IRMI Update—Issue #159
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
April 18, 2007
In This Issue
Colleague,
We introduced the Construction Risk and Insurance Specialist (CRIS™) continuing
education and certification program 2 years ago, and I'm delighted to report
that it is turning into an overwhelming success story. The number of designation
holders recently surpassed 800, and more than 1,500 additional risk and insurance
professionals are currently working toward the CRIS designation.
The CRIS program consists of five core courses covering the essential elements
of risk management and insurance for construction projects. Completion of the
program is a testament to the recipients' knowledge of construction insurance
and dedication to providing professional service to the construction industry.
In support of the CRIS program's relevance, consider that it is recommended
by the Construction Financial Management Association (CFMA) and the designation
has been obtained by employees of contractors, project owners, insurance agents,
brokers, and insurers.
Learn more about the CRIS program or find an agent or broker who has been
certified as a Construction Risk and Insurance Specialist here.
We hope to see you at one of our spring construction risk seminars, perhaps
in Orlando next week. Get details on the locations, dates, and agendas here.
We also recently surpassed a milestone with the publication of the nine hundredth
article on the IRMI web site. The archive of articles, which is available to
you without cost, is a tremendous resource, and we hope you find it useful.
Watch for some exciting changes to IRMI.com in the coming months.
Thanks for subscribing to IRMI Update, and have a great day.
All the best,
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI
Help Management Understand the Value of Full-Time
Risk Management—All organizations manage risk. However, often risk management
responsibilities are informally performed throughout an organization and with
third-party vendors because many corporate managers continue to view risk management
as simply avoiding dangers. So the need for a full-time risk manager may be
difficult to determine.
Typically, senior management will ask at what point a full-time risk manager
is justified. The simple answer would appear to be the size of the organization.
However, the need for full-time risk management is not as much about the size
of the organization as it is about the risk profile of the organization. A smaller
organization can have a complex and time-consuming risk profile that demands
full-time risk management while a larger organization can have a simpler risk
profile that is less demanding.
One scenario that might help give other managers a better grasp of the scope
of risk management is to take the sum of the most critical components of cost
of risk, (a) insured and uninsured losses and (b) insurance premiums, and multiply
them by an estimated potential savings, say 10 percent, that can be expected
from a professional managing these components. Comparing this number to the
cost of having a full-time risk manager may bring into perspective the value
of risk management to the organization.
Drawn from
Practical
Risk Management, Topic A-2, Staffing the Risk Management Function.
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Below you'll find summaries of some recent additions with links to the articles.
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In IRMI Update 158, Editor Jack Gibson described
his biggest pet peeve: when insurers take different positions on the application
of the same policy terms in two or more different (but similar) cases. He asked
readers for their views on the ethical dilemma of this practice, several of
which are reproduced below.
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Jack, your questions are good ones. Unfortunately, there is no simple
answer to your ethics question regarding consistency of policy interpretation.
As a licensed attorney, I litigated policy terms in our state on several
occasions. While consistency of interpretation and application can be readily
achieved in a single jurisdiction, all states regulate contracts differently,
applying a myriad of interpretation principles. What may appear to be factual
similarity of cases can get lost in the interplay of fact and law. That
said, we have a real problem with business ethics in this country, and it
is time we faced up to it. Company CEOs and management must do more to restore
credibility and integrity to this industry by improving accountability and
consistency in business practices. Broad form approaches to policy terms
create vagaries that can be abused. The industry has the power and responsibility
to adopt plain language terms and conditions so consumers clearly understand
their rights and responsibilities. Thanks for raising these important and
timely questions.
—Laurence Hubbard, President/CEO, Montana State Fund,
Helena, MT
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Jack: the first problem was talking to coverage attorneys. They litigate
in different states and will therefore apply the law of the state in which
they practice, regardless of any "nationwide position" espoused by a client.
That said, as a claim professional of 33 years (12 years in the home office
claim department of a Fortune 500 insurance company) and an expert witness
for the past 5, I have on occasion witnessed the same insurer take contrary
positions on the same issue, not just nationwide but within the jurisdiction
of the same state and even the same appellate district. In some instances,
senior management had no idea that its employees were taking contrary positions;
in others, the decision was made at or near the top. Why? Many times it
is lack of training and the failure to transfer knowledge from one generation
of claim employees to another; other times a non-technical person in charge
decides too much money is be paid out and decided to "take a stand." The
result, the more things change, the more they stay the same!
—Charlie Henderson, Principal, Henderson Consulting,
Newtown Square, PA
-
Jack Gibson's commentary is on target in saying that insurers act unethically
if they intentionally interpret an arguably ambiguous policy provision differently
in comparable situations. Jack's examples add credence to the critics of
our industry when they charge that we profit unjustly from our "insurance
double-speak." The inconsistent conduct that Jack rightly condemns further
undermines the policyholder trust, the utmost good faith, that I have long
believed should be one of our most treasured assets. In fact, I would go
a step further and contend that insurance policies should be written in
a way that leaves no room for varying interpretations. Furthermore, I would
suggest that insurance policy language be simple and clear so that policyholders
understand what their coverage means. Then there will be no need for insurers
to struggle over which interpretation is best.
—Dr. George Head, Director Emeritus, American Institute
for CPCU, Exton, PA
-
I agree with you on the coverage issues of the insurer "changing" their
interpretation based on what make their case look better. But let's be fair,
risk managers—many times based on the "advice" of their brokers and their
own attorneys—do the exact same thing. They submit a claim with an interpretation
of what works out best for them. And, as these situations are so numerous,
the "insurance industry" continues to have "respect, or lack thereof" issues
everywhere they turn.
—Henry Good, Risk Management Consultant, ABD Insurance
& Financial Services, Redwood City, CA
-
The simple response to perceptions that insurers arbitrarily apply different
facts to the same policy terms and conditions is that insurance contracts
are a function of state laws, not uniform federal laws. Therefore, there
is a multiplicity of outcomes with regard to pollution exclusion, trigger
of coverage, etc., state by state. Perhaps a task-force based approach to
the matter would help provide some uniformity, such as the process that
led to the promulgation, and then adoption, state by state, of the Uniform
Commercial Code.
—Rick Green, Attorney, Akron Metropolitan Housing
Authority, Akron, OH
-
I work with attorneys, and in providing expert witness testimony, I have
seen this even in adjacent states. Often, the determining factor is the
precedence of previous cases in that particular state. Underwriting rates
may well reflect the litigious climate of the state, and if rulings have
provided coverage relief in specific instances, then premium was not collected
for certain exposures for which the insurer did not contemplate having to
make payment. To wit, most Midwestern states have fewer litigated claims,
and their rates are lower than most East or West Coast states, reflect this.
Lest we forget, insurance companies are profit-driven, so of course will
look to become profitable in every way possible.
—Nancy Blair Benson, Principal, Risk Analysis & Insurance
Consulting, Lower Saucon Twp., PA
-
Jack: I could write a book on this. Even more insidious is the fact that,
while insurers constantly take opposite sides of coverage issues in separate
cases, they then argue that the contract is not ambiguous so the insureds
cannot avail themselves of the doctrine of "contra
proferentum."
—Robert Hughes, Chairman, Robert Hughes Associates,
Inc., Dallas
-
Jack, this may not be an intentional action by the insurance carriers.
With the size and span of companies today, communications between claims-claims,
claims-underwriting and claims-underwriting-marketing is difficult. I get
different answers on theoretical questions directed at carriers depending
on who I ask, so I'm like a little kid: I ask the parent who will most likely
give me the answer I want. Maybe the solution is an internal communications
fix within the carriers' businesses. If this is an intentional act by insurers
to avoid paying legitimate claims, that is a huge problem and is something
that organizations like IRMI need to address for insurance consumers. Thanks
and good luck with this.
—Marc Anderson, Risk Manager, Multnomah County, Portland,
OR
-
Having been in the business for over 35 years, the first 10 working as
an underwriter and manager for a major carrier, I understand the problem
all too well. Claim professionals often treat claim payments as their personal
assets, forgetting it is underwriters who cause companies to have to pay
claims. At the end of the day, if no one had claims, there would be no insurance
industry. The basic problem is that there is, and probably could never be,
a central source for vetting all claims. Individual coverage analysis rest
with individuals, and in advance, those individuals will never comment on
coverage until they are presented with the facts of each individual case.
Their determination is their own judgment. Fortunately, they are usually
right, but are also wrong on some occasions. I'll eliminate the major corporate
misjudgments from this observation, as a corporate cultural flaw, but do
not ascribe this view to the day-to-day decisions adjusters make. Without
a central clearance of all adjuster decisions, I do not think it practical
to have even a 90 percent correct determination in all claims. Rather, as
a long-time participant and proponent of the independent agency system,
I believe it is a significant duty and benefit for us to be the advocate
and watchdog over all claim scenarios. We don't deny or accept coverage,
but we should know when it is due, and battle for the appropriate remedy.
—Steve Abram, Sr. Vice President, Wells Fargo Insurance
Services, Sherman Oaks, CA
-
One of the reasons you see this moving coverage
target on the part of insurers is that some courts have essentially held
that obligations of good faith and fair dealing end at the courthouse steps,
by disallowing policyholder bad faith claims for carrier misconduct after
a coverage dispute is in suit. Carriers take this litigation "privilege"
and run with it, and it is as if they have been freed from the bounds of
the bargain that they had made with their insured.
Insurers have a duty to timely and fairly investigate a claim, and to
timely inform the insured of the results of that investigation, and to explain
in specific detail where coverage problems arise. This obligation presupposes
a rational and consistent interpretation of policy terms, and a consistent
application of such terms to all claims. But that goes right out the window
when there is a coverage litigation, and policies suddenly shape-shift in
carriers' hands to frustrate the insured. Carriers sometimes go so far overboard
in this regard, that they take up factual positions that are belied both
in reality, and in the basis upon which they underwrite policies. When you
are that far a field, it is my view that carriers' counsel have also run
afoul of their professional obligations of candor before the court. You
are not supposed to present false positions and false factual arguments
to a court.
Carriers further facilitate this improper malleability by often agreeing
to, in effect, re-litigate the issues amongst themselves in a private proceeding
following the outcome of the litigation against the insured. They get to
have their cake and eat it too. In this after-the-fact proceeding, the carriers'
"true" positions reemerge. The courts that insulate carriers from the ordinary
legal consequences of such misconduct (by disallowing "in-litigation" bad
faith claims), often reason that the adversarial system permits such conduct,
and so long as it is confined to litigation, there is no larger harm to
insureds. But carriers are not shy in using their freedom from consequence
to shape favorable litigation outcomes, which are then reported, and which
are then incorporated into carriers' disclaimers or reservation of rights
letters on a wholesale basis. In reality, the impacts are not confined to
the specific litigation.
—Mark McPherson, Partner, Waters, McPherson, McNeill,
P.C., Secaucus, NJ
-
We see all too frequently insurers taking completely opposite positions
as to the meaning of certain provisions of their policies based on what
will provide them with the least amount of liability. I have seen several
insurers attempt to justify such contradictions by asserting they owe it
to their shareholders not to pay claims that are not covered. Forgotten
in all of this is the policyholder with whom they have direct contractual
relations. I do agree that ethics and the reputation of an insurer is brought
into question by such tactics. I also question how much training and education
claims personnel are getting or being required to get from their employers.
Some denial letters and discussions about denials reveal far too little
understanding as to even the basics of coverage. Plenty of opportunities
for learning about the basics of insurance coverage are offered throughout
the country, but seem rarely to be used by insurers for their claims personnel.
This alone gives me some pause—it seems that an agent/broker/consultant
is in a different world from insurer claims personnel—one in which the worlds
do not meet and often results in problems for the policyholder.
—Craig Stanovich, Principal, Austin & Stanovich Risk
Managers LLC, Douglas, MA
-
In reading your editorial about the complexities of policy language in
inconsistent interpretation of coverages, it brings to mind an observation
made some time ago on an agent's office wall. This was a framed property
policy of many years ago that stated "If your building at XXXX address burns
down, our company will pay you $XXXX. (signed by the company president over
a fancy gold seal) "How simple things used to be."
—Edwin Thompson, Loss Control Manager, Wells Fargo
Insurance Services, Clearwater, FL
-
Yes, in working for 6 insurers over 23 years, I have seen inconsistent
application of the principals you raised. Of the 6 I have worked for, 3
don't exist any longer; probably due to their inconsistently handling of
coverage triggers. However, you also have the problem of different state
courts applying the manifestation versus the continuous trigger (for when
operations are completed) theory of coverage, which could explain some of
that inconsistency. As to a process of how to avoid this problem, my experience
is that there is usually a "home office staff claims" person or persons
that attempt to maintain a company's consistent claims handling from jurisdiction
to jurisdiction. I, myself, have played that role as a regional coverage
specialist previously (at one of the companies that doesn't exist any longer.).
But you are very correct about one thing—the inconsistent handling does
give the industry a bad reputation.
—Martin F. Ellis, CPCU, ARM, Sr. Commercial-Farm
Ranch Field Adjuster, American Family Mutual Insurance, Franktown, CO
-
Both insurers and insureds usually will argue the most favorable coverage
position. This is expected, and is not the problem. The problem is when
insurers or insureds take positions that are unreasonable, and only serve
to increase expenses for all parties while bolstering the unprofessional
idea that one "side" always wears the white hat to the other's black. Of
course, one may fairly argue that one man's reason is another man's folly....
—Nate McKitterick, Partner, DLA Piper, East Palo
Alto, CA
-
Yes, I have experienced an insurer do precisely this. I think this has
been allowed to happen because, over the years, the insurer never gets to
jointly profile the risk, its exposure(s) with the insured. Moreover, the
policy documentation evidencing the contract is made available, if at all,
much after the cover has incepted. Insurers must be made to stop doing this.
Their centuries-old habit of insuring on "utmost good faith" basis must
stop, as they do not, cannot, settle claims on the same basis. One possible
solution is to get the insured also to sign the policy document on having
read its contents and understood its scope of coverage. It will also help
to insist that the proposal form necessarily be made part of the policy
document. Besides, there must be a time frame agreed upon for claim settlement/payment.
In case of delay beyond this agreed time frame, interest must become payable.
Impractical concepts like "indemnity" must be substituted by pragmatic "replacement/reinstatement"
basis. Incentives to insureds, insurers, and intermediaries for ensuring
and maintaining a long-term relationship will also add value to the insurance
contract.
—Pranatharthi Chandrasekar, Senior Manager, Hindustan
Lever Ltd, Mumbai, India
-
Agree 100 percent with the editorial. It is rather unfortunate than an
insurer takes this dual position on the same issue guided—or misguided I
should say—by its opportunistic self-interests of the moment. "Double-talk"
helps no one in the industry and, worst of all, not even the insurer itself
in the long run. What a disservice they are doing to themselves, the industry,
the consumers, and to the thousands of dedicated and straight talking insurance
professionals of the world. We in the industry have to deal with the stigma
created by the exclusions contained in the "small print," the overshadow
of "ivory towers" erected to satisfy over-inflated egos of presidents and
CEOs at the cost of "premium gouging," the Eliot Spitzer cases, and many
other issues. We do not need the help of an insurer leaving on public records
that it is indeed talking out both sides of its mouth, depending on which
direction its wind is blowing. And, as to questions of whether it is unethical
or it gives the industry a bad name: Res Ipsa Loquitor.
—Julio Velasquez, VP—Casualty and Professional Lines,
MBI Americas Corp., Miami
-
The point that Jack makes here is of course a truism: Insurers will tend
to take the argument that will cost them the least when coverage is unclear.
It is equally true, however, that policyholders and their lawyers will do
the same for their own interests, seeking always the coverage stance that
will optimize insurance payments. Between these two offsetting truisms,
we know that the courts consistently tend to take the position that will
benefit the policyholders the most (with the possible exception of some
recent Katrina related decisions in Federal courts). Perhaps most daunting
of all for insurers is the fact that the "triple trigger theory" referenced
by Jack is a continuing concern since the "Keene
v. INA" decision that created this coverage trigger controversy more
than 2 decades ago. Jack Gibson suggests that it is unreasonable and even
unethical for this coverage trigger minefield to still exist today, questioning
whether insurers are not actually enjoying the option of taking different
trigger positions on similar cases (i.e., "exposure" versus "manifestation"
versus "injury in fact"). It is a good question. The "claims-made" new product
introduces by ISO in 1986 did a lot to address the "stacking of limits"
issue but it left the question of exactly "when" an occurs takes place unresolved.
Some injurers have tried to solve this problem. In Bermida, for example,
the $100 million plus in excess limits for high-risk manufactures is normally
written on what some call a "first occurrence" trigger with a strong "batch"
or "integrated occurrence" wording tying all claims from a related event
or manufacturing error to the time and the policy limits in effect when
the first occurrence was reported. The fact remains, however, that the CGL
and most umbrellas remain highly exposed to this continuing issue, and Jack
Gibson is right to question the ethics of allowing this problem to continue.
—James McDonald, Director, Navigant Consulting, Philadelphia
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