On Friday, August 31st, we'll be giving a webinar titled, Using a Captive For Health Care Coverage. This half-hour webinar will discuss:
1.) Risk -- what it is, what it isn't, and how we fund it
2.) Insurance -- what it is and what it isn't
3.) Forming and running the captive.
4.) The healthcare segment
The webinar is at noon and will last about half and hour before questions.
You can sign up at this link.
If your company has a fleet of vehicles, you're undoubtedly aware of "negligent entrustment," which has the following elements:
(1) entrustment of the vehicle by an owner;
(2) to an incompetent driver;
(3) that the owner knew or should have known was unlicensed, incompetent, or reckless;
(4) that the driver was negligent on the occasion in question; and
(5) that the driver's negligence proximately caused the accident.
(Monroe v. Grider, 884 S.W.2d 811 (—Dallas 1994))
Managing against this risk should be one of the goals of your company's risk management program for its vehicle fleet. If you don't, this could result:
On July 19, 2018, a jury in Texas awarded a plaintiff $101 million for a crash with a tractor-trailer in 2013. The indictment held both the company and its driver responsible, arguing the company was negligent in hiring the driver in the first place. The jury found the driver to be 70% at fault with the company at fault for the remaining 30%. The company’s negligence was calculated at $75 million. The plaintiff’s attorneys argued the company negligently hired the employee by violating its own safety policies and was negligent in its training and supervision contributing to the crash.
This has particular salience for captive insurers, which companies use as part of a broader risk management program. The most common implementation methodology is for the captive to underwrite a deductible reimbursement with its third-party insurance company while the parent company bolsters its risk management program for its vehicle fleet. This eventually lowers auto liability claims boosting the captive's profit.
Please call us at 832.330-4101 to learn more.
If your captive is large enough, you may be eligible to convert to a pure captive, which would eliminate pooling fees and lower costs. Please contact us at 832.330.4101 to learn more.
Recently, several articles have highlighted the impact of climate change on property coverage.
Let's start with this piece from the Washington Post that highlights how rising sea levels are effecting housing in the Charleston area.
Elizabeth Boineau’s 1939 Colonial sits a block and a half from the Ashley River in a sought-after neighborhood of ancient live oaks, charming gardens and historic homes. A year ago, she thought she could sell it for nearly $1 million. But after dropping the price 11 times, Boineau has decided to tear it down.
In March, the city’s Board of Architectural Review approved the demolition — a decision not taken lightly in Charleston’s historic district.
“Each time that I was just finishing up paying off the bills, another flood would hit,” Boineau said.
If insurers follow their standard mode of operating, we'll see premium increases or an exodus of insurers underwriting property risk in coastal area -- which would hit a lot of cities. There's also the possibility of increased litigation as policy-holders attempt to force insurers to cover certain risks.
And then we have this from Axios, which highlights how climate change is highlighting coverage gaps in property policies:
The big picture: Research shows that the world’s cities can expect on average $320 billion in lost economic productivity each year because of climate-related risks — climate change, floods, droughts, wild fires and heat-island effect, among others. Meanwhile, because more than 60% of these direct and indirect costs are not typically covered by insurance, insurers and public finance are in retreat as suppliers of last resort. For example, 60% of FEMA claims in Puerto Rico have been denied. Even against predictable threats like floods, earthquakes and wildfires, the protection gap is massive.
This reminds me of the mold situation in Texas, which led to a large increase in litigation in the late 1990s.
And finally, we have this from CBS:
As the nation plans new defenses against the more powerful storms and higher tides expected from climate change, one project stands out: an ambitious proposal to build a nearly 60-mile "spine" of concrete seawalls, earthen barriers, floating gates and steel levees on the Texas Gulf Coast.
Like other oceanfront projects, this one would protect homes, delicate ecosystems and vital infrastructure, but it also has another priority: to shield some of the crown jewels of the petroleum industry, which is blamed for contributing to global warming and now wants the federal government to build safeguards against the consequences of it.
The plan is focused on a stretch of coastline that runs from the Louisiana border to industrial enclaves south of Houston that are home to one of the world's largest concentrations of petrochemical facilities, including most of Texas' 30 refineries, which represent 30 percent of the nation's refining capacity.
Texas is seeking at least $12 billion for the full coastal spine, with nearly all of it coming from public funds. Last month, the government fast-tracked an initial $3.9 billion for three separate, smaller storm barrier projects that would specifically protect oil facilities.
This tells us that companies are already trying to mitigate future damage from rising sea levels.
How can a captive help? Several ways.
1.) A captive can underwrite large deductibles for property policies, putting the insured in control of the first layer of risk and the claims process.
2.) A captive allows the insured to write the insurance policy, giving him maximum control over what is covered along with the triggering mechanism for the coverage.
Currency flows and central bank statistics are are two of the most arcane areas of economics. But here's the basic gist: a positive capital flow occurs when money is flowing into a country while a negative flow occurs when money is leaving the country. The former is economically positive; it indicates that foreign investors view the target country as an attractive investment. The latter is bad; it indicates that investors are pulling money out of the country, meaning it's no longer a good investment. Usually accompanying the latter situation are phrases like, "currency crisis," or "balance of payments crisis." There is no good way to spin capital outflow; it is an inherently bad development.
The two charts above show Puerto Rico's capital flows data but in different time frames. The top chart goes back to 1971. For most of that time, Puerto Rico's capital flows fluctuated around 0. That's not great, but not fatal either. That changed at the end of the 1990s when there was a huge capital inflow. But then in 2012 capital flows turn negative. They've been that way for the last six years. There is no good way to spin this data: it is fundamentally very negative. More money is leaving the country than going in.
Here's a historical comparison: the exact same situation happened in Greece:
And why did investors flee Greece? Because it was a fiscal and economic disaster -- just like Puerto Rico, which has been in a recession for the last ten years and where high unemployment is a feature not a bug.
This is not a good jurisdiction for any complex transaction. Period.
If you're an insurance producer that would like to add captives to their business model, please sign-up for our webinar on Friday, August 24 titled, Adding Captives to Your Insurance Practice. You can sign-up at this link.
Back when I first started studying economics and business, it was standard practice for businesses to stockpile raw materials for production. Manufacturers would have a lot (or two or three) next to their production facility where they would store raw materials that would eventually be used to produce their product.
That practice started to change sometime in the late 1970s or early 1980s when the "just-in-time" model came into being. This model is
a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies use this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.
While this method of inventory management is more efficient, it opens the company up to a new set of risks. For example, suppose the delivery of key element "X" is late because a storm in the Pacific Ocean forced boats to shift transportation lanes. This would slow or stop production, causing short-term losses. This is but one fact pattern that illustrates the problem of "supply chain disruption." Captives are a potential solution to this problem:
With the growth of just-in-time manufacturing and global sourcing, supply chains are becoming more complex and vulnerable.
Meanwhile, dangers such as aging infrastructures, political instability, climate change, cyber threats, communications vulnerabilities and even reputational harm, threaten first-, second-, and even third-tier suppliers.
According to Nick Wildgoose, Zurich’s global supply chain product leader, investment in supply chain risk management has increased considerably since the global disruptions of 2011. Even so, he said, the level of disruption is still high, with 65 percent of corporations [reporting] a disruption in 2017.
If your company has at least $10 million in revenue or 25 employees, a pure captive might be a solution to some of your supply-chain (or other) issues. Please contact us to learn more.
Puerto Rico is a poor jurisdiction to form and run a captive. My reasons have nothing to do with the law, but with the island's infrastructure, economy, and finances. Let's start with this the islands electric infrastructure:
The blackout in Hurricane Maria's wake was one of the largest ever. More than 160,000 Puerto Rican homes were damaged or destroyed. Power restoration cost more than $3 billion and was mired in controversy: PREPA's seen five CEOs in the 11 months since the storm.
One of those CEOs, former General Electric executive Rafael Díaz Granados, resigned in July, rather than accept demands by the island's Gov. Ricardo Rosselló that his $750,000 salary be reduced. PREPA is bankrupt and $9 billion in debt. In January, Rosselló announced plans to sell the insolvent company.
For months following the hurricane, the Federal Emergency Management Agency helped repair the island's power grid. However, in July FEMA's assistance ended while about 16,000 homes remained without electricity, despite urging from Puerto Rico's Congressional representative for the agency to extend its contract.
Many experts say that despite PREPA's efforts, the island's grid remains as fragile as it was before the storm. Plans to improve it are underway and will cost $26 billion more, according to a report submitted to Congress earlier this month. Days before, a federal judge ruled that the island doesn't have final say over its finances, a decision that has already cut into public assistance.
The first thing to consider when thinking about relocating to a jurisdiction is its physical infrastructure. This is especially relevant in the Caribbean, which is prone to hurricanes. Electricity -- which is something we take for granted in the developed world -- is an issue on the island. Most importantly, the system remains fragile, implying that, should another hurricane hit the island, the electricity problem will occur again. That alone is a reason to look elsewhere.
There are economic issues as well:
The economy has been in a perpetual recession for the last 10 years while the unemployment rate is over 9%. I would argue that high unemployment is structural, meaning it's now built into the economy.
Finally, we have the "Puerto Rico Debt Crisis:"
The Puerto Rican government-debt crisis is a financial crisis affecting the government of Puerto Rico.[a] The crisis traces back its history to 1973 when the government began to spend more than what it collected. To cover that imbalance, the government issued bonds rather than adjust its budget. That practice continued for four decades until 2014 when three major credit agencies downgraded several bonds issues by Puerto Rico to "junk status" after the government was unable to demonstrate that it would be able to pay its debt. The downgrading, in turn, prevented the government from selling more bonds in the open market. Unable to obtain the funding to cover its budget imbalance, the government began using its savings to pay its debt while warning that those savings would eventually exhaust and that it would thus eventually be unable to pay its debt. To prevent such scenario, the United States Congress enacted a law known as PROMESA, which appointed an oversight board with ultimate control over the commonwealth's budget. As the PROMESA board began to exert that control, the government sought to increase revenues and reduce its expenses by increasing taxes while curtailing public services and reducing worker's benefits. Those measures further compounded the crisis by provoking social distrust and unpleasantness in the general population.
The government's finances are about as unsound as you can get.
To sum up: Puerto Rico has
Is this really a place to perform a sophisticated transaction?
If your company has at least $10 million in gross revenue, 25 employees, or is in a high-risk business, a pure captive might be an appropriate risk management tool. If you'd like to learn more, please attend our webinar this Friday at noon, titled, "The Stand Alone Captive Alternative." You can sign up at this link.
This fact pattern is derived from Lexington Ins. Co. v. Chi. Flameproof & Wood Specialties Corp. (N.D. Ill., 2018)
Chicago Flameproof and Wood Specialties sold fireproof wood to JL Schwieters Construction, Inc. and JL Schwieters Building (“JLS”). JLS ordered wood they believed to be FRT compliant lumber; however, Chicago Flameproof delivered its Flame Tech lumber, which lacked this requirement. JLS’s customer could not tell the difference and installed the Flame Tech product. When it was discovered that the installed product was deficient, JLS’s customer removed the wood and informed JLS who then sued Chicago under a number of causes of action, alleging, among other things, consumer fraud, breach of warranties, and breach of contract.
This is where it gets interesting. Chicago had a standard CGL policy which, of course, covers damages to “property” by an “occurrence.” On the surface, that doesn’t seem to be the case here. Instead, these facts are better explained as a warranty claim, where the plaintiff alleges that the defendant claimed a good was “fit for a particular purpose” when it wasn’t. Yet Chicago argued the CGL language applied while the carrier Lexington Insurance said it didn’t. The court sided with the insured, ruling:
In the underlying complaints, JLS plainly seeks to hold Chicago Flameproof liable for physical injury to tangible property. In its federal suit, JLS repeatedly claims that the removal and replacement process caused or will potentially cause damage to existing elements of the four building projects, including damage to the exterior walls, wiring, and Tyvek insulation.
While it is true that, under Illinois law, the costs of repairing and replacing an insured's defective product or work generally do not constitute property damage, see Eljer, 757 N.E.2d at 502, this does not necessarily foreclose coverage where, as here, there are actual allegations of physical alterations to property other than the insured's product.
The event leading to the coverage contest involves JLS’ customer removing the non-compliant wood and replacing it with compliant material. Some property damage would naturally ensue as part of that work. This is supported by CGL Commercial General Liability from National Underwriters 8th Edition (page 9), “Reference to physical injury suggests that the tangible property must sustain some form of visible harm or impairment.”
That reading, however, is not clearly apparent at first blush from the policy language. I have a sneaking suspicion that Chicago's lawyers feel they pulled a rabbit our of their hat when they won this case.
Chicago Firewood would benefit from a captive in the following ways:
We're hosting a webinar on Friday, August 10th, at noon CST, titled, "The Stand Alone Risk Management Solution." If your company or your client's company is large enough (It has either $10 million in gross revenue, or 25 employees, or is in a high risk industry) please sign up at this link.
When putting together a risk management strategy, it's difficult to know what risks to avoid, what risks to take on, and what risks to shift. The above matrix, called the Prouty Risk Matrix, helps companies make those decisions.
The matrix has two columns. The left side ranks the probability of risk occurring from rare to very likely while the top ranks the cost of those risks from trivial to extreme. You'll also notice the different colors to the boxes.
Green boxes -- labeled "low" -- are risks that the insured will take onto their income statement. Why? Because the combination of their occurring and then the resulting cost is favorable to the insured.
Yellow boxes -- labeled "medium" -- are risks that the insured will insure. Why? Because they're at worst likely to occur and when they do occur the cost associated with them is higher.
Red boxes -- labeled high -- are completely avoided because they have a high probability of occurring and when they do happen, they cost a great deal of money.
From Insurance Law 360:
As northern California wineries look to recover from devastating October wildfires that scorched a wide swath of the state’s famed Napa and Sonoma wine country, they will face a host of insurance issues, including whether coverage is available for smoke-tainted grapes and how much they can recover for business interruption.
I routinely have conversations with insurance agents who assure me that their policies are comprehensive, covering all potential losses the insured might face. But a good insurance company lawyer will tell you that's most assuredly not the case. This is especially true when the company is facing a large number of claims; that's when counsel sharpens their pencils, digs into the dictionary and case law, and begins narrowing the legal meaning of key words and terms.
This highlights two benefits of captive insurance. First, the ability to write your own policy gives the insured complete control over the defining key terms and conditions in the policy. Second, controlling the claims process means the claim will be handled expeditiously and efficiently.
These two benefits alone make a captive a worthwhile venture for any company.
Captives are a complex business transaction. Placing them in a jurisdiction that was utterly decimated by two hurricanes is probably not the best idea.
We're giving a free, 1-hour continuing education course in captive insurance on Wednesday, October 11. You can sign up here.
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
This is the final post in my series describing the linkages between hurricanes and captive insurance. The first post detailed the benefits of controlling the claims process while the second focused on the benefits drafting the contract. Here, I want to focus on three coverages that naturally come to mind when thinking about hurricanes.
Property Damage: it’s not uncommon for insurance companies to mandate high deductibles for property coverage in locations prone to natural disasters. Several years ago, insurers in Florida only sold property polices that had a windstorm deductible equal to the greater of $50,000 or 5% of the property’s fair market value. This means that a $5 million dollar property had a mandatory deductible of $250,000. A captive can cover this risk with a deductible reimbursement policy.
Pollution: Houston has a robust oil and chemical sector. Unfortunately, runoff from industrial sites owned by these companies contaminated floodwaters in the city. Harvey also flooded the city’s sewer system, further tainting floodwater. And don’t forget the cost of mold damage and subsequent remediation, which not only grows quickly but is also excluded from property policies.
Loss of Income: Both Houston and Florida completely shut down during their respective hurricanes. Businesses obviously lost a large amount of income during this time. Florida, which has a large tourism business, may have suffered more because Irma hit at the end of the holiday season. Businesses in both locations would obviously benefit from a loss of income policy – a captive insurance staple.
These are just three policies off the top of my head. More obviously exists.