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TRENDS IN INSURANCE CLAIMS. Claims Trends Introduction. Focus on claim trends in: Property insurance. Commercial general liability insurance. Directors and officers liability insurance. Report on recent case law. Reinsurance claims that may arise from the trends. PROPERTY INSURANCE.
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Claims TrendsIntroduction • Focus on claim trends in: • Property insurance. • Commercial general liability insurance. • Directors and officers liability insurance. • Report on recent case law. • Reinsurance claims that may arise from the trends.
Major Market Influences In Property Insurance • Globalization/Supply Chain. • Climate Change/Green Coverage. • Developments in Property Insurance Law.
Globalization • Supply chain has grown increasingly complex. • Reliance on outsourcing (mftg, parts, services). • Just-in-time inventory. • Single source vendors.
Globalization • Survey of 600 financial executives. • Supply chain risk – greatest threat. • Physical disruption to supply chain. • Mitigation.
Globalization • Japanese auto manufacturer. • Single source – brake valve supplier.
Supply Chain Coverage • Contingent Time Element (direct suppliers). • Dependent Time Element (direct and indirect suppliers).
Supply Chain Coverage • Challenges for insurers. • Site access. • Jurisdictional issues. • Determining coverage. • Determining quantum. • Control over exposures?
Climate Change • Increase in frequency and severity of fire and natural disasters (wild fires, hurricanes, typhoons, droughts). • Companies – heightened awareness. • Looking at sustainable building designs – going “green”.
Climate Change • “Green” buildings – new designs, products and materials. • More efficient use of energy. • Local code changes: incorporating “green” building standards.
FM Global – Going Green • U.S. Green Building Council’s LEED Gold Standard:
FM Global – Going Green • $154M project - $60M building. • “Green” - 8% of construction costs. • Every room monitored with sensors (climate, lights). • 95% of construction debris was recycled. • Carpeting – 100% recycled materials. • Exterior blinds to regulate sunlight.
Green Coverage • Emerging property risk exposure. • What if the manufacturing plant was not “green” at time of loss? • Local code enforcement required green. • Voluntary measures.
Green Coverage • Potential for large uninsured losses. • Prompted insurers to develop “green” enhancements/endorsements. • Coverage – additional costs (products, materials, methods) to repair/rebuild to “green” standards.
Green Coverage • Green enhancement at another facility? • Install a geo-thermal generator? • Green recovery even though no rebuild? • Increased period of restoration? • Property and BI exposures.
Industry Perspective • New emerging exposures – minimize disputes between cedents and reinsurers. • View our treaty reinsurers - partners. • Treat them fairly (notice, information, transparency).
Industry Perspective • Credibility. • $1.1 billion of $4.6 billion in gross premiums. • Dependency on treaty reinsurance – from 26% to 14%.
Industry Perspective • Facultative reinsurers (per risk). • Incidence of disputed claims higher – shared/layered programs. • Challenges to “follow the fortunes”. • Ex gratia – “commercial” payment.
Property Survey • Survey of Professionals. • Over 350 claims professionals asked to respond to six question survey. • 73 people (approx. 20%) participated. • 85% claims executives or managers. • 76% HPR, Large Loss or Middle Market • 50 people provided additional comments concerning specific claim trends.
Property SurveySpecific Trends Identified • Hurricane (9 Respondents). • Public Adjusters (8 Respondents). • Excessive Claims (6 Respondents). • Crime (5 Respondents). • Time Element (4 Respondents). • Experienced Claim Adjusters (4 Respondents).
Property Insurance Law Physical Loss and Fortuity Abbey Company, LLC v. Lexington Ins. Co. (C.A.9Cal. 2008) • Island ferry service insured ferry and property intended for its use. • A divided court found silting of the channel was physical loss insured under the policy.
Property Insurance LawPhysical Loss and Fortuity Wakefern v. Liberty Mutual (N.J. Super 2009) • Insured lost power during an outage. • The policy covered power interruption that results from “physical damage.” • The New Jersey Appellate Court found that “physical damage” is present when property is not available for use, as a result of a “physical incident.”
Property Insurance LawPhysical Loss and Fortuity Markwest Hydrocarbon, Inc. v. Liberty Mutual Ins. Co. - (10th Cir. 2009) • Following an explosion, the DOT ordered insured to undertake testing and maintenance. • The policy covered “all risks of direct physical loss or damage.” • The court found maintenance and testing was not insured – only fortuitous losses are covered.
Emerging CGL Claims • Predicting next wave of major CGL claims. • Status of law/science underpinning emerging risks. • Major developments in asbestos and pollution claims – still most significant claims facing CGL carriers.
Predicting Next Wave • Accurate prediction of potential claims inherently difficult. • Broad scope of CGL coverage. • Open-ended nature of “occurrence” based policies. • “Claims-made” policies enhance predictability/finality. • Competition may limit marketability.
Predicting Next Wave • Blockbuster losses typically arise from either: • Single catastrophic event. • Or, widely-used products/practices. • Harmful effects not fully appreciated at time of use. • Activity largely unregulated. • Long damage/disease process. • Injury/damage not apparent for long time.
Predicting Next Wave • “Emerging claims” fitting profile. • Food contamination outbreaks. • Lead paint. • Climate change. • Toxic torts. • Nanotechnology. • BPA.
Food Contamination Outbreaks • Sharp increase in the number of outbreaks – massive recalls. • Specialized policies exist, but CGL impact too. • To date, largely property damage event.
Food Contamination Outbreaks • Significant coverage issues. • “Impaired property” exclusion. • “Sistership” exclusion. • “No-injury” claims. • Insured’s contaminated product integrated into 3rd-party’s product.
Lead Paint • Escalation feared as result of public nuisance suits. • Cases brought by states/municipalities. • Would require remediation of millions of dwellings. • Feared result has not materialized. • Only adverse verdict overturned on appeal by the RI Supreme Court.
Climate Change • Huge potential for significant claims • Energy companies/ automakers. • Liability suits have failed – political questions doctrine. • Scientific studies narrowing area of legitimate debate. • Increased carbon emissions regulation. • Merits continued close monitoring.
Asbestos/Pollution: Developments • After 30 years of litigation, important coverage disputes remain. • Important 2009 high court decisions. • Mass: Boston Gas • Cal: Stringfellow
Asbestos/Pollution: Developments • Goal of global settlements: Finality. • Increasing efforts to circumvent global settlements. • Rescission claims by insureds. • Contribution claims by other insurers. • Attacks on scope of bankruptcy orders. • Challenges to Exhaustion.
“D&O” Background • 3 Basic D&O Coverages: • “Side A” Coverage: directly afforded to D&Os. • “Side B” Coverage: reimbursement afforded to the company for indemnification obligations to D&Os. • “Side C” Coverage: direct coverage to the company for its own liabilities. • D&O is typically written on “claims-made” basis.
Global Financial Crisis • Recipe for a Spike in D&O Claims. • Subprime and Credit Crisis. • Demise of Prominent Investment Banks and Financial Institutions. • Collapse of World Markets. • Global “Recession”.
Bankruptcy http://www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsJun2009.cfm
Claims Exposure • D&Os face legal exposure from bankruptcy filings and bank failures. • Corporate bankruptcies typically lead to an increase in securities litigation. • Since 1995, 35% of the large public companies filing for bankruptcy have also sustained securities class action lawsuits against their D&Os. • In 2007 and 2008, this number ballooned to 77%.
