Adaptation of Insurance: Pursuit of the Perfect Policy. Todd Piersol & Brian Pilarski

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1 Adaptation of Insurance: Pursuit of the Perfect Policy Todd Piersol & Brian Pilarski

2 Why Another Insurance Seminar? The risk bearers adapt based on experience and modeling Most consumers buy insurance the same way they have their entire lives Black Swan events change consumer behavior for a short period of time, but do we keep up?

Why Another Insurance Seminar? Hurricane Andrew: 1992 Search: Insurance Lessons Learned from Hurricane Andrew 1. Carriers adapt stronger cat modeling 2.

3 Why Another Insurance Seminar? Hurricane Andrew: 1992 Search: Insurance Lessons Learned from Hurricane Andrew 1. Carriers adapt stronger cat modeling 2. Building codes changed significantly (ordinance) 3. Flood or not flood? 4. Business Income coverage tightened 5. Carriers change deductible structures

Why Another Insurance Seminar? Hurricane Katrina: 2005 Search: Insurance Lessons Learned from Hurricane Katrina 1. Arguments over cause of loss language (Flood?)* 2.

4 Why Another Insurance Seminar? Hurricane Katrina: 2005 Search: Insurance Lessons Learned from Hurricane Katrina 1. Arguments over cause of loss language (Flood?)* 2. Ordinance & Law accounts for massive uninsured 3. Power Loss claims not covered 4. Indirect Business Interruption losses not covered 5. Direct Business Interruption losses not covered *Note: Immediately post Katrina, flood policy purchases spiked over 20%. Nine years later, flood policy purchases are near pre-katrina levels.

Lawsuits over cause of loss language (Flood? Storm?) 2.

5 Why Another Insurance Seminar? Hurricane (Superstorm) Sandy: 2014 Search: Insurance Lessons Learned from Hurricane Sandy 1. Lawsuits over cause of loss language (Flood? Storm?) 2. Ordinance & Law accounts for major losses uninsured 3. Power Loss claims not covered 4. Indirect Business Interruption losses not covered 5. Direct Business Interruption losses not covered

6 Why Another Insurance Seminar? Michigan Rain & Flood : 2014 Search: Insurance Lessons Learned from 2014 Michigan Floods 1. Arguments over cause of loss language (Flood? Water Backup?) 2. Ordinance & Law issues 3. Power Loss claims not covered 4. Indirect Business Interruption losses 5. Direct Business Interruption losses

7 The Insurers have Learned and Adapted Have Consumers? Source: Property Casualty 360

8 Contract or Commodity? Insurers Treat the Policies as a Contract; Many Consumers Treat it Like a Commodity Commodity Material or product Can be bought and sold Little differentiation in makeup Supply/Demand and Unit Cost Coffee, Crude Oil, Gold Contract Identification of parties Agreement between parties Terms & conditions to support agreement Acceptance of Agreement and Terms Buy/Sell, Employment Agreement, Insurance Policy

9 The Fear Factor #10 Earthquakes: Over 5,000 earthquakes per day in the US. #9 Fire: ~550,000 fires in the United States in 2014 #8 Products Liability: $33 billion in products liability verdicts in 2014 #7 D&O: $1.4 billion in Anti-trust verdicts in #6 Slip & Fall: The average loss for a slip/fall claim is $20,000 *PropertyCasualty360.com: Top 10 April 9, 2015 *The National Law Journal * Ponemon Institute * #5 Breach of Contract: $1.8 billion in BOC verdicts in #4 Employment Practices: 243 EEOC claims filed every day. #3 Data Breach: 48 million detected cyber attacks in the US in #2 Workers Comp: US WC insurers reported combined loss rations of 116%, 118%, and 120% in respectively. #1 Business Interruption: 60% of businesses impacted by a major disaster close within two years of the event.

10 Commercial Insurance Contract to insulate businesses from accidental/unexpected financial loss Risk/Lawsuits/Injuries Business/Owner(s) Work Comp

11 What s the Point? In the end, the industry & expectation is all about M-O-N-E-Y $$$$$$ However, commercial insurance is NOT A COMMODITY Legal system protects insurers requires all insureds must read their own insurance policy Language is confusing, differs amongst carriers, terminology similar but different in many areas Policies are written by insurance carriers

12 Common Policy Declarations Common Policy Conditions Policy Type Specific Policy Declarations Coverage Endorsements

13 Pound of Flesh: Property Co-Insurance Why It s In the Contract: The insurance companies want to ensure they receive appropriate levels of premium Issue: Requires the client know exactly the costs to rebuild/replace (partial or complete loss) if a loss occurs Issue: Particularly difficult is business interruption includes co-ins Issue: Too Little Insurance, Perfect Amount of Insurance (Lottery), Too Much Insurance Common Options: 80%, 90%, 100%, Waived (Agreed Value), Blanket

14 Pound of Flesh: Property Co-Insurance: Example $1,000,000 Declaration Page- Property Policy 80% Co-Insurance requirement; $1,000 deductible Full fire loss $1,500,000 total cost to rebuild Payout: Did Insured ($1,000,000) divided over Should Insured ($1,500,000)=.67% By contract, limit purchased must be at least 80% or subject to penalty Claim Calculation: $1,000,000 (less) co-insurance penalty (.67)= $666,666, less $1,000 deductible- $665,666 insurance money available $1,500,000 loss = $834,334 UNINSURED

15 The Empty Vault: Property Business Interruption Coverage Why it s in the Policy: Provides money to continue business operations during period of loss/restoration. Covers payroll, expenses, profit, extra costs incurred to maintain or re-establish operations Issues: Most misunderstood coverage amongst agencies, clients and insurance carriers Issues: Insufficient limits, carrier limitations (unknown until claim), lack of coverage for dependent suppliers/clients/customers & failure to account for Black Swan event Issues: 85% of business suffering a full loss fail within one-year of the loss.

16 The Empty Vault: Property The Solutions to Keep Vault Stocked Pre-Loss Approach to Adequate Coverage: Business Income Worksheet, Consultation from CPA/Advisor, Contingency Planning Loss Management Strategies: Loss Adjustment Fees/Claims Expense can be added to policy to pay for 3 rd party assistance (often CPAs) to provide forensic accounting and loss adjustment help. Almost always no charge and limits available at very high amounts. Purchase Consideration: Off-premises utility interruption, civil authority, indirect damages, extended period of restoration, payroll expenses Traps: Monthly limitation, waiting periods, dependent properties/suppliers, key customer/anchor tenants

17 The Empty Vault: Property Example of Loss Scenario: Fire at neighbor location Material and over-stock held in neighbor location Neighbor didn t carry adequate insurance Fire investigation takes 5 months to complete Litigation ensues Client carriers point to each other 19 months later, still not re-opened

18 The Empty Vault: Property Contingent Business Interruption: Air Liquide America Corp. v. Protection Mut. Ins. Co.[43] Property next door to a fertilizer distributor (Air Liquide) was also its major supplier. Explosion at the supplier damaged both properties. Even though the physical damage would have created a covered loss for Air Liquide, they would not have had any fertilizer to distribute because its main supplier was destroyed. The policy for Air Liquide provided that there would be no loss payable for any period of time during which the business would not have been in operation in absence of the loss. They would not receive any BI payment until their supplier was back in operation.

19 Snakes in the Weeds: Property Traps & Gaps for Clients to Consider in Property Flood Earthquake Protective Safeguard Endorsement Vacancy Provision Co-Insurance Limits

20 Snakes in the Weeds: Property Traps & Gaps for Clients to Consider in Property Protective Safeguard Endorsement North Carolina Manufacturer: fire destroys building and contents. Fire Marshall discovers there was no water in the sprinkler system s holding tank. Leaks had been reported but not fixed. NC Court of Appeals sided with the insurer, stating that the Protective Safeguard Endorsement that was included in the policy required the insured to maintain the fire protection safeguards. The insurer was found to be not liable for the loss.

21 Gaps & Traps: Workers Compensation Exclusive Remedy Michigan Law 100% responsibility if injured regardless of part time, 3 or more, etc Independent Contractor: Pass through liability Super Policy: Life Insurance Disability Medical Rehabilitation

22 Gaps & Traps: Workers Compensation Clients can directly influence costs of insurance (only policy in commercial insurance) Experience Modification Formula AKA: EMR, E Mod, Experience Rating Two Areas to Manage Costs: 1. Prior to a loss (prevention) 2. After a loss (reduction)

23 Gaps & Traps: Workers Compensation Prevention: Training, hiring practices, equipment quality, drug testing, supervision, culture, ownership involvement Reduction: Immediate reporting, treatment, light duty accommodation, communication and engagement throughout the claim Pervasive & Consistent Issues: Re-aggravation of old injuries Failure of following protocols, safety Questionable injuries Frequency leads to severity 600 near misses, leads to 10 minors losses, that leads to 1 large loss

24 Gaps & Traps: Workers Compensation FREQUENCY: 5 - $20,000 claims Primary ($16,500) Claim 1: $16,500 Claim 2: $16,500 Claim 3: $16,500 Claim 4: $16,500 Claim 5: $16,500 Claim 1: $20,000 Claim 2: $20,000 Claim 3: $20,000 Claim 4: $20,000 Claim 5: $20,000 Excess (industry weighted) Claim 1: $3,500 x.11 = $385 Claim 2: $3,500 x.11 = $385 Claim 3: $3,500 x.11 = $385 Claim 4: $3,500 x.11 = $385 Claim 5: $3,500 x.11 = $385 SEVERITY: 1 - $100,000 claim Primary ($16,500) Claim 1: $16,500 Total= $16,500 Claim 1: $100,000 Excess (industry weighted) Claim 1: $84,500 x.11 = $9,295 Total = $9,295 Total= $82,500 Total = $1,925 TOTAL MOD IMPACT = $84,425 TOTAL MOD IMPACT = $25,795

25 Gaps & Traps: Workers Compensation FREQUENCY: 5 - $20,000 claims SEVERITY: 1 - $100,000 claim TOTAL MOD IMPACT = $84,425 TOTAL MOD IMPACT = $25,795 Based on current payroll, D-ratio/ELR, a payroll classifications, the insured s MOD formula prior to these claims scenarios was: 245,678 (actual) = ,267 (expected) Add $84,425 Add $25, ,103 (actual) 249,267 (expected) 271,473 (actual) = = 249,267 (expected) The 23 point difference, for an insured paying $50,000 annually in base premium, could mean up to $11,500 in addition premium per year

26 Gaps & Traps: General Liability Injury to 3 rd Party- Property or Person Products- Completed or Operations Premise, Personal Advertising Injury (libel, slander), Products Subject to Conditions: Any insured must provide notice of a potential fact or circumstance. Insured: employee, owner, officer, part-time, previous employed, volunteer, contracted Failure to provide notice may result in denial of claim

27 Fine Print: Liability Reporting Provisions can be punitive. tightened policy language as a condition precedent to the obligations of the insurer, as soon as practicable

28 Gaps & Traps: General Liability Items to Adjust on General Liability Notice & Knowledge Fellow Employee Injury Unintentional Error or Omission Failure to Notify Per Location Agg Expected or Intended Injury Broad Named Insured Contractual Liability Additional Insured Endorsements (200+ approved and available)

29 Fine Print: D & O, EPLI Defense & Settlement: Right to Choose your Hammer? the current list of approved employment defense firms Hammer Clause Settle or pay consent & cost implications

30 Gaps & Traps: Management Liability Directors & Officers Private Companies Need due to competitors, suppliers & employees (current and future) Financial protection in case of company insolvency Provides protection in case of bylaw/state law or scenario prevention Legal contract with manuscript capabilities Items to Look for: Final adjudication language Remove failure to procure insurance provisions Severability Notice & Knowledge

31 Questions About Brown & Brown of Detroit (presenters) 3 rd largest agency by revenue in Michigan Independent Agency handling middle-market client consulting and placement of insurance programs Proprietary analysis tools for client exposure reviews and insurance placement Part of 4 th largest agency/intermediary in nation

Business Interruption Losses from Hurricane Harvey Have Started: Billions of Dollars of Insurance Claims Expected

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