Hurricane Harvey and Irma Captive Insurance Ruminations: Controlling the Contract Drafting Process9/18/2017 If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101.
We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources I thought it would be inappropriate to continue my “Hurricane Harvey and Captive Insurance” series while Florida was dealing with Hurricane Irma. But now that the worst is over, I wanted to continue my train of thought. Last week, I showed that controlling the claims process is an incredible advantage to owning a captive. This is especially beneficial during a large catastrophe because your captive won’t be flooded with non-parent company claims, slowing down the settlement process. This week, I want to turn to the ability to control the contract drafting process. Insurance companies are the sole party drafting insurance policies – whose formation and interpretation is governed by contract law. Several interpretive presumptions (the adhesion contract doctrine and the presumption in favor for finding coverage) are supposed to prevent a bias that favors insurance companies. But these concepts must be applied by a judge – and there is never any guarantee he or she will rule in your favor. It’s best to control the actual drafting process to make sure the policy contains the desired terms and conditions. The following story best illustrates this benefit. Several years ago, we were talking with a potential captive client that had losses due to Hurricane Sandy. They filed a large loss of income claim with their property insurer due to the storm. The insurer responded with a counter-offer that was 10% of the client’s submitted damages. The reason for the difference? The insurer argued the loss of income was caused by cessation of utilities, which, according to the policy, had a maximum payout equal to the insurer’s counter-offer. At this point, the client has two options: he can accept the counter-offer or sue the insurer. The former would mean a fairly quick resolution but for a far lower dollar amount while the latter could take years. And a lawsuit would cost money – this with the client already in a weakened financial position. Had the insured formed a captive, he could have drafted the policy himself, giving him maximum control of terms, conditions and overall language. He could have written a simple loss of income policy with broad terms and conditions that would have covered the loss. Or he could have written a difference in conditions policy for his commercial coverage that could have provided coverage. These are just two of the possible scenarios. More are possible.
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Hurricane Harvey Captive Insurance Ruminations: The Importance of Controlling the Claims Process9/4/2017 If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101.
We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources I live in Houston, Texas. And while the last few weeks have been understandably difficult, I could not be prouder of my city or state. Watching the first responders work tirelessly for days was awe-inspiring. Seeing large numbers of people risking their lives to help rescue their fellow citizens was one of the greatest acts of selflessness I have personally witnessed. Kudos should also be given to numerous city, county, state and federal employees who swiftly and efficiently responded to the disaster. As the press reports damage totals, I find myself thinking how this natural disaster highlights several key benefits of captive insurance. While I don’t want to appear too opportunistic in making these observations, I also want to highlight several important lessons we can take from this tragedy, starting with how captives give the insured much more control over claims management. Insurance companies serve two masters with conflicting goals. On one hand, they are contractually obligated to indemnity the insured who naturally wants the largest settlement possible. While several legal principals will contain the total settlement amount, the insured will push these boundaries to obtain the largest amount allowed by law. But the insurance company is also a profit maximizing enterprise whose driving force is to increase shareholder value. This demands the company contain costs, a goal diametrically opposed to the insureds desire for a maximum settlement. A natural disaster like Hurricane Harvey – which creates the potential for a huge spike in claims – puts additional cost-minimizing pressure on the insurer, compromising its contractual duty to fully indemnify the insured. The following example illustrates this point. After Hurricane Ike in 2008, a commercial real estate investment company that I worked with on other matters filed a claim with its insurance carrier to repair the roof of an apartment complex damaged by the storm. It took the insurer 18 months to pay, during which time the complex was uninhabitable. The company eventually declared bankruptcy; the delayed settlement was partially responsible. I’ve long suspected (although never received any proof) that one or both of the following situations caused the lengthy delay in settlement: 1.) The insurer was flooded with claims, lengthening the settlement process. 2.) The insurer delayed paying the settlement to obtain a larger compounded investment return, offsetting the total cost of claims. Owning a captive insurance company would have insulated my client from both these problems. Because the captive only had one client (the parent company) they would only have to process claims for one insured, streamlining the settlement process. And the captive would have far less incentive to delay settlement because that would have betrayed its fundamental business purpose -- to indemnify the parent company in the even off loss. Controlling the claims process is but one captive advantage highlighted by Hurricane Harvey. I’ll touch on a few more over the next few weeks. I divide the insurance market between “third-party insurers” and “captives.” The former are large, publicly-traded insurance companies. “Asset-liability management” -- the science (or art, depending on your perspective) of timing the payment of liabilities with investment income -- forces this group of companies to favor predictable risks. For example, suppose an insurer has a claim payable in 12 months. Their investment department will purchase an asset that will mature when the claim comes due. Unpredictable risks complicate this relationship, explaining why the large insurers shy away from these policies (If you’d like to learn more about this discipline, please see Frank Fabozzi’s Asset Liability Management) . Enter captive insurers, who often lead the way in the insurance market by underwriting new and exotic events. The Ocean Drilling case offers a prime example: During the 1960's plaintiff faced difficulties insuring its drilling rigs. At that time the drilling rig business was written predominately by the Lloyd Syndicate ("Lloyd's"), with the London Market serving as an ancillary market to Lloyd's. As the technology of drilling rigs developed rapidly, Lloyd's adjusted its insurance rates in an attempt to cover itself against potential losses from the new drilling rigs. Because of the limited experience in insuring the new rigs and a number of substantial losses on these rigs, insurance rates increased sharply. By the end of the 1960's, rates were as high as 10 percent of the value of insured vessels, and plaintiff was unable to obtain full coverage of its rigs through the existing insurance market. In response to this dilemma, plaintiff analyzed its history of premiums and losses and determined that establishment of a captive insurer could alleviate the problems that plaintiff faced in the insurance market. In 1968 plaintiff established Mentor as a wholly-owned subsidiary incorporated in Bermuda. A recent article in Business Insurance provides an excellent example of how a captive could provide coverage for a new risk: driverless cars: Captive insurers can be a solution to cover the emerging risks presented by driverless cars that traditional insurers have either been slow to respond to or have quoted unacceptably high premiums for. ….. There are about 1.2 billion vehicles on the road worldwide, with more than 1.2 million fatalities per year, said Christine Kogut, a principal for Milliman Inc. based in South Burlington, Vermont. “The thought is that driverless and connected vehicles can eliminate all of the negatives that we have now,” she said. “They can help us be safer, save energy, cut pollution, increase the city capacity without adding concrete, and they can provide mobility to millions of people that don’t have access to transportation. The endgame is that we can be safer and more productive, and our mobility can be more personalized, more affordable and more convenient, which is what all of us really want.” The driverless car scenario is very similar to Ocean Drilling: each insured encountered higher than desired premiums due to the newness of the risks involved. This opens the market up to captives So, if your company has a new and hard to place risk, please contact us at 832.330.4101 to learn more. On Thursday, August 10th, at 10AM, we're giving a 1-hour course in captive insurance. If you're a CPA, CFP or Texas insurance Agent, it's good for 1-hour of CE. You can sign up at this link. If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources My knowledge of popular culture is at best limited – and quickly declining. I know who Kanye West is. That’s it. But despite my less than literate knowledge of popular culture, this story from the Washington Post perfectly illustrates why he should have had a captive: Lloyd’s, the London-based insurance underwriter, is proud of its reputation as the company that “specializes in unusual risks.” They include: the legs of Betty Grable, Rudolf Nureyev, Michael Flatley and David Beckham; the breasts of Dolly Parton; the hands of Keith Richards and, moving away from body parts, the 69.42 carat diamond Richard Burton bought for Elizabeth Taylor. The company’s vintage (founded in 1688) and its ye olde nickname (Lloyd’s used to be called “Lloyd’s of London”) gives it a special aura. Some call Lloyd’s “venerable.” But Kanye West does not venerate Lloyd’s. He and his company, Very Good Touring, are engaged in a battle with the insurance underwriting giant over a multimillion dollar policy purchased for West’s 2016 Saint Pablo Tour to cover the possibility it might get canceled, which some part of it did. And now West’s lawsuit against Lloyd’s, filed in a federal court in California earlier this week, is shaping up to be one of the ugliest superstar insurance disputes since Michael Jackson’s estate took on Lloyd’s for concert losses due to his death in 2009. A quick summary: West paid his premiums, hundreds of thousands of dollars of them. Lloyd’s hasn’t paid the millions West is seeking to cover the losses from the cancellation. West believes the company is trying to use “unfounded” allegations about marijuana use as a reason for not paying, the lawsuit says. And he accuses Lloyd’s of trying to smear him with news leaks in an effort to get him to back off. This is an all-too-common situation. The insured purchases coverage for a specific risk. After filing a claim, the insurer argues that it doesn’t have to pay for one or more specific reasons. A lawsuit ensues, enriching litigators and creating aggravation for everybody else. These facts are tailor made for a captive. West went to Lloyd’s of London -- a tacit admission that his risk is unique. By involving Lloyd’s, he’s already 75% of the way to forming a captive. Had he done so, West’s lawyers could have written the insurance policy, thereby preventing this situation altogether. But instead, he’s learned the hard way that insurers don’t like paying large claims. On Friday, June 29th, at 10AM, we're giving a 1-hour course in captive insurance. If you're a CPA, CFP or Texas insurance Agent, it's good for 1-hour of CE. You can sign up at this link.
If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources One of the primary objections I hear from insurance agents about captives is that commercial policies are comprehensive. But, the devil is really in the details here -- or, more specifically, in the legal precedent interpreting the policies. For example, how comprehensive is a duty to defend? On the surface, the wording looks pretty iron clad. But there's a big split among the states as to what duties this actually encompasses: Does the duty to defend require an insurer to prosecute an insured’s counterclaims or fund the insured’s counterclaims? The First Circuit certified these questions to the Massachusetts Supreme Judicial Court. In Mount Vernon Fire Insurance Company v. Visionaid, Inc., issued on June 22, 2017, the Massachusetts Supreme Judicial Court answered them, concluding that the duty to defend – under either contract or the common law – encompasses no duty either to prosecute a counterclaim or to fund the prosecution of a counterclaim. ..... Some states view it as an unambiguous word, excluding representation for claims by the insured. Other jurisdictions view “defend” as ambiguous, requiring insurers to prosecute affirmative counterclaims in some instances, such as where the counterclaim would reduce liability on, or is factually intertwined with, the underlying claim. Massachusetts now firmly stands with those states following the literal and narrow reading of “defend.” This opinion also resolves any ambiguity about the scope of defense cost payments under Massachusetts law by clearly stating that the duty to defend and the duty to pay defense costs are co-extensive. If the company had a captive, they probably would have underwritten a legal liability policy, which would have indemnified them for this loss. If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources For smaller companies, captives usually cover "stochastic" risks. These are infrequent events that are more expensive than the average claim. Employment lawsuits are a good example, as shown by several studies. U.S.-based small and medium sized businesses face an almost 12 percent chance that they it will be hit with an employment claim, with their chances much higher in certain states. A new study of employee charge trends by specialty insurer Hiscox found New Mexico, Washington, D.C., Nevada, Alabama and California as the top states for employee lawsuit risk in the U.S. Employers in these markets with at least 10 employees face a substantially higher risk of being sued by their employees when compared to the national average. According to the study, U.S.-based companies have at least an 11.7 percent chance of having an employment charge filed against them. Not only are these events more common then you'd like, they're also expensive. Hiscox claims data for small and mid-sized businesses (under 500 employees) indicate that one in five will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney’s fees and settlement costs. For those that did have insurance coverage, the average deductible cost was only $35,000, compared to the $90,000 balance paid out by their insurance company. The median judgment for cases that go to trial is approximately $200,000 for employment lawsuits adjudicated by the courts, while one-in-four cases resulted in a judgment of $500,000 or more, according to the study. These figures are confirmed for by other sources: A representative study of 446 closed claims reported by small- to medium-sized enterprises (SMEs) with fewer than 500 employees showed that 19% of employment charges resulted in defense and settlement costs averaging a total of $125,000. On average, those matters took 275 days to resolve. Due to the unpredictability of costs and fairly high claims history, this is a perfect coverage for a captive insurer. If you're a CPA of CFP and would like to learn more about captives, please sign-up for our continuing education presentation on captive insurance. It's free and will provide you with a 1-hour continuing education credit. Our next webinar is on May 31 at 11AM CST.
If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources Manufacturing has gone through a fundamental change over the last 50 years. Previously, companies stored parts on site, using them when required by the manufacturing process. Now, everybody uses a "just in time" system, where parts and materials are delivered right before they are used. This creates a potential problem: what if a crucial part isn't delivered on time? The company has to either slow down production or stop altogether, potentially losing revenue in the process. A "supply chain disruption" policy -- a staple of captive insurance companies -- can minimize the damage. These policies indemnify the company for the loss related to the delay. A recent story from Bloomberg highlights this risk: BMW AG will seek compensation from Robert Bosch GmbH after missing parts for models including the bestselling 3-Series sedan caused production stoppages in Germany, China and South Africa. A lack of steering gears supplied by Bosch, the world’s largest car parts supplier, means there’s only limited vehicle production at various German plants, while factories in Tiexi, China, and Rosslyn, South Africa, have moved up or extended planned interruptions, BMW purchasing chief Markus Duesmann said Monday in an emailed statement The Boston Fed's 2016 Cyber Security Conference Shows the Need for This Coverage, a Captive Staple5/7/2017 If you're a CPA of CFP and would like to learn more about captives, please sign-up for our continuing education presentation on captive insurance. It's free and will provide you with a 1-hour continuing education credit. Our next webinar is on May 31 at 11AM CST.
If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources Because financial institutions hold assets and a large amount personal information, they're a natural target of hacking. This is more than a hypothetical: over the last 24 months, the Central Bank of Bangladesh has been hacked as have other large institutions. Realizing the importance of this problem, the Boston Federal Reserve held a conference on cyber security in the spring of 2016. This link has a number of relevant presentations from that conference. The cost of Cyber coverage has increased over the last 24 months, thanks to an increasing number of large claims. As a result, companies are at minimum placing their deductible cyber coverage in captives at an increasing rate. Please call us at 832.330.4101 if you'd like to learn more If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101.
We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources Last week, footage of the Chicago Transit Police forcibly removing a United passenger went viral. But just as shocking was United’s response. Their first public statement will go down in public relations history as one of the most tone deaf responses ever. It took the company 24 hours and three attempts before its communications contained the appropriate level of contrition. In the intervening period, their stock price dropped and public perception of the company plummeted. United is clearly a company that needs to engage in an aggressive PR campaign to right their image with the flying public. If they had a captive insurance company (and, like most Fortune 500 companies, they probably do) and had the foresight to properly underwrite a group of business policies, they would have a reputational restoration policy that would reimburse the parent company for PR expenses and some of the lost income. This is simply one more real world example where a captive could provide insurance not underwritten by traditional third party carriers. If you'd like to add captive insurance to your professional offerings and would like to become an affiliate, please contact us at 832.330.4101. We own and operate the first Montana based series LLC named Aegis. We run it in conjunction with Aceterrus Insurance Resources It's no secret that the U.S. economy is increasingly based on intellectual capital. This means the cost of defending one's IP rights should be at the forefront of any business with intangible assets. According to the 2015 Economic Survey conducted for the American Intellectual Property Association, the median cost of litigation is high:  While there are commercial policies available for this exposure, a captive provides the best option for several reasons:
1.) A custom insurance policy: an insurance policy provided by the insurer isn't written to the insured's advantage. In contrast, a captive allows the insured complete control over contract language, insuring coverage. 2.) Complete control of litigation: having a captive allows the insured to chose the counsel best suited to the case. 3.) Fewer problems with claims: while captive adhere to insurance industry standards regarding the claims process, the ability to control the claims process allows the insured more control. If you or a client of yours is interested in using a captive for their IP coverage, please call us at 832.330.4101. |
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