Underwriters Warned Of Tricks

Underwriters Warned Of Tricks

By E.E. Mazier

NU Online News Service, March 26, 10:43 a.m. EST?Business owners are trying every trick in the book to outwit underwriters and shift their business risks into their insurance programs, an industry expert has warned.

Richard L. Thomas, chief underwriting officer for the Domestic Brokerage Group of AIG, in New York, made that observation as guest speaker at the New York-based Conference of Special Risk Underwriters last week.

Speaking on the topic "Foreseeing the Future, and Other Underwriting Skills," Mr. Thomas said at least before Sept. 11, risk managers' definition of "enterprise risk management" had been "the global view of how to protect the corporation's balance sheet."

But now, he said, he is seeing evidence of "a creeping element'' of more and more companies looking to structure their insurance programs to pick up more of the business risk.

The problem is that if underwriters are unaware this is happening, they may not know how to evaluate and price a risk properly, "and then later we get surprised by it," Mr. Thomas said. This in turn could lead to huge payouts by insurers, he added.

Another situation in enterprise risk management structures that he noted is that businesses are putting all of their coverages such as property, casualty, management liability and products liability in one package with one limit.

Because of the difficulty of perceiving the types of loss that might result from such diverse lines of coverage, Mr. Thomas questioned the ability of the excess underwriter to price such exposures properly. Improper pricing in turn could mean substantial and unanticipated exposure for excess insurers once the lower levels of coverage are exhausted, he warned.

Even when insurance programs are not being restructured, many businesses are bringing creative lawsuits to convince courts to find coverage under the existing policy language.

Mr. Thomas called this tactic of plaintiffs' attorneys the "cruel and unusual punishment" of policy language.

One example he cited was the Y2K cases in which policyholders tried to find coverage for their computer remediation efforts under the "arcane" sue-and-labor clauses of their commercial liability policies.

The sue-and-labor provision, born in the ocean marine policies of the old seafaring days, was originally designed to encourage policyholders to minimize loss by protecting cargo from further damage on ships hit by storms at sea.

Mr. Thomas noted that a number of these sue-and-labor Y2K cases had been brought by some of AIG's oldest and most valued customers.

He reported that 45 such cases had been brought against AIG and that 44 of these had been disposed of without payment. In the 45th case an appeal of a summary judgment granted in AIG's favor is pending.

Another emerging trend, Mr. Thomas said, is the attempt to find coverage for a business risk under the "advertising injury" provision of commercial general liability policies. An advertising injury is libel, slander, an invasion of privacy, piracy or misappropriation that occurs in the course of advertising activities and that results in loss to another party.

He noted that lawyers are turning to this provision when coverage cannot be found under the bodily-injury or property-damage provision of a business' policy.

Next, Mr. Thomas said that the world of e-commerce is creating a "tremendous new array of exposure."

Several insurers are developing new products specifically to address e-commerce exposures, he said.

While this is a good thing, Mr. Thomas said, it is having an unintended effect. When a loss occurs, business owners who balked at paying for separate e-commerce coverage are trying to recover under their comprehensive general liability policies --or "legacy insurance contracts," as Mr. Thomas characterized them.

"The very fact that we have more fully defined exposures under e-commerce [policies]? will be the springboard for a number of attacks against legacy contracts," Mr. Thomas suggested.

He also warned of financial guarantees that masquerade as surety bonds. Under bonds that act as financial guarantees, the surety frequently waives any defenses to claims against the bond, a situation Mr. Thomas found untenable for any insurer.

"We've seen a number of these [claims] in recent months, and the people bringing them to us are getting very creative in finding ways to disguise them and make them look like something other than a financial guarantee," he said.

On the issue of water-caused mold damage claims, Mr. Thomas declared that "the only thing they're trying to do with mold today is scare you into paying big bucks as part of the award."

Science hardly supports the "hysteria" surrounding claims that exposure to mold causes severe physical harm, he said.

When dealing with mold claims underwriters have to keep their wits about them, Mr. Thomas advised.

In his view, mold damage is primarily "a Texas homeowners problem" because the regulatory scheme there mandates particular wording in homeowners' policies that allows for such claims.

"The Texas homeowners form is one of the few property forms in existence that doesn't require homeowners to maintain their premises, which is just outrageous." Mr. Thomas declared.

"Unfortunately, some of these concepts migrate and we don't always have judges who can actually read policies," he cautioned.

Mr. Thomas said underwriters must exercise a high degree of discipline because there is going to be more challenge than ever before to really understand product, the scope and nature of coverage, and "the threats that are out there."