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Insurance Archaeology

Insurance Archaeology: A Strategic Imperative for Policyholders and Insurers

Sheila Mulrennan | March 1, 2000

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Sheila Mulrennan explains that even though it has become increasingly difficult for policyholders, insurers, and reinsurers to reconstruct their pre-paid historic insurance assets, it is more important now than ever.

In recent years, companies of all sizes have increasingly come to recognize that an audit of past and present insurance policies is an essential "best practice" of risk management. With legal liabilities taking up an even larger proportion of any company's risk profile, managing the insurance portfolio has become as essential as managing expenses, revenue, or investments.

Several factors add urgency to the need to reconstruct past insurance coverage. Emerging tort litigation, combined with existing asbestos and environmental liabilities, threatens the balance sheets of companies and government entities of all sizes. While liability exposures increase for more companies in virtually every industry, insurance records are disappearing at an alarming rate.

Waves of downsizing, corporate relocation, and mergers and acquisitions have shortened institutional memory and created a need for lost policy searches from as recently as the past decade. Simultaneously, unprecedented "mega" mergers within the insurance industry, as in corporate America, have disrupted record-keeping on a massive scale.

As information overload accelerates, document destruction schedules have followed suit. Exacerbating this problem, 1999 has for decades been a popular destruction date. All these factors make it increasingly difficult for policyholders, insurers, and reinsurers to reconstruct their pre-paid historic insurance assets.

Emerging Torts: Fruitful and Multiplying

Over the past quarter of a century, asbestos and environmental claims, coupled with consumer activism on the product liability front, have (in the words of one insurance industry lawyer) "created a vast plaintiffs' coverage bar and a judicial, political, and information-gathering network that thrives on a third wave of new tort claims" [Mealy's Environmental Claims Journal, Spring 1998, paraphrasing Tom Brunner of Wiley, Rein & Fieldings].

Recently, class-action lawsuits targeting multiple defendants and consolidating the claims of thousands of plaintiffs nationwide have proliferated. The 1998 class-action tobacco-litigation settlement, which resulted in fees in the billions for several plaintiffs' firms, dramatically upped the ante and raised the profile of class-action litigation.

Asbestos and Environmental Losses

While overall loss estimates have been reduced in the past 5 years as new settlement mechanisms and incentives have taken hold, the stream of losses is far from abating. In 1998, following 2 years of sharp loss reductions, insurance companies' net incurred asbestos and environmental (A&E) losses spiked upward 44 percent to $2.7 billion. While the rise was caused largely by a handful of extraordinary reserve actions prompted by mergers and acquisitions, experts expect continued year-to-year fluctuations in A&E losses for the foreseeable future.

"To assume [A&E losses] will always be trending down is not realistic," according to Amy Bouska, principal and consulting actuary for Tillinghast-Towers Perrins. Asbestos losses in particular "just keep going and going and going," according to Ms. Bouska [Business Insurance, 7/5/99].

The Pervasive Need for Insurance Archaeology

Now consider the primary defense against these multiple threats—a company's insurance portfolio. It is, at best, a Herculean task for a company or government entity to access its historic insurance program, including all endorsements, exclusions, and changes in limits. Often, the liabilities stretch back 10, 20, or 40 years, involving the activities of predecessor companies as well as decades worth of pre-acquisition coverage.

This exercise is not mental gymnastics for its own sake. Recovering and organizing a historic insurance portfolio has become an essential survival measure for virtually every organization in the United States, including corporations, partnerships, and nonprofits. Two special categories with distinct insurance recovery needs of their own are municipalities and insurance companies.

Mending the Municipal Safety Net

When it comes to Superfund liability for environmental cleanup, municipalities and other local government entities have been literally left holding the bag. Under Superfund provisions, cities, towns, and counties whose "pollution contribution" consisted of no more than trucking ordinary garbage to local landfills have found themselves "jointly and severally liable" for decades' worth of toxins dumped, leaked, and emitted by businesses and private citizens within their jurisdiction.

Like the corporations and small business that did the bulk of the polluting, municipalities and other local government entities—including water and sewer authorities, transportation authorities, and school districts—have been caught in a web of litigation that has accounted for a least one-third of Superfund cleanup costs to date. According to the National Association of Counties, cities, towns, school districts, and counties have been the targets of more than 750 lawsuits filed by private Superfund defendants seeking to minimize their own cleanup liability. Moreover, the Environmental Protection Agency has named counties, cities, and towns as owners or operators at approximately 100 co-disposal landfills on the National Priorities List.

Unlike corporations, government entities labor under a double mandate: to protect their citizens' health and to provide maximum value on the tax dollar. To fulfill the latter goal, municipal officials must aggressively pursue insurance coverage for environmental cleanup costs. Due diligence in this regard can serve taxpayers as surely as increasing the tax base or reducing government expenditures, because the possibility of recovering millions or tens of millions of dollars in cleanup costs is very real.

According to most state courts that have ruled on the issue, policyholders liable for environmental damage are entitled to insurance coverage not only under the policy that was in effect at the time when damage was first discovered, but also under every policy in effect during the often decades-long period when damage was silently occurring. Thus, if environmental damage occurred over a long period of time, a municipality (or any other party deemed liable for pollution) may be entitled to coverage for both defense and indemnity under multiple, even scores of, insurance policies.

Reinsurance Archaeology

As another link in the liability chain, insurers and reinsurers have their own imperatives for maximizing recoveries for mass tort and environmental liabilities. The first wave of A&E claims has now had 2 or 3 decades to shake out, and the pace of settlement has accelerated. Now that a body of case law has built up regarding insurance coverage for environmental cleanup, many insurance experts have noted this year that policyholders and insurers alike are more disposed to settle old claims rather than litigate.

As more claims involving old policies are settled, insurers are turning to the next deep pocket. Like old primary policies, reinsurance contracts from the 1940s, 1950s, and 1960s have lower retentions and broader terms, and reinsurers should prepare for a steady onslaught of claims against these old contracts. Notice of claims in many instances may have been delayed, possibly for years, due to protracted coverage litigation or the chaos created by failed insurance companies. These claims are heading in reinsurers' direction—and behind them, fresh waves of claims on vigorous new species of emerging torts.

Another prudent application of insurance archaeology for insurers arises in situations where researching lost policies on behalf of the policyholder results in documenting years or even decades of coverage by other insurers, thus spreading the risk.

Finally, insurance companies are far more than simply insurance providers. They are large conglomerates. As a result of acquisitions, real estate holdings, investment activity, fiduciary duty, and the full range of other risks facing diverse enterprises, they are subject to virtually every form of liability exposure.

The Shrinking Insurance Industry

In the past, companies seeking to reconstruct their insurance histories could rely heavily on the brokers who sold them the policies. While brokers remain an often-crucial source of information, a decade's worth of consolidation in the insurance brokerage industry means that brokers themselves can be almost as hard to trace as the insurance policies.

The "Top 10" brokers of a decade ago have combined into a "Big Three" (New York-based Marsh USA, Chicago-based Aon Risk Services, and Willis Group of London). In addition, as reported in the Journal of Commerce [November 30, 1998], in 1998 alone, one out of every three agencies with revenues of more than $5 million acquired another agency.

Insurance companies have also been an important resource for reconstructing missing policies, but this traditional fallback may also fall away as the surviving entities of numerous mergers face the inevitable relocations and downsizing which are part of corporate restructuring.

A Millennial Time Bomb

In corporations throughout the United States, 1999 has long been the most popular year to mark records for destruction. Since the 1960s, multiple nines have served as "null value" codes in the date fields of many document management programs—and many human minds seem to have taken the cue, choosing 1999 as a once-comfortably-distant scheduled destruction date.

In their daily work, insurance archaeologists encounter this millennial time bomb in page after page of records management indexes in virtually every industry. Since this trend alone will account for a wholesale loss of historic records, time is of the essence in identifying and preserving any remaining records that can document valuable coverage.

Taking a Proactive Approach

While business-friendly tort reform makes its yearly appearances in state and federal legislative sessions, few analysts expect American society to grow any less litigious in the foreseeable future. Indeed, the trend is in the opposite direction. The odds seem good, for example, that Congress will soon grant nongovernment US employees the right to sue their health maintenance organizations (HMOs) for damages. Indeed, the "right to sue" has arguably been the most rapidly expanding American right for a generation.

At the same time, the trend in insurance coverage disputes seems to be away from litigation and toward negotiated settlement. The sheer volume of insurance coverage disputes in the 1980s and early 1990s have led to a maturing of case law and an increasing familiarity on both sides with arguments on the other, not to mention the increasing length and cost of litigation.

As the emphasis shifts to settlement, a premium is placed on knowledge—for a policyholder, of its complete historic insurance portfolio, and for an insurance or reinsurance provider, knowledge of its reinsurance or retrocessional coverage. Now more than ever, to postpone research of historic insurance records may mean consigning valuable coverage to oblivion.

Upcoming articles in this series on insurance archaeology will explain the steps involved in conducting an historic insurance audit and ways to utilize an audit in due diligence for mergers and acquisitions.

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