IRMI Update—Issue #150
An E-mail Newsletter for Risk and
Insurance Professionals
ISSN: 1530-7948
December 13, 2006
In This Issue
Colleague,
It is a pleasure to report that more than 600 people have now
earned the Construction Risk and Insurance Specialist (CRIS) designation,
and over 1,500 more are working towards it. Obtaining the CRIS designation
involves completing five core courses covering such topics as contractual
risk transfer, builders risk insurance, and general liability insurance.
We've recently implemented an
online directory of agents and brokers who have earned the designation.
The directory is a valuable resource for contractors looking for
an agent or broker with demonstrated dedication to the construction
industry.
The CRIS program now includes three additional CE courses beyond
the core, addressing wrap-ups, design-build risk and insurance,
and additional insured issues. And more are coming. Completion of
the CRIS core is not a prerequisite for taking these courses, and
insurance CE credit is available for them in most states.
The cost of a CRIS course is just $49. Additionally, the Construction
Financial Management Association (CFMA) has endorsed the program
and CFMA members receive a discount by indicating special promotion
code E958030 when you order. Learn more about the
CRIS program.
Thank you for subscribing to IRMI Update. Best wishes for a happy
and healthy holiday season.
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI
Beware of Reverse Risk Transfer—Some
contractors and vendors are using a novel contractual approach to
reduce the amount of protection they are providing to their customers.
They provide a contract that holds a client company harmless and
indemnifies it in the event of a loss. But buried in the contract
is a statement that they are liable for only a stated amount of
damages at which point the client company agrees to hold them harmless
and indemnify them. Such provisions are sometimes called "reverse
risk transfer."
They can then provide a certificate of insurance showing high
policy limits and broad coverages, including an indication that
additional insured status applies, but rely on the contract to limit
their indemnification obligation and a limitation in the additional
insured endorsement to limit the additional insured’s coverage to
less than policy limits. When coupled with the reverse risk transfer
provision, the effect is that the vendor or contractor protects
the client company for the relatively low losses but and the client
company protects the contractor or vendor for larger losses.
While there is nothing wrong with this approach when all the
parties understand and agree to the arrangement, it does not follow
standard practice for most industries. These provisions are easily
overlooked by managers and are often accepted unknowingly in contracts
provided by contractors or vendors.
We have found that the best solution is to have an attorney develop
custom contracts for use with vendors and contractors that include
hold harmless wording, indemnification statements, and insurance
requirements. If contracts are not used with smaller vendors or
contractors, the attorney may be able to establish a work order
system incorporating such provisions that also meet the requirements
of a contract.
Along with reviewing the hold harmless contract provisions, ensure
that an attorney includes insurance requirements in contracts—both
coverages and insurance limits. Generally, the contract should also
require the contractor or vendor to name your company as additional
insured on its general liability insurance policies and obligate
it to provide certificates of insurance confirming that this policy
change is in place. Then make sure the certificates are received
and reviewed against a checklist of requirements. Any that are not
in compliance should be kicked back for re-issuance.
By: Dan Devin, CPCU, ARM, ALCM
Executive Service Consultant,
Fireman's Fund
Hartford, CT
Suggest a Risk
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or filling gaps in insurance coverages.
Submit your tips.
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We have recently updated a number of the reference manuals in
the IRMI library and published new issues of
The Risk Report and
Captive Insurance Company Reports.
To make sure you don't miss any of this new information take 30
seconds to scan the "What's New" summary page.
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There are now over 800 risk management and insurance articles
on IRMI.com. Below you'll find summaries of some recent additions
with links to the articles.
If you're still scrambling to fulfill your continuing education
(CE) requirement for 2006, IRMI has the answer with online courses
that are easy to take and informative as well. One newly revised
course is IRMI on additional insureds, which has been updated in
response to recent changes in additional insured approaches being
allowed by insurers. You can purchase enough courses to meet most
state's annual CE requirements for less than $50! For more information
or to order one of these or other CE self-study courses, see the
Training and Education section of
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In IRMI
Update 149, Jack Gibson asked what the insurance industry should
do to prevent another Katrina-sized disaster from happening. While
hurricanes can't be prevented, financial losses resulting from them—insured
or otherwise—may be reduced by stricter building codes and underwriting
requirements. Below are readers' thoughts on this topic.
-
As insurance agents and brokers, our job is to
educate people on what their insurance policies
cover and don't cover. If we could do an advertising
campaign asking prospective homeowners to contact
their insurance agents "before" they buy that new
home, we might be able to help them make a more
informed decision as to the location and type of
coverage they'll need. Flood zones, liquifaction
factors, etc., are something most of us don't even
consider when purchasing one of the most valuable
assets we have.
—Anne Youngberg, Accounting
Manager, United Agencies La Verne, La Verne, CA
-
I live in a Coastal Area. If the Feds are to
remain in the flood insurance business, they need
to charge adequate rates. They should quit writing
coverage on any new construction on barrier islands,
as this is nothing more than a disaster waiting
to happen. Not if, when! New Orleans is another
story. Most of what has been done after Katrina
is politically motivated and not based on rational
thought. As for the industry, since everyone would
like to make believe that their homeowners or other
property policy covers flood, just price for it
in coastal areas. My big question to these people
when they go to court is: If your neighbor bought
a flood policy, and you did not, you must be an
idiot if you expect your homeowners policy to pay
your flood loss!
—Ron Anderson, Producer/Owner,
Underwood Anderson & Associates, Pensacola, FL
-
A judge just found the insurance companies liable
for paying flood damages to the homes that were
flooded by broken levees in New Orleans, even though
the policies were not written to cover flood insurance.
Because two companies stated that "no matter what
the cause" flood damage would not be covered, they
were not included in the judge's decision. All others
must pay.
As long as judges take sympathy over reason for
the homeowners and refuse to ignore the intent of
the policy and the fact that premiums were not collected
for flood damage, people are encouraged and will
continue to not only build in flood areas, but will
not put out the money for a flood insurance policy.
I understand that other countries have cities
built below sea level. The levees that hold the
water back are given highest priority, provided
top maintenance and are improved and upgraded regularly.
For anyone to seriously and intelligently consider
rebuilding in New Orleans, and any flood-prone area,
two considerations should be uppermost: 1) The quality
and maintenance of the levee system, and 2) Flood
insurance should be a requirement, not an option,
for any homeowner. These factors should not only
be the consideration of the homeowner but also of
the city, county, and state where this development
would occur.
—Chris Van Matre, Contracts
Specialist, Omnitrans, San Bernardino, CA
-
As a resident of the City of New Orleans and
a 37-year insurance professional who was a victim
of the gross negligence of the U.S. Army Corps of
Engineers, I can categorically state that had the
Corps built the levees to Category 3, which we were
assured they were, the post Katrina flooding would
have never occurred. While it is true raising many
homes and other properties 3 or more feet would
not likely prevent them from flooding should the
levees fail in the future, the real issue is guaranteeing
our citizens the flood protection we have been promised.
Rather than criticize the NFIP and politicians,
let's place the blame where it rightfully belongs
and hold the U.S. Corps of Engineers, their contractors
and respective Levee Boards accountable. The people
of New Orleans, St. Bernard Parish and South Louisiana
love our communities. Many have never lived anywhere
else or even ventured beyond the city or parish
limits. The people, culture, and architecture make
New Orleans and South Louisiana the most culturally
unique and richest city and state in the USA. I
will never stop defending the right of the people
of our state who have been so displaced to return,
rebuild their homes, and reclaim the lives and lifestyle
that so many come from far and beyond to enjoy.
While on the surface it may seem insane to allow
people to rebuild their homes in flood-prone areas,
doing so utilizing the technology that keeps Amsterdam
high and dry is an achievable goal. Rather than
pushing to stop people from returning, America and
Americans should be coming together and questioning
the safety of the flood and levee protection systems
all across the USA. What has happened in New Orleans
should be a wake-up call to America. We can fix
the problem and guarantee people category 3, 4,
and 5 hurricane storm surge protection. At the same
time, we can fix the problems with the NFIP. But
none of this can be accomplished without the collective
outrage of the American people and the will to truly
hold those responsible accountable to those who
have and continue to suffer so much.
—Michael Glapion, Assistant
Vice President, Gillis, Ellis & Baker, Inc., New
Orleans
-
There is nothing in the U.S. Constitution that
authorizes Congress to take tax money from you and
me and give it, as charity, to others. Those who
are terminally stupid as to build in a flood zone,
in the fire brush area, or in other high-risk locations
should pay for the risk they are taking without
assistance from those of us who are take more conservative
risks.
I live in an earthquake zone, but they come once
every 40 years or so, and I have invested my money
and insurance premiums wisely to cover that risk,
which is slim. Hurricanes come almost every year,
Tornados go through the alley every year, the Mississippi,
by definition, floods every year. I would not stop
people from taking risks, and if they want insurance
for that risk, they should pay the value of the
risk they are taking. It makes no sense to rebuild
a house once every 5 years because you like the
view. You are not victims of nature, you are victims
of your lack of judgment.
—Barry Zalma, Consultant,
Zalma Insurance Consultants, Culver City, CA
-
I regret being so bluntly practical, but the
situation in New Orleans is not about motivating
rational decision making, or educating the public,
or avoiding a bad rap. It is about political clout
and buying votes. I am sure you read about the federal
judge who recently decided that flood had many meanings
and the policy flood exclusion was invalid. I am
not a pawn of the insurance industry, but this is
another clear attempt to make the industry a contributor
to the welfare state.
While the questions you pose are logical, there
is nothing logical in the mix of insurance and politics.
Just ask yourself, who are the biggest beneficiaries
when billions are spent rebuilding homes in areas
that will almost certainly flood again? Hint: it
is not the homeowner. If government really wanted
to help the homeowner, they would give them the
grant money with the proviso that they not rebuild
below sea level.
We are naive if we think that the solution is
as simple as building codes and education. Expediency
replaces logic, and dollar signs replace good sense.
—Rick Moscicki, Managing
Principal, The Risk Consulting Group, Jacksonville,
TX
-
You want to drive your classic
Vincent Black Shadow motorcycle without a helmet?
You like that breeze blowing in your hair? No problem!
However, when you unfortunately check into a hospital
emergency room, and a trauma team is trying to save
you because of a head injury that could perhaps
have been prevented by your wearing a helmet, watching
your vital signs dance on the various high-tech
ER monitors, taking BP readings, hoping you don't
"code," maybe society has some interest. This is
especially true if you have no insurance to cover
what may prove to be a costly medical event and
your subsequent reassignment to a nursing home where
you spend the balance of your years basically drooling
on yourself. Using the same logic, if you purchase
or build a home on pristine beachfront property
that is historically in the path of hurricanes,
to a greater or lesser degree, society may have
some interest in what you may be doing.
Putting the less-government debate aside for
a minute, it is incumbent on local municipal officials,
maybe even the insurance industry, to ask—make that
demand—that you take steps to protect yourself from
what may be a 10-, 50-, or a 100-year storm event.
Stealing a page out of graduate level MBA course
texts, you should be rewarded for "best practices,"
and penalized for being a bonehead.
Society as a whole should not be bailing out
those who should have known better. I'm sorry, but
your bad personal behavior, or bad personal risk
management choices, should not be MY problem. If
this was a political race, you might say I'm soft
on warm summer rains, soft on sun sets on the beach
after a perfect summer day, but hard on those who
make choices that the balance of society may have
to share in funding.
As an industry, we just can't continue to fund,
and the rates can't continue to anticipate, what
amounts to stupidity. No one benefits if we permit
bad choices or bad behavior. Someone needs to draw
a line in the sand and just say NO.
—E. Bernard McGlynn, Jr.,
Sr. Practice Leader—Claims & Surety Services, Lewis-Chester
Associates, Inc., Summit, NJ
-
About 8-10 years ago, FEMA declared it would
not pay for rebuilding in the flood zone of Lake
Travis in central Texas, which is used as a flood
control lake on the Colorado River. This initially
angered many of those residents; however, the rest
of the citizens in the area realized the wisdom
as did the real estate and banking industries. If
FEMA were to make the same statement in the flood-prone
areas in Louisiana and along the Gulf Coast, it
would help. Also, local building codes can, and
should, be changed to reflect these realities.
—Robert Rogers, Owner, Rogers
Safety and Risk Management, Austin, TX
-
The states have to include insurance professionals
in the planning and zoning decisions for those areas
subject to flood and other catastrophes. In addition,
the flood programs/policies have to be amended to
incorporate wording that mandates rebuilding to
the correct standards to avoid future damage. As
part of this amended procedure, insurance companies
need to assess the areas and the cost to rebuild
the correct way. Coverage must be built in to allow
for the extra cost of building right. There may
even need to be a financial partnership between
insurance companies and government in the early
stages. As policies are written—new, through purchases,
or switching insurers—the new requirements will
come into play and the premium load will lighten
as the exposure is reduced.
—Peter Wellman, Senior Underwriter,
Church Insurance Co of Vermont, Bennington, VT
-
As a taxpayer and a buyer of insurance, I do
not like to be forced to subsidize those that decide
to make a personal choice to accept excessive risk
like moving into a flood zone or an area that will
be hit by a hurricane. We have far less control
over where a tornado hits or a hail storm hits and
it is usually limited to a very small area, subject
to almost anywhere. Floods and hurricanes are very
predictable, and we can stay out of harm's way,
except for personal choices to live in that area.
—Philip Hansen, CRIS, CSP,
Owner, P&H Services, Salado, TX
-
It is bad public policy to allow citizens to
rebuild time after time in areas known to be flood
zones. This forces the rest of the taxpayers, who
have more common sense, to foot the bill over and
over again for nothing other than stupidity. The
levies will be breached again, we already know that
because the Army Core of Engineers has indicated
that there are still many weak spots in the levy
system that they have not addressed yet.
Continuing residency in New Orleans' flood zones
carries centuries of sentimentally based mushy thinking
that costs all of us billions, it's time to stop
this nonsense. The state and federal government
can create new towns close by with new public mass-transit
systems—remember the 1950s' building boom that created
all of our suburbs? Why not do it now—for about
the same cost as is being squandered in the city
now?
—Tom Davis, President, Davis
American Ltd., Oak Brook, IL
-
Many questions came to mind while I read this:
1) Will insurance companies offer coverage to
below-grade buildings?
2) Will the government bail these people out again
when their homes flood?
3) Were building codes upgraded to the latest hurricane
standards?
4) Are lenders able to finance the remaining balance
on homes built in such an area?
5) When will we learn from past mistakes?
Looks like uneducated people pushed the rulings
through to make themselves look better without fully
understanding the situation or caring about the
outcome.
—Virginia Stirnweis, Risk
Manager, WCI Communities, Inc., Bonita Springs,
FL
-
Americans were touched and shocked by the devastation
of the Gulf Coast Region. Years of building and
lack of funding for essential safeguards played
into this mass disaster. It is evident that even
insurance companies did not anticipate Katrina in
their catastrophe models. The dollars that poured
out of Americans pockets after that event show the
willingness of people to help.
Unfortunately, helping people may not be providing
loans so that they can rebuild in the same place.
Home is about family, not about where a house is
located. As sorry as I am that people lost their
houses, I'm confident that homes can be built elsewhere.
Government has a responsibility to safeguard
the treasure of this nation. That is to do what
is good for all. We have seen many instances where
money has been squandered, wasted, stolen, and unaccounted
for in this disaster. That must stop. Our leaders
need to make decisions from their head now and not
from their heart.
—Gloria Thompson, Agent,
American Agency, Inc., Minneapolis
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