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INDEX
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According to the Insurance Information Institute, the cost of auto insurance is expected to rise 3.5% in 2004 - the smallest increase in four years.
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FM Global, the big property insurer, reports on how critical good housekeeping can be at your business. A layer of dust as thin as a dime can be dangerous. The company's website offers a video of a dust explosion created in their test bunker by igniting a small amount of plastic dust. See it at www.fmglobal.com/about/campus/demo_detail.asp.
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Never rely solely on e-mail for imparting important information, such as that which concerns your insurance. Some people may spend days away from e-mail because of meetings, trips, or vacations. Also, spam filters increasingly are frustrating e-mail delivery and the sheer volume of e-mail and spam increases the risk of something getting lost in the process.
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| Voluntary payments are a big risk |
Some insureds believe that they can pay certain losses out of pocket and be reimbursed by their insurer. In many cases, such "voluntary payments" can become the insured's sole obligation and eliminate coverage that might otherwise be available.
Most liability policies contain a "voluntary payments exclusion" that says something similar to the following:
No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than first aid, without our consent.
Some of the reasons for this exclusion include prevention of collusion between a claimant and the insured, allowing the insurer an opportunity to defend if appropriate, and giving the insurer control over settlement negotiations. While this provision might seem clear enough to some, various courts have developed different interpretations of the term "voluntary" and have differed in their interpretation of how the provision applies.
Aside from not reading the policies, there are reasons why an insured might not expect the voluntary payments provision to apply. One example is in pollution cases, where the insured often is compelled by threats of fines and penalties to instigate cleanup immediately. In some such cases, courts have found the clean up costs to be "involuntary" even though sometimes made without first consulting the insurer.
Builders or manufacturers can sometimes voluntarily incur expenses when customers allege that the product or work is defective. A conscientious builder or manufacturer may want to fix the problem quickly to avoid further claims or litigation and might expect an insurer to see things the same way.
Unfortunately for the insureds, insurers often do not concur, as the plaintiff discovered in Jamestown Builders vs. General Star Indemnity Co. In that case, a California appellate court affirmed a lower court decision that Jamestown was not entitled to reimbursement for fixing water damage in homes it had built, because of the voluntary payments provision. The court did note, however, that economic necessity, insurer breach of contract or other extraordinary circumstances could have resulted in the opposite finding, but no such circumstances existed in this case.
Some professionals occasionally see their professional liability insurance as "goodwill" coverage. In such policies, the voluntary payments provision prevents insureds from prejudicing a case that should be defended. For example, if a surgeon promises money to the family of a patient who died, the insurer would find it difficult to deny liability even if investigation showed that the physician did nothing wrong and even exceeded standards for practice.
Although in some cases circumstances may justify reimbursement of payments made by an insured without insurer consent, it is a dangerous practice. Before signing that check or making any commitments to someone who claims a right to recovery, always consult your insurance professional.
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| Some thoughts for your next insurance renewal |
With the insurance market becoming a little more competitive, now is the time to think about how you would like your insurance program to look. Here are a few ideas.
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Go for coverage not for price. Now is the time to improve the scope of coverage. If you focus on coverage rather than price in your approach to insurers, your image as a potential customer improves. Pricing will follow as the market becomes more competitive.
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Think about with whom (the insurer) you would like to spend your future. As the market becomes more flexible, some quality insurers may venture into lines of coverage or industries they shunned in the hard market. However, they are likely to be choosy about whom they insure. This may be the time to develop a relationship with a first class insurer.
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See how far your money will go. If prices are coming down, some of that savings may be better spent on higher limits of coverage in liability lines. This may be especially important following the recent hard market in which typical pricing patterns sometimes were reversed, i.e., the next dollar of coverage sometimes cost more than the last.
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Consider the need for new coverages. This may be the time to look at coverages considered prohibitively expensive in a hard market. As capacity (cash) flows back into the market, more insurers are willing to write certain lines of coverage they previously avoided, causing prices and terms to improve.
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| Court orders insurer to defend for "injury to water" |
A manufacturer of industrial equipment sold parts to around thirty municipal water systems that the customers claimed contaminated their water supplies with lead. The municipalities sued the manufacturer for their costs of decontamination. The manufacturer submitted the claims to its general liability insurer for defense and indemnity.
The insurer refused to defend on the grounds that the loss was purely economic and did not involve bodily injury or property damage. The manufacturer then sued the insurer for bad faith.
A trial court ordered the insurer to defend the manufacturer. The insurer appealed. The 2nd District Court of Appeal upheld the trial court and ordered the insurer to defend. In its findings, the court noted that "the underlying plaintiffs' allegations of injury to their water raise a possibility of coverage sufficient to trigger a duty to defend."
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| Workers compensation costs rise faster than wages |
Despite efforts at reform and medical cost containment, workers compensation payments increased in 2002 at a rate more than 18 times greater than the rise in wages. Workers compensation benefits increased by 7.4% while wages only rose .4%. This is the second year in a row for workers compensation to outpace wages according to the National Academy of Social Insurance, publishers of the report.
The largest portion of the workers compensation cost increase was attributable to medical expense, 9.4%. Indemnity benefits rose 5.8%. More information is available at www.nasi.org.
Taken in conjunction with other reports, this information may be ominous news for the workers compensation insurance market. According to a report by Fitch Ratings, workers compensation insurance price increases have peaked and now are leveling off and in some cases, declining. Thus, if benefit costs continue to outpace wages and inflation, insurers could be headed for more problems.
Another report from Standard & Poor's Rating Services cites "downward pricing pressures" as a threat to the California workers compensation market. Those pressures include calls for rate reductions in light of anticipated savings from workers compensation reforms in that state, some of which have yet to be enacted.
While it may appear that some relief for spiraling workers compensation costs may be in sight, these reports, taken in conjunction, imply that relief may be short-lived. Businesses should consider that possibility in their budgeting and planning.
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"An" - a small word with a big impact, at least as used in the following policy exclusion:
"This insurance does not apply to ... Any Claim based upon, arising from, or in consequence of an Insured having gained in fact any personal profit, remuneration, or advantage to which such Insured was not legally entitled."
In a case before the Fifth Circuit Court of Appeals, the court said the exclusion applied when any insured had received illegal profits. Only one director did in this instance. Nevertheless, the court ruling barred coverage for innocent directors as well. The court noted that, had the exclusion stated that it applied when "the" insured (rather than "an" insured) received illegal profits, the other directors would have been covered.
While this is a rather narrow interpretation of a policy provision, it is a lesson to insureds about the importance of reading policy language carefully. The decision also points out the importance of a separation of insureds or "severability clause" in liability policies - especially D&O policies. Such wording says, in effect that the wrongful acts of one insured shall not affect coverage for any other insured.
At times during a "hard" insurance market, such a provision (severability) may be difficult to obtain. This has been especially true following the numerous corporate scandals of the recent years. With the insurance market improving, however, this is one of those provisions that companies should try hard to obtain in their D&O policies.
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| Medical liability reform reduces costs to hospitals |
Last year, Texas joined the list of states to pass medical malpractice liability reform. According to the Texas Hospital Association (THA), the liability losses have dropped significantly in the past year since passage of the new law.
Member hospitals of the THA reported an overall 17% drop in insurance premiums. The number of cases filed against hospitals has dropped 70% according to the report.
Next door in New Mexico, medical care costs are rising. Members of the New Mexico Medical Society were told by the president of one insurer specializing in medical liability coverage, that the cost of malpractice premiums has increased an average of 9.8% this year. Higher risk specialists have seen increases of up to 19%, according to the executive.
Last year rates in New Mexico rose 14% overall for physicians. In 2002, the increase averaged 35%. The insurer providing this information, American Physicians Capital, reportedly insures most doctors in New Mexico.
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| A drunk driving case - everybody loses |
A civil jury in Harris County, Texas has awarded nearly $25 million involving a fatal crash caused by a drunken driver. The defendant driver was held responsible for approximately $15 million and his insurer and the insurer's rental car agency were each liable for approximately $5 million. Separately, the manufacturer of the vehicle in which the deceased was riding settled with the plaintiffs.
The defendant is insolvent and in prison after pleading guilty to vehicular manslaughter. The insurer was held liable because it arranged for a rental vehicle for the defendant. The rental car agency was held liable because of its association with the insurer and because it provided the vehicle used by the defendant. The manufacturer's vehicle burst into flames as a result of the crash, and it settled before trial.
According to the plaintiffs (the estate of the deceased), the insurer knew (or should have known) that the defendant had his license suspended a month earlier for drunk driving. That accident resulted in the damage to the defendant's car that caused him to obtain the rental vehicle to get to work while his car was being repaired.
The insurer claims that all it did was transfer a routine phone call to the rental agency. The rental company claimed that the defendant presented a valid driver's license.
No party can be content with the results of this terrible situation. Along with the obvious issue of the dangers of mixing alcohol with vehicles, there is a lesson to be learned that the tragic consequences of a careless act can touch many parties, in this case, the family and friends of the victim, the insurer, the rental company, and the auto manufacturer. Had the situation been related to the defendant's employment in any way, his employer likely would have been involved.
Another important lesson is that limits of liability insurance chosen by many small to medium businesses often reflect wishful thinking rather than reality. While it is true that the vast majority of accidents result in small losses to the insured, the real purpose of insurance is to protect against the catastrophic losses which, while rare, are real.
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