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IRMI Update—Issue #76

An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
November 4, 2003

In This Issue

Message from the Editor

Colleague,

My last message, on the refusal of many businesses to buy terrorism insurance, drew many replies. I was relieved to learn I'm not the only person who is concerned about this. If you were one of those who replied, thank you for doing so. You can read a selection of the responses we received in this issue of IRMI Update.

If you are an agent or broker facing an impending year-end deadline to renew your license, you might want to consider one of the continuing education (CE) options IRMI offers. First, of course, is the 23rd IRMI Construction Risk Conference, which is only a couple of weeks away. In most states, you can earn up to 21 hours of CE credit by attending. In addition to the learning experience, you will also benefit by networking with more than 1,000 other insurance professionals and construction risk managers. See the Agents and Brokers CE Credit chart to see how much CE credit your state granted.

Another option is our online CE course offerings, which we make available year round in conjunction with WebCE. IRMI has authored seven high quality commercial lines courses that are available in most states and three personal lines courses are coming soon. In addition, many more property-casualty and life-health courses authored by WebCE are available. You can quickly and easily download the course materials or order printed copies from our Web site. Online testing is offered in most states or you can take a pen-and-paper test. And the pricing is incredibly low; you can generally get all the CE credit you need to renew your license for under $50. To learn more, go to the training & CE section of IRMI.com.

Thank you for subscribing to IRMI Update and the confidence you place in our company. I hope to see you at our conference in Chicago in just 2 weeks.

All the best,

Jack

Jack P. Gibson
President
IRMI

Sponsor News from AAIS

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Risk Tip

Protect Property Owners from Dry Cleaners' Pollution Exposure—While dry cleaning operations can be found in almost any strip shopping center or other retail location, they pose an environmental threat that far surpasses almost any other retail business of similar size. Most dry cleaners use a solvent called Perchloroethylene, or Perc, which is toxic and a known carcinogen. Perc is heavier than water, and any spill or release can result in cleanup efforts that are both difficult and expensive. Dry cleaners also present a pollution exposure from solvent laden air filters, chemicals, wastewater storage and disposal, leaking containers, and other related activities—all part of the dry cleaning process.

Unfortunately, most dry cleaning operations are small businesses with limited resources to pay for a significant pollution incident. Further, almost any businessowners policy (BOP) or commercial package policy excludes pollution incidents. Even BOP products targeted to dry cleaners offer only limited pollution coverage (e.g., $10,000), which would be virtually worthless in the event of a pollution incident requiring professional remediation.

To protect property owners, risk managers of lessors should consider requiring that dry cleaner tenants purchase environmental liability insurance to cover the pollution exposure. This requirement should be stipulated in the lease, and the property owner should be named as an additional insured. Insurance policies have been developed that specifically address the pollution exposures of dry cleaners—with coverage and high limits that are appropriate for the risk. These policies are reasonably priced, although many dry cleaning operators will not voluntarily purchase the coverage.

The risk manager or agent for the property owner may need to direct the dry cleaners to the markets offering this coverage. Many large property owners are now doing exactly that, advising their lessee on the coverage to purchase and directing them where to acquire.

By: Ron Tursovsky CPCU, AIT
Account Executive
Intercorp, Inc.
E-mail: rdt@Intercorpinc.net
www.intercorpinc.net

Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. We'll give you credit for your contribution.

New Expert Commentary

There are now 471 articles on IRMI.com, and many more are in production. Below you'll find summaries of some recent additions with links to the articles.

IRMI Online

What's New—We have recently updated IRMI Online to include the latest issues of our newsletters, The Risk Report, Captive Insurance Company Reports, and Financing Risk & Reinsurance, as well as supplements to a number of the reference manuals. If you subscribe to IRMI Online, please click below to go directly to a summary of the new issues and information with direct links into the publications.

IRMI Construction Risk Conference

Make Your Hotel Reservation with Your Conference Registration—IRMI's room block at the Sheraton Chicago Hotel and Towers in conjunction with the 23rd IRMI Construction Risk Conference is fast filling up. To ensure you are included in the IRMI room block, please register for the Conference and complete the hotel reservation information as soon as possible. Special hotel discounts are available. Call Campbell Travel at (800) 501-2570 (in Dallas (972) 716-2570) for hotel options and room rates. Click here to register.

IRMI Products & Services

New Terrorism Book from IRMI—Terrorism Insurance: What Risk and Insurance Professionals Must Know is IRMI's latest softbound book for the industry. Written by the IRMI editorial team along with guest contributor Kathryn Westover, this book provides a concise but thorough explanation of the state of terrorism insurance in the United States today. Ever since September 11, IRMI research analysts have closely followed terrorism developments affecting the industry, from broad exclusions, to the Terrorism Risk Insurance Act (TRIA). Now all that research can be yours, consolidated into one readable and affordable reference.

Training & CE

Time Is Running Out To Get 2003 CE—If you're still scrambling to fulfill your continuing education (CE) requirement for 2003, IRMI has the answer with online courses that are easy to take and informative as well. One new course is IRMI Commercial Auto Insurance, which provides an introduction to commercial auto insurance, focusing on the standard coverage forms developed for this line by Insurance Services Office, Inc. (ISO). It examines some of the motor vehicle statutes, the public policy issues behind them, and their effect on various types of commercial auto coverages. For more information or to order one of these or other CE self-study courses, see the Training and Education section of IRMI.com.

Your View—Terrorism Coverage

In IRMI Update 75, Jack Gibson expressed concern over the apparent low purchase rate for terrorism insurance and asked for your views on the matter: are businesses buying it, is the pricing reasonable, what should agents recommend, should insurers make it a mandatory peril to get a spread of risk and reduce adverse selection? We received many informative responses, several of which are reproduced below. Some have been edited for length.

  • My agency is not offering terrorism as an optional coverage. We include terrorism coverage in every proposal and policy just as fire, wind, vandalism and other perils are included. We don't sell insurance without terrorism coverage....

Even an attack in another city, 100 miles or more, could impact one of my clients. I just renewed a large manufacturing client whose biggest customer is one of the largest defense contractors in the United States. My client has contingent business interruption exposures. If my client's customer was "hit" by a terrorist act, the result would be financial disaster for my client (in the absence of terrorism coverage)....

We should all recall the time many years ago when only fire and lightning coverage and, later, wind coverage were available. The perils being insured were those that presented a catastrophic exposure. Later, as the population grew and society changed, we were exposed to an ever-increasing array of perils that eventually became the "norm," such as vandalism, theft, etc.

The U.S. Government established the Flood Insurance Program because of the catastrophic exposure and lack of insurance industry willingness to assume flood risks. Now we are faced with the new exposure of terrorism and, again, the United States has stepped up to the plate, only this time as a partner (albeit the "big" partner) with the insurance industry to offer this coverage.

My largest business client is owned by a person whose residence is on the coast. That individual has flood coverage on his residence through the National Flood program and excess flood in the specialty market. I would not consider flood coverage an "option" for his residence nor would I consider terrorism coverage an "option" for his business. The primary difference between terrorism and other catastrophic exposures, such as flood, earthquake, hurricane, tornado, etc., is that a terrorist act is unpredictable. The exposure is as real as any other.

—John DeLoach, DeLoach Insurance Services, Inc., Tallahassee, FL

  • Most of my clients are rejecting terrorism coverage in an attempt to cut their insurance costs. I do not think the premiums are out of line for this coverage; however, it is not consistent from one carrier to the next. Our agency never recommends to the client that they cut coverage to save money. I always recommend it, but most choose not to keep it.

—Greg Whitlock, Jim Anderson & Co., Lawrenceville, GA

  • I agree that a broadly defined terrorism endorsement should be included as a mandatory peril in property coverage. I have long thought that the perils of flood and earthquake should have been included. In 30+ years as an underwriter, agent, and broker I have seen the federal government respond to one Midwestern flood after another that could have been insured if the risk had been spread economically over the whole country.

I would add whatever weight my opinion has to any activity to include terrorism as an automatically insured peril and stop the same kind of insurance roulette that has occurred in the flood and earthquake area.

—William Brookshire, SR VP Marketing, Rebsamen Insurance, Inc., Little Rock, AR

  • We too are concerned that so few people buy terrorism coverage—hardly anybody does down our way. But in their defense, the carriers are all over the board with this, and there is no consistency. That makes for a tougher sell in areas where people think, "It can never happen here." However, I have found some success in pointing out the "Failure to Maintain Insurance" clause in many D&O policies. Could a D&O insurer come back and deny coverage since the insured elected not to buy terrorism coverage which was readily available? That is, they failed to maintain this insurance? I bet they could. And they would. So, based on this, more of our insureds buy the cover. We do need to make this coverage mandatory. For us, if the cost is minimal, say, under $100 for a line of coverage, we often make the decision for the insured and just include it in the quote/proposal and say they have the coverage. We feel it is our responsibility as a broker.

—Ray Klembith, Summit Global Partners, Austin, TX

  • Century Surety Company charges 4 percent and makes it mandatory. I think that is absolutely the smartest move. As a surplus lines broker, I do not have access directly to the insured to make recommendations, but have been recommending to the agents that they sell the terrorism coverage. Pricing is all over the board from the max at 10 percent of premium subject to $250 minimum to less than 1 percent of premium.

Century Surety is the only carrier in my stable making coverage mandatory, and it isn't slowing down sales at all. We get a lot of grumbling that the agents wish they could waive it—but they are grumbling with bind orders so I think this approach is not hurting anyone. On the contrary, it is helping the insured and the carrier to spread the risk. What really concerns me are the agents that are successfully selling a monoline policy with Century Surety—including terrorism—and also a monoline coverage line with another carrier that waives terrorism. And the agent doesn't understand the increase in potential E&O with this approach.

—Tracy Engel, London American General Agency, San Diego CA

  • As to TRIA and whether or not coverage should be mandated—I feel that once again the U.S. Government missed the boat entirely when they "mandated" insurance carriers provide the coverage, and then left them to figure out how they were going to rate and charge for a coverage that had previously been excluded. If the government had gone about it in a similar manner as how FEMA was originally developed, come up with "Special Hazard Zone" modeling, community participation, even a participating government insurance program especially for the hazard of Terrorism—then not only would the carriers have a clearer idea of a justifiable rate structure, but the policyholder would be able to understand what their particular needs would be for this coverage.

—Robyn Burgess, Van Gilder Insurance Corp., Denver

  • You put it right—I think clients have been lulled into a false sense of security in the absence of any terrorist acts, particularly in urban centers, hence the decision on the part of most buyers not to purchase terrorism coverage. I guess the fact that TRIA passed at all is a good sign. Our firm handles a lot of New York real estate clients, and we have found that they normally will not purchase coverage, regardless of cost, if they are located above 60th or 70th Street, but the purchase rate downtown is greater. The fact that overall property rates are declining is a good sign and may result in more clients purchasing coverage. Then, of course, there is the issue of whether clients' banks are requiring purchase of "all risk" coverage, which basically requires purchase of the terrorism option.

In my opinion, the coverage should be mandatory. This would put more money in the till in the event of future terrorist incidents and would take the option out of hesitant purchasers' hands. TRIA expires in 2005, and it remains to be seen what will happen after that, whether we have another incident or not.

—Robert C. Meder, Vice President/Sales Manager, Kaye Insurance Associates, Inc., New York

  • I don't necessarily agree to make terrorism a mandatory peril. Most of the clients are purchasing the coverage because the premiums are certainly low enough.

One way to sell the coverage would be to remind clients that they may have a credit line against any business property, or a mortgage on buildings that the financial institutions require the customer to purchase "all risk" physical damage coverage and this would mean including terrorism.

—Louise D. Neigel, CIC, The Pilgrim Organization, Lyndhurst, NJ

  • Most of my agents' clients are not buying the coverage. Some companies are only charging 3 percent of the premium for the coverage, which is not expensive, but they are still not buying. I don't think it has anything to do with the price. People don't feel the need.

—Lynda Parry

  • I think making it mandatory and spreading the risk on the surface sounds like a good idea. As an agency practice on the smaller accounts, we do not give our insureds a chance to reject the coverage. We do allow them once the charge exceeds around $1,000 or so if it represents a large percentage increase in their overall premium. Our advice is always to accept it, because you never know what can happen, just ask New York.

—Joey O'Connor, Eustis Insurance & Benefits, New Orleans

  • Clearly the companies are overpricing terrorism coverage and, as a result, insureds are not buying the coverage. If the industry got smart and priced terrorism coverage reasonably, I think 80 to 90 percent of commercial insureds would purchase the coverage.

—David J. Skolsky, CPCU, Insurance Analysts & Consultants, Avondale Estates, GA

  • Main issue I have is regardless TRIA, Non-TRIA, stand-alone, US, WW, etc., is that NBC "nuclear biological and chemical attacks" are excluded under property policies. NBC threats are what we hear daily about. We need all terrorist attacks covered. An anthrax attack would not be covered. TRIA may not exclude NBC, but the property contracts do.

We did elect this year to purchase TRIA and Non-TRIA this year as premiums were reasonable from our new property insurer, FM Global. NBC is not covered.

—David Kervin, Tech Data Corp., Clearwater, FL

  • Regarding terrorism coverage, you are correct in your assessment that premiums are all over the board. I recently had a company that wanted to charge my condominium association client $900 for terrorism coverage on their earthquake policy. It appears to be a way for companies to pad their bottom line.

—Gary M. Pehaim, CIC, Pehaim & Snipper Insurance Services, Inc., San Diego

  • Our head office is located in Edmonton, Alberta, Canada. While the threat of terrorism may not be as great here, it still exists. We should consider adding the peril of terrorism as a mandatory coverage in light of the apathy in purchasing this coverage when given the choice. The rate should be a minimal rate, say .005 and subject to a $2,500 deductible similar to flood damage here in Canada and .01 subject to $5,000 deductible for higher risk targets. This is no different than the current earthquake coverage pricing in Canada. More and more clients are becoming reluctant to purchase the coverage in Alberta, now that it's actually being charged for in the hard market, and the cost in the high risk zones in British Columbia has increased dramatically while capacity shrinks. If the cover were added as suggested above on the terrorism issue, it would be affordable for everyone, insureds and insurers alike. Spread of risk—what a concept!

—Doug Davis, CIP, CRM, Vice President, Phoenix Insurance Group Edmonton Inc.

  • Jack, as TRIA does not cover acts committed by domestic terrorists, such as the Oklahoma City bombing, and has several other coverage holes, many people see no real solution. I recommend that they set up an offshore captive and fund it for future events.

—Michael R. Mead, CPCU, President, M.R. Mead & Company, LLC, Chicago

  • It never ceases to amaze me how our industry continues to make the same mistakes. We still have not figured out that most insurance coverage being sold is a socialistic product in a capitalistic society. By allowing the capitalistic freedom of choice to purchase or not to purchase, the insurance industry is basically allowing itself to be "selected against," which in my underwriting days was considered a "no, no." Just like several other coverages (example D&O, EPLI) that do not have much spread of risk and where the industry is selected against, the exposures are not spread (law of large numbers), and thus the premium costs per unit will be high.

That said, what is right or wrong, in most cases, depends on one's position. Should tax payers be forced to pay taxes to support the Terrorism Act so building owners in New York can afford insurance? Or should lenders be force to make decisions to loan money, or not, to those with greater exposures? I guess I am glad these type of decisions are made by people smarter than me... or is it just that the golden rule applies here, i.e., he who has the gold, rules?

—Jim Sammons, VP, Guaranty Insurance Services, Inc., Austin, TX

  • It is a cost/benefit issue dependent upon the attractiveness of your enterprise and its vulnerability to attack. A vulnerable facility in an unattractive location—i.e., low impact in the event of a terrorist attack—may not decide to purchase at current pricing and definitely shouldn't have in last year's environment....

I contacted a broad spectrum of entities in the local marketplace. Of the 17 response, 12 have some coverage; 6 have some level in their primary general liability (little or none in excess layers); 11 have TRIA and domestic coverage in their primary property policies; and 2 have stand-alone full property coverage....

Most seem to have analyzed the issue and elected to protect their company's assets, but do not perceive much third-party liability exposure....

—Michael F. Grace, ARM, CPCU, Risk Manager, Gary-Williams Energy Corporation, Denver

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