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 Tip. Send us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll
acknowledge your contribution as we did for Dan.
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.
For IRMI
Online and Print Subscribers
For SilverPlume
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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 IRMI.com.
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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.
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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?p>
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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