From Levees To Nudist Camps, E&S Writers Take On Most Unusual Risks

As the nation nervously looked on, the massive storm surge caused by Hurricane Gustav topped--but did not breach--the weakened New Orleans levee system last year. That was a huge relief not only to owners of homes and businesses in the area and their insurers, but to one specialty underwriter on the hook for an unusual related risk as well--the professional liability of architects and engineers in charge of fortifying the protective walls.

Mark Henderson, vice president of Markel Shand Inc., watched with concern for the safety of those in New Orleans, but also as someone with skin in the game--an underwriter insuring architects and engineers who have been rebuilding the levees that ruptured during Hurricane Katrina in 2005, flooding The Big Easy.

While the repairs to the levees are incomplete--and thus the firms insured by Markel might not have been legally liable even had the levees failed during Gustav--Mr. Henderson said another catastrophic flood inundating New Orleans would have been so problematic from a claims standpoint that the company and its policyholders might have decided they had to tender the policy limit.

And so Mr. Henderson had good reason to exhale an extra sigh of relief when the levees in fact held during Gustav.

Mr. Henderson said that after Hurricane Katrina struck the Gulf Coast, many standard insurers and even E&S carriers were reluctant to write anything that had to do with the New Orleans levee system.

But he said Markel has now written professional liability coverage for architects and engineering firms that have been involved in designing repairs of the levees for two years. "I think we were the only ones that quoted it," Mr. Henderson added.

He noted that sometimes writing risks just after there have been problems can work in a carrier's favor, since the underwriter knows there will be significant energy invested in fixing what went wrong.

In the case of the levee system, Markel was satisfied with the top-notch expertise of the consortium of firms involved in the rebuilding. The Army Corp of Engineers is also overseeing the project, and Mr. Henderson said that Markel made sure it was receiving premium relative to the high risks involved.

The company, he said, felt that the odds of everything that would have to happen to cause a loss were very small indeed.

Those odds, though, seemed a bit larger when news organizations were broadcasting video of wind-driven water crashing into the levees during Gustav. "It's a nervous time for underwriters when any impending weather situation is even brewing, much less when you get to the point where actual water is shown on TV going over the tops of the levees," said Mr. Henderson. "At that time, you can really just hope for the best."

As for the progress being made on the repairs to the levee system, Mr. Henderson said he recently read an article passed along to him by the wholesaler on the risk, reporting that repairs are ahead of schedule and going well.

For excess and surplus lines carriers and their wholesale and retail brokerage representatives, insuring firms that repair the New Orleans levee system is but one among many unusual risks crossing their desks.

Some, such as insuring unique recreational aircraft, involve inherent risks that make them obvious prospects for specialty players in the E&S markets.

Others, such as insuring goats hired to graze in fields for the purposes of trimming the area and removing weeds, are seen as relatively safe bets but simply outside of the underwriting realm and comfort zones of standard companies.

Chris Behymer, vice president of marketing at Markel Southwest Underwriters, spoke of some risks that fall into the latter category.

One was a camp that, in many respects, operated similarly to any other facility that would probably find coverage in the standard market, offering a variety of ordinary, low-risk activities, such as boating, bingo and movie nights.

There was an additional twist, however--as this was a nudist camp, which made it an unknown risk for standard carriers, and so it ended up being placed in the E&S market.

Mr. Behymer said that, from Markel's perspective, there was no real problem underwriting the exposure--so to speak. Indeed, he said it was not much different than for a regular camp.

"I think some [standard carriers], their underwriting appetite is pretty well controlled," according to Mr. Behymer. "In our mind, it's just like a regular camp."

He added that "of course, you hear the jokes about, 'Well, I'll have to go out and do the inspection.'"

Not able to resist a joke of his own, Mr. Behymer said, "We didn't really see much of a problem [underwriting the nudist camp risk], and we certainly wouldn't want the insured to go bare, without any insurance."

Another risk that Mr. Behymer said is relatively safe but unique enough to end up in the E&S market involved a man who owned goats that would be hired by others to fix up fields.

Mr. Behymer said customers would call the insured, and he would bring his goats to the field and let them graze there for a day or two. The goats would trim the field and eat unwanted weeds as well.

While Mr. Behymer said he does not see a lot of significant risk for this business, he did discuss some potential losses that could occur. A goat biting a person was one possible exposure mentioned, in addition to a stray goat causing a vehicular accident.

Sticking to the animal theme that has dominated previous NU articles on unusual risks and claims, Mr. Behymer said he had seen an account years ago that involved cattle. One of the cows walked in front of a truck, and the vehicle was damaged. Mr. Behymer speculated that a similar event could occur with the goats. He said overgrazing might also cause a loss, where the goats could possibly eat plants over a property line.

In general, though, Mr. Behymer said the working goats represent a relatively benign risk that standard companies avoid essentially because it is different from exposures they are used to.

Another unique risk that is clearly the domain of E&S carriers is liability and physical damage coverage on a recreational aircraft--called a "powered parachute."

Chris Zoidis, associate vice president of wholesaler Burns & Wilcox and director of SRD-International, said such vehicles are similar to an ultralight aircraft--which, he noted, is "like a mini go-kart--there's not much more than a seat, and it has wings across the top, and it's really powered by a small propeller in the back."

Ultralights, he said, are classified as a type of aircraft. But a powered parachute, Mr. Zoidis noted, is an ultralight aircraft without wings--featuring a parachute on it instead.

In addition, the seat is smaller, and the rest of the craft is lighter. Mr. Zoidis joked: "I picture it as a kitchen chair attached to a parachute that has a lawnmower engine on the back with a propeller."

The powered parachute, for insurance purposes, is not even considered an "aircraft," according to Mr. Zoidis.

"Traditionally, you would go to the aircraft market for [insuring] something like that, but they would not classify it as an aircraft because it didn't have any wings, and it didn't have large propellers like a helicopter," he noted.

Mr. Zoidis said Burns & Wilcox was able to secure coverage through a Lloyd's of London program, on the condition that insured vehicles only come from four major powered-parachute manufacturers.

He said Burns & Wilcox is comfortable with the maintenance programs in place at these manufacturers--which also, offer safety courses on how to operate the recreational craft.

Currently Burns & Wilcox writes around 200 of these risks and covers both liability for the operator as well as physical damage for the craft.

With respect to underwriting, Mr. Zoidis said powered parachutes are written similarly to ultralight craft or hang-gliding operations. The difference, he said, is that powered parachutes are largely individually owned, rather than rented out. They are usually owned by people who use them frequently, Mr. Zoidis explained.

Experts who spoke with National Underwriter cited many other unique risks they have handled.

Mr. Behymer said he has seen liability insurance written for an operation that involved placing cameras in the woods on state land in an attempt to locate Bigfoot.

Mr. Zoidis recalled insuring a $1 million contest held by a large fishing and hunting retailer, where contestants were challenged to catch a world record bass in the United States in a three-month time frame, so that the retailer could display the live bass in a tank at a store (nobody was able to claim the prize).

For all unique risks, the experts said wholesalers are essential to the underwriting process. Mr. Zoidis said E&S carriers look for the wholesalers to get the pertinent facts about a risk, and then present the exposure to the underwriters in a way that shows how it can be properly insured.

Mr. Henderson said wholesalers are highly attuned to the markets in which they work, and they are able to gauge the true appetites of the surplus lines insurers they work with.

The carriers that ultimately agree to take these unusual risks are, after all, "integral to the process," he added.