re-enter proprietary data. The company filed a claim for its losses against its insurance policy.
Lambrecht's insurer denied the loss, arguing that the loss was not accidental and did not constitute direct physical damage. Lambrecht filed suit and the insurer cross-complained. The trial court granted summary judgment to the insurer.
The appellate court reversed the lower court. The court of appeals noted that the insurer did not allege that the insured participated in the activity that caused the loss. The court further noted that injuries caused by the intentional acts of a third party are accidental from the insured's viewpoint in such circumstances.
As to the physical damage argument, the court noted that the policy specifically covered electronic media and records and held that damage to the server fell within the policy's "direct physical damage" provision. The court also held that given this interpretation, Lambrecht's loss of business income also was covered. In claims arising out of hacker attacks, business income is often by far the most significant loss component.
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| The case for side impact protection for autos |
According to a study by the Insurance Institute for Highway Safety, side impact collisions are more deadly than front collisions even though the former are less frequent. About 9,600 people died in 2002 as a result of side-impact crashes.
The reason for the seriousness of side-impact collisions is not because of physics. Frontal collisions usually involve more force. The reason, according to the Institute, is that in most vehicles dashboard air bags are standard. Relatively few vehicles have side air bags, although most manufacturers offer them. Some of those that do have side protection (even as options) fared poorly in the study's crash tests because either the airbag was not large enough to protect the occupant's head, or the side structure of the vehicle crumpled inward too far.
The single most important factor in high risk of side impact injuries was lack of an airbag. Although three of the vehicles tested with side airbags achieved "acceptable" or better ratings, none of the vehicles passed without the airbags. According to the Institute, side airbags reduce fatalities by 45% for drivers.
The study's findings are likely to encourage efforts by regulators to mandate stricter safety standards. The study specifically studied the effect of mid-sized cars being struck broadside by a sport utility vehicle (SUV). SUVs already are under fire because of safety concerns. This study confirmed that when the higher and heavier SUVs and trucks collide broadside with mid size passenger cars, the auto occupants are seriously at risk for head injuries.
For companies with auto fleets, this study and the issue of side impact collisions should be considered when making purchases for vehicle fleets. Not only is there a workers compensation issue involved, but for those companies whose vehicles may be used to carry non employees failure to equip fleet vehicles with available safety standards may be a liability issue as well.
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| International business insurance needs |
Globalization is spreading. Increasingly, mid-sized and even smaller firms find themselves doing business in far away places. Many may not realize that the insurance programs designed for their domestic business may not work everywhere. Local laws, insurance practices, political activity, and currency fluctuations can all work to defeat the intent of your coverage program. Here are some examples:
- If your company has employees, facilities, or other assets in foreign countries, you may be at risk. In some locations, you can be sued in that country even for incidents that occur in the United States.
- Many countries will not accept foreign insurance coverage and mandate purchase of local policies. Often coverage under these policies is deficient by U. S. standards.
- Some foreign property insurance policies value stock at invoice price rather than selling price. Some value business property only at actual cash value, rather than replacement cost.
- Foreign liability policies may cover only payment of judgments, not defense of suits.
- Foreign insurers may be much stricter about such matters as correct description of an insured location and may deny coverage on technicalities that U. S. insurers could not.
- Property insurance policies in foreign countries often cover far fewer perils than U. S. property policies. Many contain restrictive "average" clauses that impose stiff coinsurance penalties. The penalties can be triggered simply by currency fluctuations.
- Your workers compensation policies may not cover all the needs of employees traveling overseas. For example, they may not cover repatriation expense for injured workers or endemic disease contracted in the foreign location.
- Foreign auto policies, which are required from local insurers in almost every country, may be restrictive, have low limits, or be issued by (technically) insolvent insurers. Also, auto accidents may have criminal as well as civil legal implications.
Package policies known as "exporters" or "international" package policies can provide improved protection for companies with relatively limited international exposures. These usually combine property, liability, workers compensation, transit, crime, KRE (kidnap, ransom, extortion) and other coverages including political risk. Larger companies may require a customized Master Insurance Program, specifically tailored to the overseas risks. If your company is new to the international marketplace, it may be a good time to give your insurance program a major checkup.
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