IRMI Update—Issue #157
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
March 21, 2007
In This Issue
Colleague,
Wow, my comments in the last issue—on the criteria executives should use
in determining whether to settle or fight lawsuits—really hit a nerve. We had
a huge number of responses, many of which are reproduced below. If you were
one of the many who wrote to share your opinion, I sincerely thank you.
Registrations for our spring seminar series are coming in fast and furious.
If you buy, sell, or underwrite insurance for commercial or residential contractors
or developers, the "Construction Defect Risk Management and Insurance" seminar
will give you many new ideas. Likewise, if you manage or insure the risks of
construction projects for which an owner or contractor controlled insurance
program (OCIP or CCIP) might be appropriate, the best practices examined in
"Wrap-ups—Avoiding the Pitfalls" will put you ahead of the game.
Learn more about these continuing education
programs.
I hope to see you at one of these construction risk and insurance seminars.
Have a great day.
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI
Manage the Sources of Risk Management Information
That May Be Discoverable—Recent amendments to the Federal Rules of Civil
Procedure (FRCP) included changes to how electronic evidence is treated in discovery.
Now all electronically stored information (ESI) that may be used to support
a case is required to be disclosed or identified. This would include not only
traditional ESI sources (forensic copies of personal computers, company file
servers, e-mail servers, and backup tapes), but also sources such as Web-based
e-mail, instant messaging, voicemail, internal database systems, and portable
productivity devices (i.e., Blackberry, Palm, and Windows CE-based PDAs).
Risk managers create, receive, and manage various kinds of information that
should be kept confidential, if possible. A substantial amount of this information
is in electronic format. Examples of risk management information it might be
desirable to keep confidential include:
- Risk assessments
- Insurance coverage information
- Loss runs and other claims history, both as to identification of incidents
and their monetary or other resolution
- Pending claims investigation activities, liability assessment, and amounts
paid and reserved
- Risk control inspections
- Post-injury remediation
While considerable attention has been paid to e-mail in electronic discovery,
other sources may have been overlooked. Given the broadened scope of permitted
discovery, risk managers should review all sources of electronic risk management
information that may become discoverable under these new rules and take appropriate
steps to manage and protect that information to the extent possible.
Drawn from
Practical
Risk Management, Topic E-10, Discovery of Risk Management Information.
IRMI Online subscribers
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There are now nearly 900 risk management and insurance articles on IRMI.com.
Below you'll find summaries of some recent additions with links to the articles.
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The Honorable Engagement
Clause—Larry Schiffer explains why reinsureds and reinsurers
have been moving away from incorporating honorable engagement language in
their reinsurance contracts.
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Is Offshore That
Far from Shore?—In his Insurance Industry Market Practices column,
Pete Polstein looks at the movement of insurance offshore.
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When Agents or Applicants
Lie to Insurers—Barry Zalma discusses the case for rescission
when full and accurate facts about the risk are not conveyed to the insurer.
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Not Another Insurance
Gimmick!—Calling hurricanes "floods" and adjusting auto premiums
by credit scores are dubious innovations that strain policyholders' trust,
according to Dr. George Head.
The first IRMI Construction Benefits Conference will be held June 12–13 in
Dallas. A dozen industry experts will lead the one-and-a-half days of practical
strategies for controlling benefit costs. If you do not work with employee benefits
programs, please pass along this announcement. Save $100 with our "early-bird"
discount by registering online before March 31.
In IRMI Update 156, readers were asked for
their opinions on whether executive decisions should be made based on the company's
best interest or the greater good. Below are some of the responses we received.
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As CEO for a major insurer, my first responsibility would be to my company.
Fighting for the greater good is not an option. Those battles must be fought
by companies that can withstand the expense or where settlement would damage
the company's reputation beyond recovery (another difficult assessment),
or by lobbyists and associations.
While my personal belief might be a fight for justice to the death, as
CEO, my job would be survival of the company. Where a decision for the good
of the company conflicts too greatly with my morality, I would no longer
be the best man for the job.
—Ashton Dooley, Professional Underwriters of Arizona,
Inc., Scottsdale, AZ
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In my opinion, doing the right thing always carries a cost. Making decisions
based on a short-term cost/benefit analysis is now a hallmark of American
business and politics. Choosing the lesser of two evils still leaves one
choosing evil. The ultimate cost of doing so leaves one morally bankrupt,
even if financially well off for a time. In America, we are now seeing the
results of this post-modern pattern of materialistic thought played out
in every aspect of our culture. We have always taught our children that
actions have consequences, and that doing the right thing when it is hard
or makes you unpopular is a mark of leadership. Anyone can do the right
thing when it is easy and makes you popular.
The fact that such questions have been elevated to the status of conundrums
is symptomatic of the level to which our society has fallen. "Fighting the
good fight" used to be a no-brainer for Americans. Now we have to ponder
such questions and turn the decisions over to financial formulas or opinion
polls ... a cowardly approach to the honor of leadership. This reminds me
of a prayer I heard once: "Lord send us statesmen and deliver us from politicians!"
—Charles McCoy, Bernard Williams & Company, Savannah,
GA
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You are the CEO of a business that is facing down the barrel of litigation
that could be both costly and precedent setting for your industry. How do
you proceed? As former speaker of the house Tip O'Neil once noted, all politics
are local. So you ultimately have to make the best decision for your business
and your investors. Yet, what you do may create problems for others in your
industry. What to do?
Hopefully, you have a strong industry organization that can work with
you as you consider your options. You may also need to work behind the scenes
(either individually or as an industry) with paid professionals who can
approach legislators to discuss various outcomes. It may be worthwhile noting
that predatory animals generally pick on the weakest of a species, but when
a state attorney general or some similar governmental entity feels there
has been some wrong committed, they generally pick on the largest organization(s).
And if they happen to select your firm, industry implications are probably
going to be a secondary consideration.
Intelligent analysis of any given problem will generally take into consideration
the larger picture, and good senior management would be wise to confront
these situations as an industry problem. And any industry group should recognize
that when they are finished with one firm, they may be coming for others.
I would like to think that AON's Pat Ryan made the best possible decision
in light of the bigger picture. If not, shame on him.
—E. Bernard McGlynn, Jr., Lewis-Chester Associates,
Inc., Summit, NJ
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It is funny that your commentary should appear the
morning after I attended the first session of a five part series addressing
this very conundrum. The 64 thousand dollar question is, "Where have the
moral and ethics gone?" Unfortunately, many corporate executives have misplaced
their sense of what is good for all concerned with what is the most expedient
avenue they can take. Instead of addressing what often are difficult and
complex problems, they pursue the short-term solution you mentioned. Unless
corporate America (I've given up on government) takes a hard look at the
moral principals and ethics that made this country what it once was, we
can look forward to more human secularism and moral decay.
—Michael Sullivan, Sullivan & Associates—Insurance
and Risk Management, Bartlett, IL
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When issues arise that will have a long-lasting affect on the industry
as a whole, upper management must consider the consequences of their actions.
Legal opinions versus stockholders should take precedent.
—Debra VandeWeerd, Nationwide Insurance, Des Moines,
IA
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In a perfect world the greater good should always prevail. However, in
our society, failing to act in the best interest of the organization that
you are charged to oversee has ominous consequences.
—Kevin McEwen, Hillcrest Insurance Agency, Mount
Dora, FL
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CNA Insurance was faced with this same type of situation about 10 years
ago, with asbestos litigation from a $9k policy written 40 years earlier.
Like Aon, CNA looked at the risks, with a good probability of prevailing
on the defense. However, when they looked at the risk of losing, which would
essentially bankrupt the company, and the likelihood of a short-term impact
of decreased writing due to solvency concerns, they settled the case for
over $1B. This decision was a strategic one that made sense for the longevity
of the company, despite the short-term adverse impact. A company must remain
focused on it's long-term goals while they live in the present, short-term
world.
—Troy Kisiel, Control Point Strategies
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Pat Ryan's observations are salient and demonstrate his shrewdness to
deal with an issue and let his company move on. Often, the defense of a
justifiable issue in a public arena, or against a claim from a client does
not produce long-term benefits for the company when it is prolonged and
so many different parties have the opportunity to make it appear questionable.
If the CEO's job is to preserve corporate goals of profitability and continuity,
that tough choice must sometimes be made.
—Michelle Luster, Rudolph and Sletten, Inc., Risk
Manager, Redwood City, CA
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Business decisions to settle generally follow from policy language—ideally
believed to clearly exclude a peril—that, in reality, turns out to "allegedly"
exclude the said peril. We know that the duty to defend is greater that
the duty to indemnify. History has taught us the lesson that so-called ambiguous
policy language equals coverage. Recall the not so absolute pollution exclusion.
Think that "sudden and accidental" meant only unexpected and unintended,
not abrupt in a temporal sense? How about a Mississippi judge finding ambiguity
in use of the word flood?
Financially, if the cost of settling is valued at a fraction of the cost
of defending, then enter into a confidential settlement. While a confidential
settlement may be a fallacy in some cases, it does not lend to the setting
of a precedent on the same level as a court verdict. Choose the "greater
good" when the greater good contributes to your bottom line.
—Michael Biscan, AIG WorldSource, Chicago
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The insurance industry has long been its own worst enemy. I have seen
many claims settled because it would cost lees to pay it than fight. I believe
with those and many other decisions be they prudent for the company at the
time or not have in the long run given insurance claimants in common the
I hit the lotto mentality. Until insurers start taking a stand on what is
right not what is less costly they will follow the old bible adage: If you
don't stand for something you will fall for anything. True leadership means
standing up for what is right and just. When we just pay things to get them
over with and out of the way we punish the policy holders from then on not
just for the moment.
—Bill Huffman, American Family, Loudonville, OH
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Considerations of reputation, integrity with past performance, as well
as current and future corporate objectives must work in conjunction with
cost-benefit considerations. Each individual decision made in our industry
affects the whole. Those aware of the decision have just added experience
to their problem-solving database from which they will draw future decisions.
Each decision reflects and reinforces particular values. When decisions
are made in light of cost benefit only, we can lose sight of objectives.
Are dollars and ethics at opposite poles? Lawsuits may challenge established
norms and practices. While it is important to regularly review and revisit
what we do and why, is it wise to set aside ideology and principle in exchange
for monetary easement? It may work for the present but we have a responsibility
to know it shapes the future.
—Leslie Hacker, Erie Insurance, Peoria, IL
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I think that the greater good of protecting the industry and the customers
for the long term must definitely be considered. This is also called ethics.
To save your company money and hurt society is not a good choice.
—Joe Masterson, Powers and Sons Construction, Indianapolis
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The decision to settle a lawsuit to avoid the costs of defense and loss
of production from involved people or staff is many times done without considering
the overall effects. With today's information readily available on the Internet,
news of many of these settlements spreads far too quickly and encourages
others contemplating actions to file suits. Costs are important to the success
of companies, however, the impact that the easy way out has on society as
a whole should be considered carefully. Creating coverages when they clearly
don't exist only inflates the cost of insurance for the general public and
increases the amount of claims for similar cases falling outside of coverage.
Managing litigation and negotiating costs up-front with counsel is my preferred
way to address these issues.
—Bill Horner, Bowen, Miclette & Britt, Inc., Houston
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Many of us have pondered the same question. Do we have a duty to our
industry, ethically and economically, to consider the consequences when
settling high visibility lawsuits? I believe we do. Not just for the industry,
but for the future of our own business. While AON might have saved money
in the short-term, the settlement and subsequent fallout in the entire industry
has caused some irreversible changes that will effect the way we all do
business. I know it's easy to "armchair" a decision when it was neither
my time or money, however we have a habit in our industry of looking toward
the short-term and we need to get past that and look to the larger picture.
Lawyers have no problem taking contingency fees of 30-50 percent on lawsuits,
how dare they tell us we have no right to profitability bonuses.
—Victoria Dearing, AAI, CPCU, Quirk & Company
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I love the issues that you bring up! You are right, while paying the
claim may save the company money in the short term, the precedent factor
could create a vicious growing tumor in the industry for all companies.
I wonder if some kind of agency could be created within the industry that
these cases would be sent for review, discussion, final decision and possible
arbitration. This would give all insurance companies a say in what is being
set as a precedent in their industry. Maybe they could also have a team
of lawyers funded by the member companies.
—Christine Van Matre, Omnitrans, San Bernardino,
CA
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The decisions regarding settlement of high profile litigation are difficult
ones indeed. However, the insurance industry is never going to prevail on
those claims without merit if it continues to cave in to every high profile
lawsuit and/or class action. The more convenient we make it to settle lawsuits
having no merit, the more volume of lawsuits we will see regardless of merit.
If the industry at least fights the lawsuits without merit, it would be
a great discouragement to those seeking to gain something they are not entitled
to through a meritless lawsuit. Having personally served as an expert witness
in approximately 50 insurance related lawsuits for both the defense and
plaintiff bar, 48 of the 50 lawsuits have settled without ever having gone
to trial. Many were clearly worth fighting for, and some would have established
case precedent law, but the insurance industry and the plaintiffs have settled
in 95 percent of the cases, regardless of merit. I might add this is clearly
a societal problem when any bona fide industry in America is so petrified
of a jury trial, it is paralyzed and simply cannot move forward, particularly
on claims having no merit whatsoever.
On the other side of the coin, I have personally observed that many insurance
claims indeed have great merit as the insurance industry's conduct has fallen
woefully short of diligent and reasonable in many claim situations. To that
end, litigation in many cases is the only mechanism to balance the tables
for those unfortunate citizens that have been mishandled or taken advantage
of. The insurance industry can resolve many of these issues by education,
training, and workforce attitudes that reasonably and fairly interpret policies,
which might include the use of independent claim review methods for many
confusing coverage cases. In conclusion, proper and reasonable policy interpretation
will go a long way to shoring up insurers' reputations and avoid the issue
of future litigation settlement altogether in many cases. High profile litigation
and class actions were not a large problem for approximately 100 years for
the insurance industry until the industry seemingly moved to the current
day position that every claim is not covered and therefore denied unless
the "insurance uneducated" laymen policyholder can interpret the policy
and clearly prove otherwise.
—Eric Elam, Elam Consulting, Inc., Jackson, MS
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It is, indeed, a tough decision whether to settle or not settle a major
suit. This question has touched a nerve that has been raw in some of us
for years in the area of claims settlement as well. Should we settle and
save litigation costs or defend at any cost? The purist in me says to defend
always. Those insurance companies that have taken a "tough" stance and defended
claims they could have settled have gained a reputation among the plaintiff's
attorneys who will think twice about pursuing a lawsuit where there is a
serious question of liability. Those insurance companies have, over time,
reduced their claims costs and increased their bottom lines by doing so.
I applaud those companies who have had the courage to do this, because the
majority of the insurance companies today will not defend a suit, even where
they have a good chance of winning, if they can settle for a nominal amount.
In my opinion, this is not only wrong, but is a large factor in the increase
each year in the number of unfounded suits, congesting the court, and contributing
to the growth in the number of attorneys looking for a new ways to make
their livings.
Admittedly, since it is not my money, it is easy for me to say "defend
it." I can certainly understand the rationale behind the decisions to settle,
but I feel that, had all companies taken a "tough" stand years ago and stuck
with it, we wouldn't be forced to be make near so many such decisions today.
This applies, not only in the area of claims, but in the broader area you
cited in your editorial. It sets a precedent with far-reaching consequences,
and once set, it is hard, if not impossible, to reverse.
In my humble opinion, right or wrong, another precedent has been set,
and we haven't seen the last of it.
—Donald Noah, Wilshire Insurance Company, Lancaster,
CA
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Insurance is a business for profit not a non-profit device for politicians
to fix social ills. The goal of insurance is to make the policyholder whole
for a "covered" loss. If someone does not purchase the proper insurance,
why should the industry be forced to pay for their poor judgment?
I've been in this business for over 35 years and the company executives
never seem to learn. They are making the same mistakes in 2007 that were
made in 1971. They need to fight and win these lawsuits, and then take the
Eliot Spitzers of the world and sue them personally for malicious and improper
prosecution to end this cycle.
—Jim Kahn, Lackawanna Insurance Group, Wilkes-Barre,
PA
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This is a lose-lose situation for the insurance industry. More often
than not, it's cheaper to settle. I speak from experience on this matter
as we are currently in litigation on a case that has cost me over $40,000
to settle a $3,000 matter. I am pursuing my case on principal, but most
insurance companies won't pursue a case based on principal just because
of the costs associated. It's difficult to explain to an insured that the
insurance company's bottom line is more important than the insured's loss
ratio. Since it's not the insured's money on the line, the insureds will
never understand this. I do feel that if we as an industry start to fight
some of the cases where it's clearly obvious we could prevail, in the long
run, the lawyers may think twice before filing that suit. And that is the
end result we want. I do feel it's worth it to pay the money in the short
term to prevail in the long run.
—Donna McCormick, CPCU, AAI, AIS, CPIW, CRIS, McCormick
Insurance Agency, Las Vegas
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I think the only answer to your question rests with the ability of a
company to determine the value of "integrity" and "reputation" when deciding
to resolve a high-visibility suit. I would be interested to see a company
value these considerations, and decide to fight a high-visibility suit.
If the marketplace (both customer and shareholder) agrees with this valuation,
it will be an economically rational decision. Regrettably, I see few companies
willing to test this idea when faced with a Spitzer-like assault in the
future.
—Ron Musto, InterWest Insurance Services, Inc., Folsom,
CA
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Any mid-level accountant can run a cost-benefit analysis, but a top executive's
responsibilities are to show leadership, vision, character, and high moral
content.
—Randy Richardson, Crum & Forster, Dallas
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