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INDEX
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- According to a report by Jury Verdict Research, the average award for employment practices liability suits reached $250,000 in 2003, a rise of 18% over the prior year. See the article on insurance for this risk in this issue. The press release and additional information about the report are available at: www.juryverdictresearch.com/Press_Room/Press_releases/Verdict_study/verdict_study9.html
- The Treasury Department has extended the provisions of the Terrorism Risk Insurance Act (TRIA) that require insurers to make available coverage for acts of terrorism as defined by TRIA. The requirement applies to all property and casualty coverages. The provisions, which were set to expire on December 31st of this year, are extended for one more year.
- Another global warming threat could result in direct property damage. According to the Entomological Society of America, 95% of experts believe that weather patterns have a direct effect on insect populations. The most affected species is termites. Termites thrive in warm, moist conditions and rising temperatures of the last few years accompanied by increased rainfall in many areas bodes trouble for property owners, especially those with buildings of frame construction. Annually, wood boring insects account for $2.5 billion in damage.
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After months of speculation about which way insurance pricing was headed, the consensus seems to have finally arrived that the market is "softening." Rates are leveling out or declining and coverage is more readily available than before. That's the good news.
The other side of the picture is a little bleaker. According to Frank Coyne, President of the Insurance Services Office (the insurance industry association that develops standard policies, forms, etc.) declining prices mean increasing competition. In his remarks at the annual conference of the Insurance Accounting and Systems Association, Coyne said that the insurance industry is still suffering from weak performance and deficient reserve funds. The combination of declining prices and continuing weak financial results could doom some companies.
Coyne implied that this is part of a trend. He said that almost 1,300 private insurance groups served the U.S. property/casualty insurance market in 1990. By 2002 the number was down to 900. The long-term trend continues with an annual average of over 30 insolvencies from the 1980s through the present. Other factors contributing to the decline are mergers and acquisitions (which put pressure on smaller competitors) and the overall poor historical profitability of the insurance industry. According to Coyne, the biggest challenge may be "survival itself" for many insurers.
There is an important point to think about in this message. The security of your insurer should be at least as important a consideration as the price of the policy. A long-term relationship with a stable insurer who becomes your financial partner has real value. For many small to medium-sized companies, developing such a relationship may be a major key to future success, especially if the company is growing.
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| Time for an insurance "tune-up?" |
Like everything else in life, your company's insurance program needs occasional maintenance. Periodically, you should meet with your insurance professional and go over some of the "structural" aspects of your program to see if it has gotten out of tune. There are many reasons why this can happen, such as changes in ownership, acquisitions, new ventures, replacement of insurers and others. Here are a few of the common "out of tune" elements that can creep into a program.
- Too many policies. Sometimes when a new venture comes about the insured must obtain a separate policy. This can happen because of the existing insurer's dislike for the particular venture, because of cost, because of payment source, because of lender requirements or for other reasons.
- Too many anniversaries. Because policies sometimes are added to meet a specific need, anniversary dates can overlap or occur all over the calendar. It is especially critical to have primary and umbrella policies concurrent because of conditions for underlying insurance requirements in the umbrella.
- Property slipping through the cracks. Over the course of time, many organizations add or delete vehicles, inventory, locations, buildings, additions, etc. Sometimes, failure to report these changes can have significant financial consequences - either from paying too much in premium, or worse, not having coverage.
- Additional insured errors. There are a number of implications here. New acquisitions, new partnerships or joint ventures, related entities should all be scheduled on liability policies. This is true even if you have so called "omnibus" insured wording. Also, you need to check all your contractual requirements for adding customers, vendors, etc. as additional insureds.
- Wrong classifications. Employees, vehicles, property, liability exposures etc. all have ways of being classified for insurance purposes. Over time, each of these inadvertently can be put into the wrong classification which can cost you money. From time-to-time a review of these classifications is appropriate.
- Inappropriate deductibles. This relates to too many policies. When an insurance program gets excessively complicated, deductibles sometimes are chosen based on peculiar characteristics of one policy or one insured location. It is better to have a well thought out approach to risk financing whereby deductibles are selected for sound reasons, including the organization's ability to pay.
These are just a few of the elements of your insurance program that may need a little "fixing." Your insurance professional can help with these and other aspects of your coverage that may need a little help.
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| What is "medical payments" coverage and who needs it? |
Medical payments coverage is part of the standard general liability policy. Usually, the coverage limit is fairly small - $5,000 is common. Since the policy already covers liability for bodily injury, the insured might ask, "Why do I need this?"
Medical payments coverage is basically "good will" insurance. The insurer will reimburse for first aid or medical expenses incurred by the insured for treatment of someone (other than the insured) injured on your premises. There is no need to prove or admit fault.
Of course, there is a charge for this coverage. Usually it is a relatively small part of the premium. More significant than the premium cost, in many cases, is the fact that claims under this portion of the policy affect the insured's loss experience and can lead to higher overall premiums in the future.
This is one of those "throw-in" coverages that could be self-insured in many cases. If you want to pay someone's small medical bills as a goodwill gesture, you always have that option. You can also report an incident to your insurer on a "notice only" basis just in case the injured party decides later to file a suit.
You may wish to consult with your insurance professional about whether deleting medical payments coverage makes sense for your organization.
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| The importance of loss records |
Loss records can help identify patterns of activities that can be controlled to prevent future losses. Sometimes loss information can also trigger thinking about ways to prevent related accident types even if they have never occurred before. The bigger the company, the more important this analysis becomes for future accident prevention.
However, loss prevention is not the only reason to keep loss records. They can also be an invaluable tool when buying insurance. There are at least three major ways loss records become important.
Detailed knowledge of your organization's loss history can be helpful in negotiating favorable renewal terms with your insurer. When insurance prices are rising, it may be to your benefit if you can point out to your insurer that the account has been a profitable one historically. If you have not been so fortunate as to have a stellar loss history, knowledge of the causes or types of losses and a plan to correct the causes may carry some weight. If a particularly dangerous activity or operation has been discontinued, knowledge of the loss history related to that activity may enable you to argue that future risk is mitigated.
Another reason to have complete loss records is for obtaining competitive quotes from other insurers. The new insurer does not know your organization. Inevitably the prospective insurer wants to see an insurance-company produced loss run to enable them to properly underwrite your account.
In addition to directly negotiating new coverage, loss runs can alert you to past issues that affect future costs, particularly loss reserves. If a loss reserve on a claim is set too high (the claim will ultimately settle below the loss reserve), then your company's "experience rating" may be too high. This could result in premium surcharges that your organization should not have to pay and may never recover if it does.
Many insurers are reluctant to provide loss runs, particularly for smaller insureds. You should try to get loss runs at least yearly and for at least the last five years. Each report should be currently valued. You should keep getting them until the last claim is closed for that year. When you are successful in getting loss runs, make copies and secure these records carefully. You may never be able to get them again, especially if you change insurers someday. Also, keep them forever. Insurers are looking farther back at loss histories today than in the past.
Finally, if you have difficulties in obtaining the loss runs, sometimes a letter to the insurer's highest ranking official in the state with a copy to the state insurance commissioner does wonders. Many states have laws and regulations dealing with providing loss information to insureds.
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| Odds of an employment liability claim: 50/50 |
According to a recent survey by the Chubb group of companies, as many as half of the companies' executives predicted an employment practices action to be likely. Slightly more than one in four privately held companies already has been sued by an employee. Estimates of the current cost to defend such a suit ranged from $100,000 (50% predicted this) to $1,000,000 (10% predicted this amount). The survey also revealed that many company executives (one in four) were concerned about suits from retired employees.
The companies reported various risk management tools in place at their organizations. The most popular of these were:
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Written antidiscrimination policies |
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(72%) |
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Employment discrimination/harassment training |
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(52%) |
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Employment practices liability insurance |
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(40%) |
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Fiduciary liability insurance |
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(24%) |
The survey was conducted by an independent research firm. A copy of the survey report is available at www.chubb.com/news/EPLExecutiveSummary2004.pdf.
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| Classify vehicle use properly to save money |
Insurers classify commercial vehicles in several ways. Each of the methods of classification affects the rate charged. When the insurance underwriter has any doubts about which classification to use, they almost always use the more expensive one.
You may be able to save money by properly classifying your vehicles' use. There are three primary use classifications: retail, commercial and service. The "retail" classification usually produces the highest rates, "service" the lowest. In general, the classifications work this way:
- Retail use is for deliveries to and from individual households.
- Service use is incidental use of the vehicle in your business, such as a contractor's truck used to haul tools and equipment or supplies.
- Commercial use is all other uses
A common classification error is to list vehicles as "commercial" use when they really would qualify for "service" use. Many contractors make this mistake. Another error is not changing classification when a vehicle is taken out of service for its regular use, for example when a retail delivery vehicle is retired from delivery routes and used for some other commercial purpose such as hauling around a plant facility or storage yard.
Your insurance professional can assist in making sure that you use the correct and most economical classification allowed for your vehicles' use.
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| Automatic policy period extensions |
One of the problems that seems to plague the insurance industry in recent years is timeliness. Many insureds have complained about late policy issuance, slow reply to requests and late renewal quotes. Perhaps the most serious of these is the late renewal quote, especially in times when insurance pricing is rising.
It is bad enough to experience the "sticker shock" of a large premium price increase. Finding out about it at the last minute just rubs salt in the wound and can leave no options. Although it may be tempting to blame the insurance agent or broker, often he or she is just as frustrated as you are at the inability to get more timely response from insurers.
One possible solution to this problem is to negotiate with the insurer to provide an automatic extension of the policy for 30 to 60 days if the renewal quote does not arrive at least 30 days before policy expiration. Ideally, the extension will be at the same price and terms as the expiring policy. If the automatic extension kicks in, you and your insurance professional will have additional time to explore alternatives to a shocking increase that you may feel is unjustified.
Obviously, the best time to negotiate an automatic policy extension is during a competitive phase in the insurance market. Your chances are best if your company also has a long-term relationship with the insurer.
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