IRMI Update—Issue #76
An E-mail Newsletter for Risk and
Insurance Professionals
ISSN: 1530-7948
November 4, 2003
In This Issue
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 website. 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
Your Complete Inland Marine Resource—The
AAIS Inland Marine Guide provides insurers, brokers, and risk managers
the most comprehensive resource for writing inland marine insurance
for construction, transportation, EDP, and other exposures. More
than 200 forms, underwriting guidelines, endorsements, pricing information,
compliance requirements, and automated rating worksheets are available
electronically. For information contact Rick Anderer at (800) 564-AAIS
or go to AAIS.
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:
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.
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.
-
Return
to Competition for Some Commercial Insurance Lines—The
Council of Insurance Agents & Brokers has released
its third quarter data showing competitive pricing
returning, and premiums flattening for commercial
property accounts.
-
Risk
Retention Group Formations Increase—Abandoned
in the soft market, RRGs are on the rise, offering
form, rate, claims, taxation, and admitted paper
benefits. Michael Mead discusses the opportunities
and challenges.
-
Embedding
Risk Management: Easier, Faster, Better—Risk
management workshops, while touted as good practice,
often fail to motivate employees to truly reduce
risk. Matthew Leitch explains how the process of
embedding can make a real impact.
-
The
Role of Development Banks in Addressing Political
Risk in Asia—Today, it is difficult to
tell the difference between "perceived" and "real"
political risk, and investors are wary. Daniel Wagner
explains how development banks can support access
to trade finance.
-
Suing
a Foreign Company That Has No U.S. Presence—What
do you do if your patent is infringed by a foreign
corporation without a U.S. office? Sanford Warren
Jr. discusses the far-from-obvious solutions available
to the patentee.
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.
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.
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.
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.
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, CO
- 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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