Risk & Insurance Chalkboard : Risk Management & Commercial Insurance Consultants : Risk Resources : Audits, Claims Assistance, Litigation Support & Testimony

The term "deductible" in insurance circles is too often treated generically.  It is widely considered to be the amount that an adjusted claim is reduced by to arrive at a net insurance recovery.  In reality, deductibles can and do operate in many different ways.

Let's consider a Commercial General Liability ("CGL") policy.  There are several different ways of structuring a deductible arrangement.  The stated deductible may apply per "occurrence" or per "claim"; to damages only; to damages including allocated expenses; to damages plus allocated expenses; to damages plus a pro-rated share of "allocated expenses"; to bodily injury ("BI") alone; to property damage ("PD") alone; to BI and PD combined; and well, the list goes on and on.

An example may help illustrate the differences of how deductibles are applied.  Walsh Industries manufactures fans for residential use and has a CGL policy with Stucker Insurance Co.  One of its fans malfunctions and causes a fire at a residence.  Two guests at the home suffer bodily injuries and the home is completely destroyed.  Walsh Industries settles the first bodily injury claim at $100,000 and incurs $60,000 of legal expenses.  It settles the remaining bodily injury claim at $250,000 and has $80,000 of legal expenses.  It settles the home owner's claim at $500,000 and legal expenses amount to $40,000.  Walsh Industries has a $50,000 deductible under its CGL policy.  But the devil is in the details.  Here is how it comes out for the policyholder:

Obviously there are other combinations if the deductibles apply to BI and PD claims separately or combined.  However, the point is that the ultimate deductible amount varies considerably depending on how the deductible amount is applied. 

It should also be kept in mind that insurers use differing wordings in deductible clauses and endorsements.  So the next time an insurer or broker/agent says the deductible is "X", say "tell me more about that....."

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Kidnap and Ransom (K&R) insurance policies typically indemnify the policyholder for the costs involved in the evacuation or relocation of  insured persons in the event of:

• The insured person being declared "persona non grata" by the recognized government of the host country;
• The wholesale seizure, confiscation or expropriation of property of the named insured;
• Political or military events involving a host country which causes appropriate authority to issue an advisory.

For non-political or medical evacuation, most Travel Accident and Foreign Workers' Compensation policies would respond.

But what happens when an insured person simply goes missing? Or when when one or more insured persons sense a threat to their personal safety although no specific threats (or advisories) have been made against such persons? In our experience, few K&R policies will respond.

Recently, though, we came across two K&R endorsements that offer insureds the prospect of at least conditional coverage in these instances. We also found an endorsement that fits between kidnapping and hijacking creating a new coverage, "Express Kidnapping".

We offer these not as ready-made endorsements but rather to provide endorsement language that a broker could take to a K&R underwriter in an effort to get such language adapted to that underwriter's K&R form.

1. Disappearance Expense Extension Endorsement pays for the cost of investigation and "other relevant expenses" resulting from the disappearance of an insured person, missing for at least 48 hours, with such expenses not to exceed 90 days. Here, $100,000 of such insurance limits are offered. Page 2 of the endorsement is a signature page and is omitted.
2. Evacuation or Repatriation Costs Endorsement appears to be a standard endorsement of this type. However, the definition of "Occurrence" holds the key to an unusual coverage. On the top of Page 2, item 4. "occurrence" is defined to include a request for evacuation based upon the contingencies cited at the top of this post, but without the issuance of an advisory. In other words, if an insured person feels exposed to any of these three contingencies and requests evacuation, such request can be granted by the insurer's K&R consultant. Here, the limits of insurance are modest, but at least the door is now open and limits negotiations can take place between the insured and the insurer.
3. Express Kidnap Extension Endorsement is a variation on both hijacking and kidnapping. The typical hijacking definition is triggered by a holding of an insured person under duress for a period of at least 6 hours while traveling on any aircraft, motor vehicle or waterborne vessel.

Kidnapping is defined to mean the seizing, detaining or carrying away by force or fraud for the purpose of demanding ransom monies.

This endorsement creates a new coverage term, Express Kidnapping, defined as the hijack of an insured person for a period of less than 4 hours while traveling in a motor vehicle. Page 2 of the endorsement is a signature page and it is omitted.

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Most business interruption policy forms will include extra expense coverage to the degree it reduces the business interruption loss. One might think that with this built in coverage there is no need for additional extra expense coverage. Not so. Let's assume a retailer has a fire and incurs cost to temporarily lease another location and for additional advertising expenses. When it comes time to settle the business interruption loss with the insurance adjustor (read  forensic accountant here), he will look at subsequent sales when the retailer is back in business. If sales increased by 10% due to an improved economy, the case will be made that the retailer made up the lost sales thereby disallowing the extra expense incurred because it did not reduce the loss of income.

Chip Merlin makes the point that the adjustment of these losses needs to be much more prompt. Many business interruption claims are not settled until well after the policyholder has returned to business. The accountants drag this out, often to be sure the lost income or sales was not made up in subsequent months. One measure to circumvent this delay is to purchase pure extra expense coverage that will apply whether or not the cost incurred reduces the business interruption loss. These expenses should be reimbursed by the insurer up front as they are incurred, because there is no need to validate that the costs help reduce the BI loss.

How much coverage to buy? Always a tough question. We have developed a user friendly worksheet to assist in determining the types of expenses that could be incurred after a loss. Since this is always a calculated estimate it is best to be conservative in establishing the limit. It is inexpensive insurance and it is always better to have too much rather than not enough. In recent years a new term, "demand surge" has evolved out of major catastrophes such as tornadoes, hurricanes and earthquakes. This relates to the increased cost of materials and supplies when a catastrophic event spikes the demand.  Generators, temporary phone lines and computer equipment may cost well in excess of your estimate in these situations. I guess this is why it is best to buy a snow blower in July rather than January.

The moral of the story is be sure you have more than adequate Extra Expense coverage so you can get back in business in the most expeditious manner. The longer the delay the greater the chance that resumption will never occur.

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Nothing will result in a quicker denial of coverage by an insurance company than when an entity being sued is not listed as a named insured on a particular insurance policy.  This is an area which often receives little attention by insurance agents and brokers (and their clients). 

But why is this?  The answers are numerous, but a common denominator is that whomever places the insurance either does not understand (a) how the "insured" provisions in insurance policies operate (there are differences) and/or (b)  the organizational structure of their client.  Organizations are often comprised of multiple entities that take different forms/structures and operate in multiple states or countries.  For instance, an organization that owns a hotel may have a separate entity to own the hotel, another to hold the liquor license, another to hold the management contract, another to act as the employer, and well, you get the picture.

The lack of attention and understanding is illustrated very well by David White in a posting on his Law and Insurance Blog  entitled "Policy Covering 'Any Subsidiary Corporation' Does Not Cover LLC's."  The case discussed involves a utility company suing its insurer after the insurer denied coverage for a claim arising from employee theft.  The theft was related to two LLC's acquired by the utility. The insurance policy in question covered the utility and "any subsidiary corporation now existing or hereafter created or acquired."  The issue boiled down to whether or not  LLC's are "subsidiaries".  The court concluded that LLC's are not "subsidiaries" and therefore coverage did not apply.  The court's reasoning focused on the fact that LLC's are not corporations (read the case (pdf) for the complete particulars and reasoning). 

Situations where an entity is not insured under a policy because there was a failure to properly list it as an insured are entirely avoidable.   Where possible an "omnibus named insured" provision or endorsement should be in incorporated into insurance policies.  Such modifications generally do not result in any additional premium.  Underwriters typically will agree to provide omnibus wording once they understand the structure of the organization.  Ask and you shall receive.

An example of such omnibus wording is:

 “[Insert parent entity name]  and any divisions, subsidiaries, affiliated or associated companies, sole proprietorships, partnerships, corporations, trusts or joint ventures, previously, now or hereafter created, and any other entity which is owned, controlled or managed by any of the foregoing.” 
 

Keep in mind that any such provision can and should be customized.  The key is to craft wording which properly encompasses the various entities comprising an organization.  As with many things having to do with insurance contracts, the devil is in the details.

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Parks Chastain did a nice job in describing coinsurance penalties in his January 6, 2010, blog entry.  This post is entitled "The Co-Insurance Penalty - Or Insufficient Insurance To Value - And Its Impact On An Insured."  This appears in the Tennessee Insurance Litigation Blog.  Mr. Chastain correctly describes the "insurance to value" concept and the coinsurance penalty calculation, which is imposed upon an insured in the event property is undervalued for insurance purposes.

I would like to to take this a step further by stating that coinsurance penalties, wherever they appear in commercial property, builders risk or other inland marine policies, should be avoided altogether.  These provisions may apply to physical damage to buildings, contents and other property, as well as time element coverages such as loss of revenue. 

While some policies do not have a coinsurance provision, the vast majority do.  The way to accomplish removal of a coinsurance provision is to request and obtain an Agreed Value policy coverage extension or endorsement from the insurer.   This is also sometimes referred to as an Agreed Amount endorsement.  In either case the extension or endorsement will suspend or waive the coinsurance requirements altogether.

Insurance underwriters will not necessarily issue a coverage extension or endorsement automatically.  The underwriter will often review internal or external property valuation guidelines to gain assurance that the insured amounts reflect the valuation method(s) set forth in the insurance policy.   In some cases the underwriter may ask additional questions of the insured.  Once satisfied the underwriter will proceed to issue the extension or endorsement.  In some cases there is a modest additional charge made for the added coverage.  In other cases it is issued at no additional cost.

Conclusions:  Coinsurance provisions do not help insureds.  On the contrary, these clauses are designed to financially punish insureds.  The potential penalty can commonly be removed by following a few simple steps.

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The U.S. Chamber Institute for Legal Reform announced the results of its1st Annual Most Ridiculous Lawsuit of the Year Poll. Nominees were drawn from FacesofLawsuitAbuse.org, a public awareness website that shows how frivolous lawsuits affect small businesses and average families.

The Top Five Most Ridiculous Lawsuits of 2009 are:

• Neighbor sues woman for smoking in her own home;
• Double-murderer sues to claim his victims’ classic Chevy pickup;
• Holocaust denier sues Auschwitz survivor, alleging memoir contains “fantastical tales;”
• Tourist sues hotel, claiming swimming pool got daughter pregnant;
• Illegal immigrants sue rancher who stopped them on his property at gunpoint and turned them over to the Border Patrol.

But my favorite, which was the September 2009 finalist, did not make the cut.   The case involves a woman who fell and was injured at the dolphin show at the Brookfield Zoo, a world class zoo that I have visited many times.  The plaintiff alleges that the Zoo “recklessly and willfully trained and encouraged the dolphins to throw water at the spectators in the stands making the floor wet and slippery", "failed to provide warnings of the slippery floor" and “failed to provide mats … when the staff knew the floor would get wet and slippery,” among other negligent acts.

Everyone who attends a dolphin show knows there is going to be excitement, thrills, and yes, lots of water being splashed about.  That is part of the experience.  While being injured is unfortunate, to not take personal responsibility and then file suit against the Zoo is ridiculous.  I wonder what Flipper would say.  Probably that he was just doing his job.

The moral is that even with good risk management practices frivolous suits are part of life for American businesses.  Unfortunately we all end up paying the added price.

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Insurance premiums are often based on established rates applied to an exposure basis, such as payroll for workers compensation or sales for commercial general liability insurance. The insurance premiums may be adjusted after policy expiration to reflect the actual exposure during the policy term.

For instance, a contractor has a commercial general liability policy for the period 12-1-08/09. The premium is $159,500, which is based on estimated sales of $110,000,000 and a $1.45 rate applied to each $1,000 of sales. This is reflected in the policy via a Premium Endorsement (PDF).

As it turns out, the contractor’s sales plummeted in 2009 due to the general economic downturn and a lack of construction work. The actual sales amounted to $30,000,000. The contractor thinks the adjusted premium will be $43,500 ($1.45 rate applied to $30,000,000 sales).

However, this is where the surprise comes in. The premium endorsement contains a “Minimum Premium” provision.  This endorsement specifies that regardless of the actual sales, the minimum premium will not be less than 90% of $159,500 or $143,910. In essence, the contractor will be penalized $100,410 (the difference between the minimum premium and the adjusted premium, had no minimum premium provision applied).

In this case the contractor and the insurer have a long-term relationship. The contractor appealed to the insurer for some relief on the minimum premium penalty.  While it was not obligated to do so, the insurer agreed to reduce the penalty by half.

The moral of the story for insurance buyers is to understand the ramifications of minimum premiums and to instruct their agent/broker to reduce minimum premiums where possible. Also, insurance buyers should be aware that some states, such as New York (PDF), have rules regarding the applicability of minimum premiums.

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Today's property and liability insurance policies provide very limited coverage for claims arising out of pollution. All organizations should conduct an analysis of the potential pollution/contamination loss exposures within their operations. They should review how their present insurance program provides coverage for claims arising out of pollution including mold, fungus and bacteria contamination.

Pollution claims not covered by your current insurance may arise from the following areas: 

1. Use of any chemicals including solvents, degreasers, paints, cleaning products, fuels, pesticides, herbicides, etc. One of our clients recently had an incident where workmen mixed the wrong chemicals together creating dangerous fumes and the part of the building where they were working had to be evacuated for several weeks.
2. Waste disposal practices. 
3. Mold, fungus and bacteria contamination.  
4. Malfunction of heating or ventilation equipment, e.g. carbon monoxide poisoning.
5. Fire to old electrical equipment including transformers containing PCB's.  One of our clients had this happen and PCB's were released into the ground.  The clean up cost was over $300,000. 
6. On site pollution clean up costs when there is a serious property loss, e.g. asbestos removal and disposal after a fire.
7. Transportation of hazardous materials within your operations. 
8. Leakage of underground or above ground storage tanks.
9. Contamination of your products.

Consider obtaining a quotation for separate pollution insurance. Once a separate pollution insurance quotation has been obtained, you can evaluate the benefits of purchasing this coverage versus self insuring the potential pollution/contamination exposures not covered by your present property and liability insurance policies. 

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Your shop superintendent calls in sick today and says he has the H1N1 flu virus. He indicates he caught it from the shop machinist or others who have been out several days with the virus, that he should be getting work comp benefits. Sounds logical, so what do you tell him?

According to Chris Boggs in his LexisNexis post, Is H1N1 Compensable Under Workers Compensation?, injury must arise out of an illness or disease that is peculiar to the work. Hearing loss as a result of years of working on a printing press or respiratory complications due to industrial chemical exposure are clearly occupational.

Since H1N1 can easily be contracted in a grocery store or simply at home it does not qualify as a disease that has exposure that is unique to a work environment. Now at this point, you might think this is contradictory to some work related accident injuries. You can injure your back while lifting a box as a warehouse employee as easily as you can taking out the garbage at home. Since it is not an injury that is unique to the workplace is it not covered by workers compensation?

The distinction here is that the injury occurred at a specific time and place (while working). It is normally the result of a specific event that can be attributed to the injury, lifting the box.  In this example it may be difficult to disprove the injury is work related since the manifestation of the injury may not be immediate. All too often employers are forced to pay for soft tissue injuries that have no work related origin. How do you prove the back strain occurred lifting the garbage can on the weekend vs. last Friday in the warehouse?

This type of uncertainty as to the origin and the cause is one of the reasons industrial commissions and courts tread very cautiously in determining whether a disease is occupational. Over the years certain illnesses, such as Asbestosis, have been directly linked to the industries that  use asbestos in their manufacturing process. The CDC records a doubling of the death rate from this over the past 20 years. Other areas, such as exposure to chemical fumes or dust that can exacerbate existing respiratory ailments, may not be as clear.

Healthcare workers can be exposed to communicable diseases through contact with a patient's blood. In most jurisdictions this would be considered occupational disease. An employee who alleges that a coworker who is HIV positive infected him where there is no evidence of work related blood contact would not be covered.

The arguments regarding the compensability of certain illnesses or diseases will continue on for years to come. Litigation often results and this can change the landscape as to what is covered as a work related illness. For the time being it is best to be cautious when informing employees as to what may be covered under workers compensation. If there is doubt submit it to the insurance company and let them decide.

As for the H1N1, stock up on hand sanitizers.

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