Transcript TRENDS IN INSURANCE CLAIMS

TRENDS IN INSURANCE
CLAIMS
WILLIAM N. ERICKSON
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
ANA M. FRANCISCO, ESQ.
ROPES & GRAY
BENJAMIN HINCKS, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY
AND POPEO, PC
JONATHAN I. MISHARA, ESQ.
FM GLOBAL
Claims Trends
Introduction
• Focus on claim trends in:
– Property insurance.
– Commercial general liability insurance.
– Directors and officers liability insurance.
• Report on recent case law.
• Reinsurance claims that may arise from
the trends.
PROPERTY INSURANCE
Major Market Influences In
Property Insurance
• Globalization/Supply Chain.
• Climate Change/Green Coverage.
• Developments in Property Insurance Law.
Globalization
• Supply chain has grown increasingly
complex.
• Reliance on outsourcing (mftg, parts,
services).
• Just-in-time inventory.
• Single source vendors.
Globalization
• Survey of 600 financial executives.
• Supply chain risk – greatest threat.
• Physical disruption to supply chain.
• Mitigation.
Globalization
• Japanese auto manufacturer.
• Single source – brake valve supplier.
Supply Chain Coverage
• Contingent Time Element (direct
suppliers).
• Dependent Time Element (direct and
indirect suppliers).
Supply Chain Coverage
• Challenges for insurers.
– Site access.
– Jurisdictional issues.
– Determining coverage.
– Determining quantum.
• Control over exposures?
Climate Change
• Increase in frequency and severity of
fire and natural disasters (wild fires,
hurricanes, typhoons, droughts).
• Companies – heightened awareness.
• Looking at sustainable building
designs – going “green”.
Climate Change
• “Green” buildings – new designs,
products and materials.
• More efficient use of energy.
• Local code changes: incorporating
“green” building standards.
FM Global – Going Green
• U.S. Green Building Council’s LEED Gold
Standard:
FM Global – Going Green
• $154M project - $60M building.
• “Green” - 8% of construction costs.
• Every room monitored with sensors
(climate, lights).
• 95% of construction debris was
recycled.
• Carpeting – 100% recycled materials.
• Exterior blinds to regulate sunlight.
Green Coverage
• Emerging property risk exposure.
• What if the manufacturing plant was
not “green” at time of loss?
– Local code enforcement required green.
– Voluntary measures.
Green Coverage
• Potential for large uninsured losses.
• Prompted insurers to develop “green”
enhancements/endorsements.
• Coverage – additional costs
(products, materials, methods) to
repair/rebuild to “green” standards.
Green Coverage
• Green enhancement at another facility?
• Install a geo-thermal generator?
• Green recovery even though no rebuild?
• Increased period of restoration?
• Property and BI exposures.
Industry Perspective
• New emerging exposures – minimize
disputes between cedents and
reinsurers.
• View our treaty reinsurers - partners.
• Treat them fairly (notice, information,
transparency).
Industry Perspective
• Credibility.
• $1.1 billion of $4.6 billion in gross
premiums.
• Dependency on treaty reinsurance –
from 26% to 14%.
Industry Perspective
• Facultative reinsurers (per risk).
• Incidence of disputed claims higher –
shared/layered programs.
• Challenges to “follow the fortunes”.
• Ex gratia – “commercial” payment.
PROPERTY INSURANCE
SURVEY
Property Survey
• Survey of Professionals.
– Over 350 claims professionals asked to
respond to six question survey.
– 73 people (approx. 20%) participated.
– 85% claims executives or managers.
– 76% HPR, Large Loss or Middle Market
– 50 people provided additional comments
concerning specific claim trends.
Property Survey
The Number of New Claims
Varies Widely
How Would You Describe The Number Of New Claims
Over The Last Twelve Months?
Much Few er Than Usual
Slighly Few er Than Usual
About The Sam e As Usual
Slightly More Than Usual
Much More Than Usual
0
5
10
15
20
25
30
Property Survey
Coverage Problems on
the Increase
How Would You Describe The Number Of Claims Over The Last Twelve
Months That Involve Significant Coverage Problems?
Much Fewer Than Usual
Slighly Fewer Than Usual
About The Same As Usual
Slightly More Than Usual
Much More Than Usual
0
5
10
15
20
25
30
35
40
Property Survey
Measurement Disputes Are
Also Increasing
How Would You Describe The Number Of Claims Over The Past Twelve
Months That Involve Significant Measurement Problems?
Much Fewer Than Usual
Slightly Fewer Than Usual
About The Same As Usual
Slightly More Than Usual
Much More Than Usual
0
5
10
15
20
25
30
35
40
45
Property Survey
Differences Between Market Segments
HIGHLY PROTECTED RISK / LARGE COMMERCIAL ACCOUNTS
Much
More
Than
Usual
Slightly
More
Than
Usual
About the
Same
as Usual
Slightly
Fewer
Than Usual
Much
Fewer
Than
Usual
Number of new claims
4
9
8
9
4
Claims that have coverage problems
3
9
17
3
1
Claims that have measurement problem
5
10
16
2
1
Property Survey
Differences Between Market Segments
COMMERCIAL MIDDLE MARKET
Much
More
Than
Usual
Slightly
More
Than
Usual
About the
Same
as Usual
Slightly
Fewer
Than
Usual
Much
Fewer
Than
Usual
Number of new claims
2
7
7
5
0
Claims that have coverage problems
5
8
6
1
1
Claims that have measurement problem
6
6
6
2
1
Property Survey
Differences Between Market Segments
SURPLUS LINES
Much
More
Than
Usual
Slightly
More
Than
Usual
About the
Same
as Usual
Slightly
Fewer
Than
Usual
Much
Fewer
Than
Usual
Number of new claims
1
1
3
4
0
Claims that have coverage problems
1
2
4
2
0
Claims that have measurement problem
0
2
6
1
0
Property Survey
Differences Between Market Segments
BOILER AND MACHINERY
Much
More
Than
Usual
Slightly
More
Than
Usual
About the
Same
as Usual
Slightly
Fewer
Than
Usual
Much
Fewer
Than
Usual
Number of new claims
1
2
0
0
1
Claims that have coverage problems
2
2
0
0
0
Claims that have measurement
problem
0
4
0
0
0
Property Survey
Specific Trends Identified
•
•
•
•
•
•
Hurricane (9 Respondents).
Public Adjusters (8 Respondents).
Excessive Claims (6 Respondents).
Crime (5 Respondents).
Time Element (4 Respondents).
Experienced Claim Adjusters
(4 Respondents).
Developments in Property
Insurance Law
Property Insurance Law
Physical Loss and Fortuity
Abbey Company, LLC v. Lexington Ins. Co.
(C.A.9Cal. 2008)
• Island ferry service insured ferry and
property intended for its use.
• A divided court found silting of the channel
was physical loss insured under the policy.
Property Insurance Law
Physical Loss and Fortuity
Wakefern v. Liberty Mutual
(N.J. Super 2009)
• Insured lost power during an outage.
• The policy covered power interruption that
results from “physical damage.”
• The New Jersey Appellate Court found
that “physical damage” is present when
property is not available for use, as a
result of a “physical incident.”
Property Insurance Law
Physical Loss and Fortuity
Markwest Hydrocarbon, Inc. v.
Liberty Mutual Ins. Co. - (10th Cir. 2009)
• Following an explosion, the DOT ordered insured
to undertake testing and maintenance.
• The policy covered “all risks of direct physical
loss or damage.”
• The court found maintenance and testing was not
insured – only fortuitous losses are covered.
Commercial General Liability
Insurance
Emerging CGL Claims
• Predicting next wave of major CGL
claims.
• Status of law/science underpinning
emerging risks.
• Major developments in asbestos and
pollution claims – still most significant
claims facing CGL carriers.
Predicting Next Wave
• Accurate prediction of potential claims
inherently difficult.
– Broad scope of CGL coverage.
– Open-ended nature of “occurrence”
based policies.
• “Claims-made” policies enhance
predictability/finality.
– Competition may limit marketability.
Predicting Next Wave
• Blockbuster losses typically arise
from either:
– Single catastrophic event.
– Or, widely-used products/practices.
•
•
•
•
Harmful effects not fully appreciated at time of use.
Activity largely unregulated.
Long damage/disease process.
Injury/damage not apparent for long time.
Predicting Next Wave
• “Emerging claims” fitting profile.
– Food contamination outbreaks.
– Lead paint.
– Climate change.
– Toxic torts.
• Nanotechnology.
• BPA.
Food Contamination Outbreaks
• Sharp increase in the number of
outbreaks – massive recalls.
• Specialized policies exist, but CGL
impact too.
• To date, largely property damage
event.
Food Contamination Outbreaks
• Significant coverage issues.
– “Impaired property” exclusion.
– “Sistership” exclusion.
– “No-injury” claims.
– Insured’s contaminated product
integrated into 3rd-party’s product.
Lead Paint
• Escalation feared as result of public
nuisance suits.
– Cases brought by states/municipalities.
– Would require remediation of millions of
dwellings.
• Feared result has not materialized.
– Only adverse verdict overturned on
appeal by the RI Supreme Court.
Climate Change
• Huge potential for significant claims
– Energy companies/ automakers.
• Liability suits have failed – political
questions doctrine.
• Scientific studies narrowing area of
legitimate debate.
• Increased carbon emissions regulation.
• Merits continued close monitoring.
Asbestos/Pollution: Developments
• After 30 years of litigation, important
coverage disputes remain.
• Important 2009 high court decisions.
– Mass: Boston Gas
– Cal: Stringfellow
Asbestos/Pollution: Developments
“Just when I
thought I was
out, they pull
me back in.”
Asbestos/Pollution: Developments
• Goal of global settlements: Finality.
• Increasing efforts to circumvent global
settlements.
– Rescission claims by insureds.
– Contribution claims by other insurers.
– Attacks on scope of bankruptcy orders.
• Challenges to Exhaustion.
Directors and Officers
Insurance
“D&O” Background
• 3 Basic D&O Coverages:
– “Side A” Coverage: directly afforded to D&Os.
– “Side B” Coverage: reimbursement afforded to
the company for indemnification obligations to
D&Os.
– “Side C” Coverage: direct coverage to the
company for its own liabilities.
• D&O is typically written on “claimsmade” basis.
Global Financial Crisis
• Recipe for a Spike in D&O Claims.
– Subprime and Credit Crisis.
– Demise of Prominent Investment Banks and
Financial Institutions.
– Collapse of World Markets.
– Global “Recession”.
Bankruptcy
U.S. Bankruptcy Filings by Businesses
(Years Ended 6/30/05-6/30/09)
Year
Business Filings
2009
55,021
2008
33,822
2007
23,889
2006
31,562
2005
32,406
http://www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsJun2009.cfm
Claims Exposure
• D&Os face legal exposure from bankruptcy filings
and bank failures.
• Corporate bankruptcies typically lead to an increase
in securities litigation.
• Since 1995, 35% of the large public companies filing
for bankruptcy have also sustained securities class
action lawsuits against their D&Os.
• In 2007 and 2008, this number ballooned to 77%.
SEC Enforcement Activity
• SEC Activity Spikes in 2009:
– 10% increase in investigations.
– SEC has been granted 118% more formal
orders.
– 147% more TROs issued.
– Most significantly, SEC has filed nearly 30%
more enforcement actions this year.
Stormy Weather?
Dire Forecast . . .
• A leading industry analyst predicted $5.9
billion of losses to D&O insurers from
2007-2009 resulting from economic
crisis.
See Advisen, “The Subprime Mortgage Meltdown, the Global
Credit Crisis and the D&O Market” (November 4, 2008).
However…
Rising Barometer?
• More recently, other commentators have
predicted a smaller impact.
See Christopher Boehning and Douglas M. Pravda, “Effects of
Subprime Suits on Coverage Litigation,” Law360, New York
(September 14, 2009).
2009 Court Decisions
• In re Huntington Bancshares Inc. ERISA
Litigation.
– “Defendants cannot be held to a standard that
would require them to predict the future of the
financial markets so as not to breach their
fiduciary duties under ERISA.” USDC (S.D.
Ohio).
• In re Citigroup Inc. Shareholder Derivative
Litigation.
– “That there were signs in the market that
reflected worsening conditions and suggested
that conditions may deteriorate even further is
not an invitation for this Court to disregard the
presumptions of the business judgment rule
and conclude that the directors are liable
because they did not properly evaluate
business risk.” Delaware Chancery Court.
Hot Coverage Issues
• Automatic stay in bankruptcy: is D&O
policy an “asset of the estate”?
• Insured v. insured (“I v. I”) exclusion.
• Late notice: prejudice required?