LMUs Spark More Interest Than Sales

American International Group may have the longest track record with loss mitigation underwriting, but the director of the insurers LMU group in New York admits the company has encountered some problems getting customers to pay for its services over the last few years.

John Rudolf of AIGs National Union Fire Insurance Company in New York spoke about the LMU product that AIG pioneered more than three years ago, during the final session of the annual meeting of the Minneapolis-based Professional Liability Underwriting Society held in Chicago last month.

LMUs, an outgrowth of directors and officers liability insurance, are essentially insurance agreements in which insurers agree to provide coverage for lawsuits already in progress, such as securities cases. In addition to securities litigation, AIGs Loss Mitigation Unit will also buy out employment, intellectual property and product liability litigation exposure.

“We live in a world of confidentiality,” Mr. Rudolf said, giving a reason that its difficult to measure the level of acceptance of LMUs. He went on to quote from a handful of press releases issued by companies that have purchased the insurance–citing benefits like the ability to put the distractions of class actions behind them.

“If you look at those quotes, you would think that the level of acceptance is quite high. But in realityour hit ratios are low in comparison to the amount of deals we look at,” Mr. Rudolf said.

Noting that it takes six-to-12 months, on average, to close an LMU transaction, he listed common themes of the insurance deals that die.

In situations where an LMU is being used to facilitate a sale, the insured may not find a buyer, he said. More generally, in other situations, the claimant in the litigation that the insured was looking to buy out might settle the litigation before coverage is bound.

“Even worse,” the client may “end up keeping the risk net themselves,” Mr. Rudolf said.

“How do you prevent a client from asking for a term sheet so that they can go out and try to settle themselves?” he asked, noting that in the process of marketing LMUs, insurers are not just educating clients about the pitfalls they face with respect to pending litigation; they also providing information on potential claim values.

“How do you keep a client taking an LMU thats excess of a retention [from] taking it to the plaintiffs bar and saying, If you dont settle with me below this attachment point, then youre going to have to fight the insurance industry?”

In the next six months, Mr. Rudolf suggested that due diligence, brokerage, underwriting and profit-sharing fees would be used more consistently by insurers across the part of the industry participating in the LMU sector, in order to align interests of clients, insurers and brokers. So “at the end of the day, if we dont end up with a bound transaction, we [will] feel like weve been paid for our service,” he said.

“If I could count acceptance as deals that we lost, I would say that [LMUs have] been very highly accepted. In all those situations, we brought added value to the client,” he added.

LMUs are part of a class of “transactional liability” insurance products that were discussed during the PLUS session. Other products discussed were representations and warranties insurance and tax opinion liability.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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LMUs Spark More Interest Than Sales

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