Category Archives: Business Insurance

Proper decontamination before and after coronavirus exposure is crucial

While insurance policies might not cover the mitigation or cleanup costs related to commercial facility exposure to the coronavirus, preserving a healthy and safe place of business remains a critical risk management issue.

As the coronavirus (COVID-19) continues to spread rapidly around the world, it’s important to know what to do if someone carrying the highly contagious virus comes in contact with any of your facilities or those of your customers. Even the potential of your business premises being exposed to COVID-19 can create a possible need to engage risk mitigation efforts. Understanding the importance of utilizing a professional, credentialed decontamination contractor both before and after facility exposure is crucial to protecting your business.

Larry Thomas

“COVID-19 has presented new challenges for businesses around the world, and it’s necessary to understand the importance of ensuring the safety of all employees and customers,” said Larry Thomas, global president of Crawford Specialty Solutions, a division of Crawford & Company that includes Contractor Connection. Contractor Connection, an industry leader in managed repair services, provides insurance carriers, brokers and consumers a global network of more than 6,000 contractors vetted and managed for performance in residential and commercial work, including specialists in technical areas like cleanup after a biological event.

“Experts have warned that we have just begun to feel the impact of the virus in the U.S., and it is expected to continue to affect lives for the foreseeable future.”

With that in mind, it’s essential you ensure you are utilizing a decontamination contractor who is rigorously vetted, held to the highest standards, and professionally equipped to restore affected sites through proper remediation and containment procedures. Here are some best practices for how to approach this critical work while reducing risk for you and your customers.

Prevention protects you, your customers and others

Prevention is the first step toward reducing exposure to the virus. Even before an incident occurs, a decontamination contractor can work with your business to provide cleaning and disinfecting services designed to reduce the opportunity for infection and keep facilities operating longer. When administered by a trusted, licensed and insured provider, preventative cleaning provides a cleaner, safer work environment and enhances employee and customer satisfaction.

Decontamination services limit business interruption

If you or your customers’ facilities are exposed to coronavirus, legitimate decontamination services using proper techniques, equipment and materials, and following CDC, state and local protocols should be employed to restore your places of business back to operation as quickly as possible, limiting business interruption. Time is critical, so you should engage with a service that provides 24/7 assignment processing and emergency response.

Lance Malcolm

“Providing access to a rapid-response decontamination service can help reduce the potential impact of contamination in the workplace and return the environment to full operational status as quickly as possible,” said Lance Malcolm, U.S. president of Contractor Connection. “The focus must be on helping companies limit business interruptions and ensure that the affected facilities are completely safe for those who use them.”

Safe biohazard waste disposal reduces future risk of exposure

As part of decontamination services, it’s also important to utilize contractors trained to handle and properly dispose of biohazard waste, safely removing any affected materials from the facility. Services that provide quality assurance review and project monitoring ensure speedy completion and provide peace of mind knowing exposure to the virus has been properly reduced or eliminated.

Business Interruption Claims Related to COVID-19

By Michael Menapace, Esq. 

The COVID-19 pandemic is unprecedented in many ways.  The human toll is first and foremost on our minds (as it should be), but as an insurance professional, I’ll stay in my lane and address one of the economic impacts – business interruption. 

Businesses Looking to Mitigate Losses

Among the ways in which we are in uncharted territory is the scale of how businesses are impacted.  Unsurprisingly, in reaction to slow-downs and shut-downs in many business sectors, businesses are looking for ways to mitigate their losses or recover lost revenue.  One avenue that businesses are exploring is the availability of business interruption coverage under their property insurance policies.  Other potential claims include communicable disease coverage found in some policies purchased by hotels or event cancellation insurance, but those claims are beyond the scope of this article. 

Property insurance was designed originally to cover fire losses and similar losses of physical property following the Great London Fire of 1666.  Of course, property policies have evolved since then to cover additional risks including, in many instances, business interruption losses caused by physical damage to property.  A property policy may, for example, pay to repair the damage caused by a fire and may cover the loss of business during the reconstruction period.  But here’s the rub.  Are the business interruptions related to COVID-19 caused by physical damage to property?

Policy Language Will Control

The language of an insured’s policy will control whether COVID-19 interruptions are covered.  Unfortunately, much of the media commentary on business interruption claims related to COVID-19 has inappropriately treated all insurance policies as though they are identical.  Policyholders have a wide array of different policies they can purchase.  For example, some policyholders have purchased an ISO Businessowners Policy (BOP) with standard terms and exclusions, others have purchased all-risk policies, and others have purchased a variation of these types. 

This commentary does not try to provide sweeping pronouncements or give the impression that a single outcome will apply equally to all situations.  Instead, the following is a starting point for a more detailed analysis under individual circumstances.  Details matter and the analysis for a particular claim must start with the policy terms and facts specific to that policyholder.

Is Coverage Triggered?

There have already been a handful of lawsuits filed related to business interruption claims, some of which suits were filed before the insurers even denied a claim.  For example, the Oceana suit filed by a restaurant in NOLA and a suit filed by chef Thomas Keller, owner of The French Laundry in California.  Also, a group of tribal nations that own casinos filed a lawsuit in Oklahoma and the owner of a restaurant/movie chain filed suit in Illinois.  Policyholders in these lawsuits are seeking a ruling that they are entitled to coverage for losses sustained during their current shutdowns.  A review of the policies at issues underscores the point made above – the outcomes in these suits and others may not all be the same because different policies are at issue. 

Nonetheless, there are some overall issues to consider.  While the scope of business shutdowns is unprecedented, we do have similar experiences as a guide, albeit on a smaller scale, that may indicate how the current COVID-19 business interruption claims may play out. 

The threshold issue will be whether the insureds can prove that their business losses are caused by “physical damage to property,” which is the standard language in many business interruption policies.  While the concept of causation focuses on assigning blame for an accident in some legal contexts, it is important to realize that in the insurance context the issue of causation is different.

In insurance, the concept of causation addresses whether a particular loss triggers coverage, not who is responsible for causing the loss.  In this regard, we can replace the word “causation” with “trigger.”  So, the question with the COVID-19 losses becomes, can these policyholders prove that their business interruption losses were triggered by physical damage to property akin to the fire loss damage mentioned above?

Past Experience

A series of cases from Minnesota demonstrates how the COVID-19 business interruption claims might be resolved. 

Where there is direct physical loss to property, such as contaminated oats that could not be sold or a building rendered useless because of asbestos contamination, the courts have found that business interruption coverage was triggered.  That is, these losses fit the definition of direct physical loss to property.  General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W. 2d 147 (Minn. Ct. App. 2001); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W. 2d 296, 300 (Minn. Ct. App. 1997). 

But, where an earthquake caused a power loss in two Taiwanese factories, and as a result, those factories could not supply products to the Minnesota insured, the court found that the outages caused no injury to the Taiwanese factories other than a shutdown of manufacturing operations, and that this did not constitute “direct physical loss or damage.”  Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400. F.3d 613 (8th Cir. 2005).

More recently, a federal appellate court considered a claim related to mad cow disease.  Source Food was a company that sold products containing beef tallow.  The USDA prohibited the importation of the tallow from Canada in 2003 after a cow in Canada tested positive for mad cow disease. The border was closed to Source Food’s sole supplier of beef product in Canada. There was no evidence that the beef product specifically destined for Source Foods was contaminated by mad cow disease, but after the border was closed to the importation of beef products, Source Food was unable to fill orders and lost business as a result.  Source Food submitted a business interruption claim.  It argued that the closing of the border caused direct physical loss to its beef product because the beef product was treated as though it were physically contaminated by mad cow disease and lost its function.  But, the court held that to characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word “physical” meaningless. Additionally, the policy’s use of the word “to” in the term “direct physical loss to property” was significant.  The court explained that the policy did not cover loss “of” property, it covered loss “to” property.  As a result, the cause of Source Food’s business interruption was the government shutdown of the border, not direct physical loss to its property.  Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006).

What About the Current Claims?

Here, are the business interruptions related to COVID-19 the direct result of the government restrictions on businesses or are they due to the physical loss to their property?  Under the reasoning of the Source Food case, much of the current business interruption claims would seem not to trigger the standard business interruption coverage in a commercial business interruption policy or BOP.  As cautioned above, this is not a universal outcome under all policies.  For example, an all-risk policy would generally not distinguish between business interruption losses due to government action or direct physical loss because all-risk policies cover all losses except those specifically excluded.  While it is possible that an all-risk policy could specifically exclude losses due to civil authority orders, that is not a standard exclusion in all-risk policies.

With regard to business interruption policy exclusions, there are exclusions to consider even if a policyholder can meet its burden to trigger coverage under the standard business interruption policy.  For example, some policies have an exclusion that precludes coverage for losses that result from mold, fungi or bacteria.  However, because COVID-19 is a virus, that exclusion may not apply.  But, other policies have exclusions for viruses, diseases or pandemics.  That type of exclusion appears problematic for policyholders, even those who satisfy the initial question of causation/trigger.

The result may not be all-or-nothing.  Might claims be partially covered?  It is possible.  For example, if a restaurant were shut down because it had been contaminated by COVID-19 and needed to be cleaned and closed for a two-week period to ensure no lingering virus remained, that period of shutdown might be considered direct loss to property even though the shut-down period after the cleaning period was not covered because the following shutdown period was attributable to a government order.  Likewise, there may be a different analysis applied to some business interruption claims that result from supply chain impacts.  However, claims related to supply chain disruptions are beyond the scope of this article.

Legislation and Duties of Insureds

It is notable that legislators in several states recently proposed bills that would retroactively void the exclusions that would apply to COVID-19 business interruption claims.  Although well-intentioned, these bills are deeply troubling because, among other things, they could severely impact the financial stability of the insurance market, which took in premiums based on such claims being excluded.  And, because the legislation would not help the 60 percent of businesses that do not purchase business interruption coverage, the risk of crippling the insurance market is even more questionable.  Moreover, these bills would address only the exclusions and do nothing to impact the initial question of whether policyholders can trigger coverage.

Nevertheless, if a policyholder believes it may have a claim under its insurance policy(ies), it should provide prompt notice to its insurer(s) so that it does not risk a denial based on late notice.  Likewise, once the claim has been made, it is essential that the insured cooperate with the insurer, including providing timely proof of loss.

Michael Menapace

Michael Menapace is a Triple-I Non-Resident Scholar, a partner at Wiggin and Dana LLP, and a professor of Insurance Law at the Quinnipiac University School of Law.

Battle Plays Out
Over Coronavirus
and Business Insurance

The Financial Times reports that U.S. lawmakers and lawyers are considering efforts to force insurance companies to pay claims related to the coronavirus pandemic. Congress also is debating the need for legislation to require insurers to cover costs from business interruption caused by the pandemic. U.S. insurers contend that their business interruption policies exclude coverage for pandemics and that making such coverage retroactive would cause the industry to collapse. Joseph Wayland, general counsel for the U.S. insurer Chubb, said the losses would overwhelm insurers’ ability to pay and that forcing these companies to take responsibility for risks they never underwrote nor charged for represented an existential threat. Bruce Carnegie-Brown, chair of Lloyd’s of London, agreed that such a revision to insurance contracts would jeopardize the industry.

A Wall Street Journal editorial argues that forcing costs of the economic disruption caused by the coronavirus pandemic upon insurers would cause long-term economic damage unless a federal backstop is put in place. The editorial says if business interruption insurance “can be stretched and exclusions nullified during a crisis” insurers will conclude that such coverage is not worth the risk and will drop the product.

Triple-I: Insurers are engaged in COVID-19 crisis

A Triple-I Fact Sheet, Insurers Are Engaged In the COVID-19 Crisis, outlines how the industry’s financial stability allows insurers to keep the promises made to policyholders in the event of tornadoes, hurricanes, or wildfires. It also notes how insurers are contributing to COVID-19 related charities, such as food banks and medical supplies.

“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk,” said Sean Kevelighan, Triple-I CEO. “Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”


APCIA on how insurers are helping customers

David A. Sampson, president and CEO of the American Property Casualty Insurance Association (APCIA), described in a statement how property/casualty insurers are working “to proactively help consumers in this time of crisis.”

Examples include temporary arrangements for:

  • Flexible payment solutions for families, individuals, and businesses;
  • Suspending premium billing for small-business insureds, such as restaurants and bars;
  • Waiving premium late fees;
  • Pausing cancellation of coverage for personal and commercial lines due to non-payment and policy expiration;
  • Wage replacement benefits for first responders and medical personnel who are quarantined;
  • Suspending personal auto exclusions for restaurant employees who are transitioning to meal delivery services using their personal auto policy as coverage;
  • Adding more online account and claims services for policyholders;
  • Shifting more resources to anti-fraud and cyber security units, in recognition that bad actors  prey on victims during times of crisis; and
  • Suspending in-person loss control visits and inspections.

On the subject of exclusions for contagious diseases in business interruption policies, the statement said:

 “If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted, and that could affect the ability of consumers to address everyday risks that are covered by the property casualty industry.”

It went on to say:

 “APCIA’s preliminary estimate is that business continuity losses just for small businesses with 100 or fewer employees could fall between $220-383 billion per month. The total surplus for all of the U.S. home, auto, and business insurers combined to pay all future losses is roughly only $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount.”

Related articles:

New York introduces bill on pandemic-related business interruption claims

Policyholders finding out that business interruption insurance doesn’t cover coronavirus

P/C Insurers Put a Price Tag on Uncovered Coronavirus Business Interruption Losses

More coronavirus insurance cover than people think, says Lloyd’s CEO

Standard insurance for Florida businesses likely won’t cover COVID-19 losses

French Laundry restaurateur Thomas Keller sues insurer for coronavirus losses



Momentum for pandemic backstop?

Business Insurance reports that, according to sources inside the federal government, progress is being made on legislation that would provide a federal backstop for pandemic risk insurance and that a related bill could be introduced within the next 30 days. According to the sources, the bill would set up a pandemic risk insurance program that would be similar to the federal terrorism insurance program. They also report that Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, is circulating a draft bill including the proposal.

Related articles:

Pandemic Risk Insurance Act – A TRIA-Inspired Model to Backstop the Business Interruption Insurance Market in Wake of COVID-19

As Business Losses Mount, Pandemic Backstop Discussions Grow

Triple-I CEO: Insurers can meet their obligations during crisis

America’s auto, home, and commercial insurers have the financial resources to meet their obligations during the COVID-19 crisis, according to a presentation the Insurance Information Institute (Triple-I) delivered to state regulators.

“This year marks Triple-I’s 60th anniversary, and we are proud to be able to report before this forum that today that the property/casualty insurance industry is well-positioned to honor the promises it has made based on strong fundamentals, which include long-term risk management and an actuarially sound approach to underwriting,” said Sean Kevelighan, CEO, Triple-I, in remarks to the National Association of Insurance Commissioners (NAIC). 

“It is important to appreciate that as much as this is a catastrophe of historic magnitude, there are more on the horizon — hurricanes, wildfires, floods —  and we must remain prepared in the way that we have long-planned, so again, we can continue act as the financial first responder that we have been for several centuries,” Kevelighan stated.

Kevelighan and Triple-I senior economist Michel Leonard highlighted a few keys to the financial strength of the nation’s P/C insurers as a group, including its:

  • Policyholders’ surplus: U.S. P/C insurers’ cumulative assets exceeded its liabilities by more than $800 billion as of year-end 2019.
  • Diverse investment portfolios: Nearly 80 percent of P/C insurers’ portfolio exposure is to non-stock assets, such as high-quality corporate and municipal bonds.
  • Reinsurance: U.S. P/C insurers’ ability to access global reinsurance markets allow them to spread U.S. financial risks worldwide.

In an analysis of the current U.S. P/C insurance markets, Dr. Leonard told the NAIC’s special session on COVID-19 that workers’ compensation insurers providing coverage to hospitals, first responders and law enforcement faced the highest exposure to COVID-19 related claims. Liability and directors and officers (D&O) insurers who cover health care, transportation, retail and pharmaceutical businesses have moderate exposure, Dr. Leonard added.

A copy of the presentation is on the Triple-I website.

Emerging cyber terrorism threats and the Federal Terrorism Risk Insurance Act

Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure.

On December 20, 2019, President Trump signed a federal funding package that includes a seven-year extension of the Terrorism Risk Insurance Act (TRIA). TRIA provides for a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism.

Passage of the act was met with resounding approval by the insurance industry. You can read more about it here.

A critical mandate of the TRIA extension is for the Government Accountability Office (GAO) to make recommendations to Congress about how to amend the statute to address emerging cyberthreats. Triple-I recently hosted an exclusive members-only webinar featuring Jason Schupp of the Centers for Better Insurance, who discussed issues likely to be addressed by the GAO report.

Schupp said the report will likely serve as a starting point for a discussion about cyber threats and how the insurance industry can better meet the needs of businesses, nonprofits and local governments for cyber insurance. It will address:

  • Vulnerabilities and potential costs of cyber-attacks to the United States;
  • Whether adequate coverage is available for cyber terrorism;
  • Whether cyber terrorism coverage can be adequately priced by the private market;
  • Whether TRIA’s current structure is appropriate for cyber terrorism events; and
  • Recommendations on how Congress could amend TRIA to meet the next generation of cyber threats.

Cyber terrorism is already covered under TRIA, but such acts don’t fit neatly into the TRIA framework. Because cyber limits and conditions are already narrow, TRIA’s current make available requirement has not been effective in providing coverage for cyber-terrorism events at the same limits and conditions as non-cyber events.

Schupp proposes that the requirement be amended so the coverage doesn’t exclude insured losses specific to the loss of use, corruption or destruction of electronic data or the unauthorized disclosure of or access to nonpublic information.

But expanding the requirement carries considerable risk. If insurers are required to make more coverage available for cyber events than they are comfortable with the result could be a pullback in property and liability insurance generally – not just for cyber events. Any expansion must be balanced with the terms of the backstop.

Schupp concluded that the GAO’s investigation and report (which is required to be completed by June 2020) is likely to kick off a multi-year debate that could substantially redefine U.S. cyber insurance markets. Insurers, policyholders and other stakeholders should engage accordingly.

To learn about how to become a member of Triple-I visit iiimembership.org.

Florida Dropped From 2020 “Judicial Hellholes” List

Each year the American Tort Reform Association (ATRA) publishes a list of “Judicial Hellholes”  — places where ATRA says laws and court procedures are applied in an “unfair and unbalanced” way in civil cases, usually to the disadvantage of defendants.

Since the issue of social inflation has been trending in recent months, it’s no surprise that the mention of ATRA’s report in our Daily newsletter garnered an unprecedented number of clicks.

Florida — a former number one Judicial Hellhole — doesn’t even make the cut this year.

“Florida took great strides toward improving its legal climate in 2019,” ATRA says “Although there is much work to be done, the election of Governor Ron DeSantis (R) has heralded a sea change in Florida’s legal landscape, beginning with the appointment of several new Florida Supreme Court justices. This new court is deferential to legislative efforts to stop lawsuit abuse and poised to correct the course set by the prior activist court.”

DeSantis in 2019 also signed into law a measure aimed at curbing assignment of benefits (AOB) litigation in the state. AOB is a standard insurance practice and an efficient, customer-friendly way to settle claims. As a convenience, a policyholder lets a third party – say, an auto glass repair company – directly bill the insurer. In Florida, however, legislative wrinkles have spawned a state of affairs in which legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.

The measure DeSantis signed puts new requirements on contractors and lets insurers offer policies with limited AOB rights, or none at all. But it excludes auto glass repairs. The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.

This year, the Philadelphia Court of Common Pleas took over the top spot for 2019. It is one of the preferred jurisdictions for asbestos litigation and home to an $8 billion product liability verdict. California, New York City, Louisiana, and St. Louis all rank in the top five.

Some of the trends noted in the ATRA report include:

  • the trial bar’s push to use public nuisance law to shift costs associated with public crises to businesses;
  • lead paint and climate change litigation;
  • the opioid and vaping crisis; and
  • new rights of action against employers.

Three Illinois counties – Cook, Madison, and St. Clair – made the list.  Antonio M. Romanucci, president of the Illinois Trial Lawyers Association, called the ATRA report misleading.  “The deceptively titled ‘Hellholes’ report is part of [ATRA’s] ongoing campaign to deny access to the court system that our tax dollars fund,” Romanucci told Illinois Radio Network. “ATRA’s annual publicity stunt demeans the U.S. Constitution and attacks citizens’ Seventh Amendment right to trial by jury.”

Romanucci said the number of civil lawsuits filed in Illinois has been declining since 2010 and was down 47 percent. And medical malpractice cases have dropped 32 percent since 2003.

Is a Global Recession Imminent? If So, Businesses Can Protect Themselves with Credit Risk Insurance

By Loretta Worters, Vice President – Media Relations

The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.  “Everyone was impacted, not just those working in banks.  Because the price of debt, the ability to get financing changed, a lot of things happened.  So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.

Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said.  “Leadership needs to be thinking about the risks in their company.  Not just the credit risks, but all risks related to their business.”

What leads to credit risk and how can companies protect themselves?

The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.

Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson.  “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.

What is Credit Risk Insurance?

Credit risk insurance is a tool to support lending and portfolio management.  It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.

What can impact credit risk?

The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.

For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.

“At the end of the day, political risks have the ability to impact credit risks.  Credit risks rarely impact political risks,” she said.  “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.

“We all talk about biases.  Everyone thinks they’re better off and it’s always someone else that has the issue.  It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people.  That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”

“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson.  “Know, too, there are a lot of tools available to help you mitigate against those risks.”

 

When Must Insurers Defend Motels
in Trafficking Cases?

Hotels and motels are routinely used for sex trafficking. Two recent lawsuits highlight the complexity of determining who bears legal costs associated with trafficking.

Human trafficking is a crime with enormous individual and societal impacts, and it relies on legitimate businesses to sustain it. Motels, for example – and, arguably, insurers.

“Hotels and motels are routinely used for sex trafficking,” reports the Polaris Project, a nonprofit that aims to “eradicate modern slavery.” Two recent lawsuits involving insurers of motels used by traffickers highlight the complexity of determining who bears legal costs associated with such activities.

Duty to defend

Both cases revolve around “duty to defend” — an insurer’s obligation to provide a legal defense for claims made under a liability policy. Before proceeding, let me say: I’m not a lawyer.  Everything that follows is based on published reporting, and no one should act on anything I write without first consulting an attorney.

In the first case, a woman sued motel operators for letting her be trafficked at their motels when she was a minor. The Insurance and Reinsurance Disputes Blog says, “The allegations of physical harm, threats, being held at gun point, and failure to intervene were wrapped up into claims ranging from negligence per se to intentional infliction of emotional harm.”

One of the motels sought defense from its insurer, Nautilus Insurance Co. Nautilus argued it was not obligated to defend based on a policy exclusion for claims arising out of assault or battery. The court agreed, and an appellate court affirmed.

In other words, the motel owners were on the hook for their own legal costs.

In the second case, a court found the insurer – Peerless Indemnity Insurance Co. – must defend its client in a suit brought by a woman claiming she was imprisoned by a man grooming her for prostitution while the owners turned a blind eye. A lower court had dismissed the case, finding insufficient evidence the motel was engaged in trafficking. An appeals court overturned that decision.

“The relevant question,” the judge said, is whether the victim’s injuries constitute personal injury. This is because the definition of personal injury under the policy included injuries arising from false imprisonment.

Because her injuries, at least in part, arose from false imprisonment, the judge said, “the answer to that question is ‘Yes’.”

So, the court said, Peerless must pay to defend the motel.

Trafficking is a $32 billion-a-year industry. Insurers might want to review their policy language to avoid funding defenses of criminals and businesses that enable them.

Language matters

The differences between these rulings seem to have more to do with nuances in policy language than trafficking facts.

In the Nautilus case, the appeals court found the exclusion – stating Nautilus “will have no duty to defend or indemnify any insured in any action or proceeding alleging damages arising out of any assault or battery” – unambiguous. It declared: “Nautilus had no duty to defend and indemnify” because the claims “arose from facts alleging negligent failure to prevent an assault or battery.”

The Peerless case involved two policies – a general liability and an umbrella – both of which contained exclusions for “‘personal and advertising injury’ arising out of a criminal act committed by or at the direction of the insured.”

The “personal” in “personal and advertising injury” includes false imprisonment.

To a non-lawyer like me, this seems as unambiguous as the Nautilus case: the Peerless policies excluded personal injury “arising out of one or more” of a variety of offenses, including false imprisonment.

The U.S. District Court for the District of Massachusetts disagrees. Its analysis goes into semantic tall grass, parsing phrases like “arising out of” and “but for” and is peppered with case law citations like:

  • “Ambiguities are to be construed against the insurer and in favor of the insured” and
  • “The insurer bears the burden of demonstrating that an exclusion exists that precludes coverage.”

It would exceed the bounds of my non-existent legal training – and the length of a blog post – to critique the court’s analysis. I recommend reading the decision.

But it doesn’t take a lawyer to see insurers have a stake in reviewing and possibly tightening their policy language to avoid having to fund defenses of criminals and businesses that enable them.

Trafficking is a $32 billion-a-year (and growing) industry, according to the Polaris Project.  With that kind of money involved, cases like these won’t just go away.

Despite Safer Skies, Aviation Claims Rise: 
What’s Up With That?

 Flying has never been safer.

You’re more likely to die from being attacked by a dog than in an airline accident (see chart).

Today’s aircraft contain more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

And yet, according to a recent Allianz Global Corporate & Specialty (AGCS) report, the aviation sector’s insurance claims continue to grow in number and size.

The report – Aviation Risk 2020 – says 2017 was the first in at least 60 years of aviation in which there were no fatalities on a commercial airline. The year 2018, in which 15 fatal accidents occurred, ranks as the third safest year ever.

Of more than 29,000 recorded deaths between 1959 and 2017, the report says, fatalities between 2008 and 2017 accounted for less than 8 percent – despite the vast increase in the number of people and planes in the air since 1959.

So, what gives?

Safety is expensive

Some of the reasons for the increased claims are good ones: Safer aircraft cost more to repair and replace when there are problems.

The report analyzed 50,000 aviation claims from 2013 to 2018, worth $16.3 billion, and found “collision/crash incidents” accounted for 57 percent, or $9.3 billion. Now, this may sound bad, but the category includes things like hard landings, bird strikes, and “runway incidents.”

The AGCS analysis showed 470 runway incidents during the five-year period accounted for $883 million of damages.

Engine costs more than the plane

Today’s aircraft contain far more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

“We recently handled a claim where a rental engine was required while the aircraft’s engine was repaired,” said Dave Watkins, regional head of general aviation, North America, at AGCS. “The value of the rental engine was more than the entire aircraft.”

When entire fleets have to be grounded – the report cites the 2013 grounding of the Boeing Dreamliner for lithium-ion battery problems and the more recent fatal crashes involving the Boeing 737 Max – costs can really soar. Boeing reportedly has set aside about $5 billion to cover costs related to the global grounding of the 737 Max.

Even after a fix is found, the task of retrofitting a fleet takes considerable time – and, in the aviation industry, time truly is money.

Liability awards take off

Compounding the claims associated with the costs of safer flight, the report says, liability awards have risen dramatically.

“With fewer major airline losses,” Watkins said, “attorneys are fighting over a much smaller pool and are putting more resources into fewer claims, pushing more aggressively for higher awards.”

Today’s aircraft carry hundreds of passengers at a time. With liability awards per passenger in the millions, a major aviation loss could easily result in a liability loss of $1 billion or more.

CA Workers Comp Earthquake Cat Bond Launched

Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.

This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 — Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.

Artemis blog says:

The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”

The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.

While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.

The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.

An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.

A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.

The report  suggested that the losses would affect 15.6 million employees working during a major earthquake.

Check out I.I.I. facts and stats on workers compensation insurance.