The E&S/Specialty World Before AIG's Bailout

The article–"New Product Tackles Uninsured Risk Of Coverage Denials"–in our August edition was my personal favorite this year, and not just because the idea seemed so unusual when the initial press release crossed my desk.

The cogent arguments presented by a lawyer, a wholesaler and a managing general underwriter to explain the need for their new offering, and their honesty in responding to skeptics, clearly set this particular article apart.

Mr. White reported that some retail agents were saying: "This is ridiculous. Why would I go in there and tell them I'm selling them coverage with a great carrier, and then tell them they need to buy this?"

Thus, he noted that in spite of the clear need for a resource to deal with the risk of coverage denials, agents were initially slow to embrace the concept of insuring the cost to bring litigation against carriers they represent.

Offering a counterargument, he said, "If everybody is honest about it, then it's a good product. If you want to have your head in the sand and pretend this doesn't happen, then you're never going to sell any."

He added that "it's just very na?ve for someone to think claim denials don't happen. They do happen–and they're challenged every day by coverage attorneys."

Further proving that product development wasn't a dying art in 2008, our newsletters periodically reported on new offerings and enhancements, including a few more that offered comic relief in an otherwise gloomy year.

D&O coverage for doggie daycare centers from Zurich North America and Fireman's Funds' enhanced yacht and watercraft coverage adding protection from total loss resulting from vermin damage come to mind.

As for the latter, the company said vermin damage is of particular concern in the Pacific Northwest, where muskrats and otters have been known to chew through exposed rubber portions of engine exhausts–not particularly funny to boat owners in the Northwest, of course, but a little out-of-the-ordinary to us city-dwellers back East.

If the image of pesky otters wasn't memorable enough, one that certainly stood out for regular readers of our newsletter and magazine was the jaw-dropping photo that accompanied the NU magazine version of our February article, "E&S Brokers, Insurers In Event Niche Tackle Mid-Air Dining, No-Show Celebs."

"What are the risk factors involved in suspending a dinner platform in the air with a crane so that guests can enjoy a meal high above the Earth?" asked reporter Phil Gusman, going on to describe a special event depicted in the photo and the coverage in the works at MGA Burns & Wilcox at the time. (The photo is attached in a link below this article for those who didn't see it the first time around.)

Our newsletters reported on a number of D&O and securities class-action trends during the year, but one report that was unique to NU among insurance magazines was a June feature on coverage battles that have emerged over excess-layer payouts.

"Should an excess carrier pay out anything on a directors and officers liability claim if the primary carrier below it has not paid out its full limit?" the lead paragraph of our article asked.

"While courts are ruling in favor of excess carriers on the seemingly uncontroversial question, excess insurers say settlement deals worked out between primary carriers and policyholders without their consent are increasingly forcing them into unnecessary battles with policyholders," we explained in our article–"D&O 'Workouts' Leave Insureds Fighting Their Way Up Towers Of Coverage."

"Our policy should only respond when the underlying is exhausted, not tired," said one excess market participant, John Kuhn, CEO of AXIS Professional Lines, in one memorable comment quoted in the article.

Mr. Kuhn and other excess carriers described concerns they have with an increasing number of deals known as "workouts" or "shaved limits deals," in which insureds contribute to large settlements of D&O claims. The insureds agree to pay a percentage of their limits of liability–often in recognition of the fact that some portion of their losses is technically excluded under their policies.

Brokers–such as Kevin LaCroix of Oakbridge Insurance Services in Beachwood, Ohio–offered counterviews on behalf of policyholders.

"They [excess insurers] undertook to provide insurance attaching at a certain level, and if the amount underneath was paid solely by insurance or by a combination of insured and insurer, [then] what difference should it make to the excess carrier?" he reasonsed.

As with many other problems detailed in E&S/Specialty Lines Extra this year, experts debated solutions to the problem. We presented one potential solution in a sidebar piece titled, "Is Quota-Share The Answer?"

With their sights set on the toughest risks–those that wouldn't attract competition from standard markets during a soft market–several E&S insurers and brokers started eyeing the growing medi-spa industry segment, and reported their participation in the liability insurance market serving that segment to NU reporters on a regular basis over the last two years.

"All of a sudden, there's almost a herd mentality involved with all these [insurance] companies getting in almost overnight," Edward Kuhn, owner of Liability Insurance Solutions, a Chicago-based agency, reported in one of our April articles delving into this class of business.

Medical spas offer everything from botox injections and fat-dissolving treatments, to alternative medicine and nutritional guidance, our article explained. Insurers pouring into the medi-spa liability market need to be wary of the potential for seemingly harmless cosmetic procedures to disfigure underwriting results with claims that can range from laser burns to fatalities, experts warned in our report.

One such expert, Kathleen Johnson, senior claims attorney for Deerfield, Ill.-based Shand Morahan & Company, a unit of Markel Corp., provided an eye-opening simplification for insurers to consider.

"You're injecting people's faces with poison" during a botox procedure, she said, referring to the fact that the injected substance–botulinum toxin Type A–is a nerve toxin derived from a bacterium.

"It is a paralytic," she noted.

While insurance programs for medi-spas and other allied health risks continued to be hot in 2008, the hottest segment of the E&S/specialty market may well be the program business arena itself.

"While the number of program carriers expanded to at least four dozen in 2008, executives of program divisions say there's no shortage of program prospects coming their way to match the list of insurance suppliers," we reported in the opening paragraph of an October newsletter article.

"We're not going to suffer a lack of opportunity," said Scott Reynolds, president of United National Group in Charlotte, N.C., one of 48 carriers listed among current carrier members of the Wilmington, Del.-based Target Markets Program Administrators Association.

In the article, representatives of United National, Markel Shand and American Safety Insurance mapped out the individual routes they take to drive past hundreds of program opportunities to find the handful they'll choose to sign onto.

Giving equal time to program managers in an earlier edition in May, program administrators expressed their concerns about carriers in our report from the Target Markets Program Administrators Association midyear meeting, titled "Program Managers Worry About Lack Of Management Stability For Carrier Partners."

"Carrier executives playing musical chairs are a bigger concern for program managers than those who drag their feet awhile before signing on to a new program," our article said, describing a concern about revolving-door personnel at carriers that overshadowed any worries they might have about an insurer's ability to give quick responses on new programs.

When we originally conceived of the idea of an E&S/specialty lines newsletter and first started planning our new venture in late 2007, there was one topic we didn't expect to come up as frequently as it did at gatherings of E&S professionals in 2008–a topic we might most simply describe as an identity crisis.

"Seeking to shake their 'market-of-last-resort' brand, executives of the American Association of Managing General Agents are redefining the value of MGAs for their retail agent customers and inviting retailers to look to MGAs as their first stop for standard coverage," we reported in an article in June's edition.

Back in March, one of our early e-newsletter articles also reported a similar initiative taking shape at the National Association of Professional Surplus Lines Offices, with the group considering the possibility of putting nearly half-a-million dollars behind a campaign to market the value of wholesale brokers–their access to insurance companies and their expertise–to retail agent customers.

The NAPSLO effort–a followup to a January survey of retail agents–was later scaled down to a more targeted marketing campaign costing closer to $100,000, but maintaining the same goal, we reported in September.

In the June article about AAMGA's initiative, past-president Scott Anderson told NU the association planned to start an awareness campaign designed to improve the image of wholesalers and general agents.

Part of this drive, he said, will involve "getting brand awareness out there–letting them [retailers] know what the AAMGA is."