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TRENDS IN INSURANCE CLAIMS.ppt

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					         TRENDS IN INSURANCE
               CLAIMS
WILLIAM N. ERICKSON                      ANA M. FRANCISCO, ESQ.
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.   ROPES & GRAY

BENJAMIN HINCKS, ESQ.                    JONATHAN I. MISHARA, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY      FM GLOBAL
 AND POPEO, PC
               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    Slightly   About the    Slightly    Much
                                       More     More       Same         Fewer      Fewer
                                       Than     Than      as Usual    Than Usual   Than
                                       Usual    Usual                              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    Slightly   About the   Slightly   Much
                                       More     More       Same        Fewer     Fewer
                                       Than     Than      as Usual     Than      Than
                                       Usual    Usual                  Usual     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     Slightly   About the   Slightly   Much
                                         More      More       Same        Fewer     Fewer
                                         Than      Than      as Usual     Than      Than
                                         Usual     Usual                  Usual     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    Slightly   About the   Slightly   Much
                                         More     More       Same        Fewer     Fewer
                                         Than     Than      as Usual     Than      Than
                                         Usual    Usual                  Usual     Usual

Number of new claims                       1        2          0           0         1

Claims that have coverage problems         2        2          0           0         0


Claims that have measurement               0        4          0           0         0
problem
            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 “claims-
  made” 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?

				
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