by ~ Jonathan Mutch (Email) (Web Site)
The Interactive Workshop, presented at the MReBA Symposium between the second and third panels, allowed all attendees to grapple with the practical consequences of the lessons imparted during earlier panel discussions. The workshop discussion was facilitated by MReBA members Bill Erickson, Alex Henlin, Kristin Suga Heres, and Jessica Park.
The Direct Policy Administered By a Broker
The hypothetical loss scenario presented an experienced municipal-markets direct insurer that created a new, combined property and liability policy for cities and towns that had “high tech startup zones.” A broker administered the entire program (both traditional and “high tech” policies) for the insurer. Municipalities submitted locations they wished to have included in the program to the broker. If accepted, the broker included the location on a master policy.
The hypothetical direct policy excluded “named storm” unless sub-limited, and the policy provided an aggregate $20 million limit for loss from hurricane – defined as a named storm with winds over 74 MPH. Flood was sub-limited to $20 million in the aggregate and the flood sub-limit stated it was “not applicable to any damage caused by a named storm” and that “coverage for such loss may be available under other provisions of the policy, subject to any sublimit.”
Off-premises power interruption was covered if “caused by damage of the kind insured” by the policy. The policy also covered “data loss” from insured physical damage or “intentional acts of others” intended to “interrupt your data processing equipment.”
In the problem, the broker obtained reinsurance for the direct insurer for losses over $20 million. The broker informed the reinsurer that the direct policy “sub-limit for flood above high-tide and hurricane is $20 million.” The broker, consistent with its practice for over 10 years, provided the reinsurer with a standard form municipal policy and offered to provide other direct polices on request. The reinsurer accepted the risk, noting the $20 million hurricane and flood sub-limits as important to its decision.
No problem is complete without a loss; and, for the Symposium, a “Jersey Shores Technology Park” played that role. A named tropical storm (“Betsy”) made landfall north of the City of Jersey Shores, but an 11-foot storm surge arriving at high tide caused significant flooding that damaged or destroyed half of the buildings in the Jersey Shores Technology Park. Buildings at high elevations in the Park were not damaged. Safety risks posed by multiple downed power lines caused civil authorities to suddenly cut power to the whole Town. This “hard shutdown” damaged electronic equipment at the otherwise unflooded, high-ground buildings in the Technology Park.
The City of Jersey Shores submitted a “preliminary proof of loss” to the municipal insurer under the “high tech” policy for over $100 million. The insured claimed that the loss had been caused by “wind-driven water and extreme high tide.”
Each table in the room was assigned a role – insured, direct insurer, reinsurer, or broker. For each of the five parts of the problem, a table spokesperson presented that party’s response to the various coverage issues created when the insured sought to obtain coverage in the face of various limitations, exclusions, or sub-limits in its policy.
Part 1 of the problem directed the group to address the sub-limit issues presented by the loss scenario. Playing their roles, the attendees focused much discussion on whether the flood sublimit applied at all, given that it “is not applicable to any damage caused by a named storm.” The insured argued that flood “caused by” named storm was outside the sub-limit and thus policy limits were available; the insurer and reinsurer argued that this language must be read in conjunction with the remaining policy wording and showed an intent to prevent “stacking” of named storm and flood sub-limits.
Part 2 of the problem considered a claim from a business within the Technology Park that lost customer data during the hard shutdown of power. Given that off-site service interruption must be “caused” by “damage of the kind insured,” attendees playing the role of insurer argued that wind from named storm Betsy downed the power lines that led to the shutdown; and the policy excluded loss from “named storm” regardless of any other peril, event or occurrence. Participants speaking as the insured argued that coverage could be afforded under the data loss provision, because officials had been “aimed at” interrupting businesses in the Technology Park when they shut down power to the entire city. Insurer spokespeople responded that a city-wide shutdown was “aimed” neither at the Technology Park nor the insured.
Part 3 of the problem layered in a hypothetical statement from the state Attorney General warning insurers not to invoke “named storm” exclusions under threat of “investigations” from the state, followed by an announcement by the Insurance Department purporting to suspend anti-concurrent causation language concerning flood or storm surge. This portion of the workshop generated much discussion about where a state or local government obtains authority to impair existing contractual conditions. It highlighted how a direct insurer – operating in the “backyard” of a government regulator – might feel more pressure to accept such impositions on contracts. Attendees playing the role of reinsurers felt compelled to remind the attendees of the risks posed by gratuitous payments.
Part 4 of the problem addressed pure reinsurance issues. The attendees learned that the reinsurance agreement applied to business written on the direct insurer’s “standard form” as “previously submitted” to the reinsurer – yet the reinsurer had never before seen the “hi-tech” form offered by the direct insurer and at issue in the claim at hand. Was it sufficient that the broker offered to provide that form to the reinsurer? A further treaty provision made reinsurance for ceded amounts subject to the limits, terms and conditions of the direct policy. Participants serving as reinsurers discussed the scope of their obligation to a direct insurer if it chose to disregard terms such as “named storm” exclusions or anti-concurrent causation provisions, and those serving as direct insurers pointed to the “honorable engagement” clause.
Part 5 of the problem concluded the joint workshop by introducing another Technology Park company with over $24 million of claimed losses who reached a settlement of that claim at full value with the direct insurer. The discussion for this part focused on the reinsurer’s statement, before the risk was accepted, that the $20 million hurricane and flood sublimits were an important element of the reinsurer’s decision. Attendees discussed the scope of the doctrine of “follow the settlements” and insurer and reinsurer alike raised questions about the accuracy – and potential consequences – of the broker’s representation to the reinsurer concerning those sub-limits.
The Workshop covered much ground in comparatively short time and produced a lively discussion of timely issues.
Mr. Mutch is a principal in the Boston office of Robins, Kaplan, Miller & Ciresi, L.L.P. He may be reached at email@example.com.
© 2013 Robins, Kaplan, Miller & Ciresi, L.L.P. All rights reserved.
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