English: A diagram of the location of tornado alley and the related weather systems (public domain, NOAA). (Photo credit: Wikipedia)

Tornado season is right around the corner here in the United States.  May and June are typically the most active months of the year for tornado genesis across the Great Plains.  Tornado Alley, as the nickname goes, sees a very large number of super cell thunderstorms which are perfect producers of violent EF2 or greater tornadoes.  The boundaries of Tornado Alley reach from south/central Texas up to northern Iowa and east/west from Missouri to Colorado.  Other areas prone to tornadoes in the U.S. include Florida and the Gulf Coast which is named the Dixie Alley and has a relatively high number of tornadoes occurring in the late fall, October through December.  As many as 1,200 tornadoes hit the U.S. every year and recent years have shown that as our planet’s climate continues to fluctuate we are seeing even stronger storms and resulting tornadoes.  But tornadoes are not limited to just the United States.  In fact, tornadoes occur in many parts of the world, including Europe, Africa, Asia, South America and even Australia.  These regions are more likely to experience increased tornado potential in parallel to the time of year in which increased solar energy and strong frontal storm systems are the norm for that area.  Thus, tornadoes can occur (and do so) pretty much year round on planet earth.

A Doppler on Wheels (DOW) unit observing a tornado near Attica, Kansas. (Photo credit: Wikipedia)

Tornado Damage/Coverage:

Over the past decade, insured losses from tornadoes have ranked second behind losses from hurricanes and tropical storms.  Tornadoes can cause extensive damage to your property due to the extremely high wind speeds they generate.  Depending on where the tornado ranks on the F-Scale (from 0-5), damage can be anything from a few broken windows and exterior issues or damaged roof, to completely losing your commercial building, business or home.  Insurers have been examining the underwriting of reoccurring natural disasters such as tornadoes in the past few years due to a noticeable increase in severity and size of these events.  U.S. insurers lost nearly $26 billion on tornadoes and related storms in 2011, which was more than the previous record for tornado related losses.  Perhaps the most tragic tornado related event occurred in Joplin, MO in May of 2011 when a very powerful EF-5 tornado took at least 161 lives and injured many more.  The tornado caused total destruction of much of the cities’ infrastructure, homes and businesses.  And as we’ve seen since the disaster, now almost 2 full years since it occurred, many claims have still not been settled with insurers.  Joplin’s total losses from the EF-5 tornado were eventually tallied at upwards of $2 billion dollars.

Property managers and owners should review their coverage accordingly to be sure that the coverage in place is adequate in light of the risks they are exposed to.  Full replacement cost coverage is of course ideal, but one should also be informed of the policy’s limits and exclusions, and for business owners, proper business interruption coverage should be in place as well.  In Texas (as well as some other states) additional coverage for windstorm or hail damage is available via a special insurance pool called the Texas Windstorm Insurance Association which requires an inspection and certain building standards to qualify.  In many cases concerning tornado damage, homes and commercial properties are not insured for their full value, which can leave property owners stuck with the difference of what they are insured for and what their damaged property is actually worth (full replacement cost).   Insurers in many tornado prone areas do not include windstorm coverage in their common policies due to the higher risk of such an event occurring.  It is imperative for you as a commercial property manager or homeowner to review your policies’ coverage limits and if needed, purchase additional windstorm coverage for the proper value of your home or property.

Related articles

• 4 Things You Need to Know About Tornado Season (livescience.com)
• Deadly Tornadoes Remembered Two Years Later (witn.com)
• Could global warming change tornado season, too? (rdmag.com)
• Weather official: Expect active tornado season ahead (kansas.com)
• Global warming to change tornado season? (wcpo.com)
• Tornadoes and global warming (blogs.courier-journal.com)

Furthermore, when a fire strikes your business, the damaging results go well beyond what the fire consumes. In almost every case, there is additional smoke damage along with water damage, as well as any destruction the fire fighters may cause in putting the fire down. This combination produces one of the most complex adjustments for both insurance companies and their clients.  As a business manager your role is to restore operations, equipment and data as quickly as possible so the company can return to work and serve its customers. If you’re not adequately covered that day may never happen and the business may fail. An often reported statistic from The Chubb Group consultants says that as many as 70% of businesses involved in a major fire subsequently fail within 3 years of the disaster.

Having the right insurance and claim assistance can improve your company’s odds.  Of vital importance is making sure your fire insurance policy is up to date with continually increasing replacement costs. The Association of British Insurers reported that from 2007 to 2008
fire damage replacement costs increased 15%.  With constantly fluctuating costs like these it is important to use an expert that can guide you to the right balance of coverage and cost
management.

Related articles

• Fire victims urge further reform of insurance industry (gazette.com)
• The Basics of Dallas Fire Damage Restoration (dallasdamagerestoration.wordpress.com)

Texas Barnett Shale gas drilling rig near Alvarado, Texas (Photo credit: Wikipedia)

Environmental Risks

Natural gas production by countries in cubic meters per year (Photo credit: Wikipedia)

The harvesting of natural gas is expected to become even more common in coming years due to that reason alone.  However, the environmental side effects of this procedure can hardly be classified as “tolerable” for residents who live nearby these drilling sites as well as for our planet.  The potential for contamination of surrounding ground water from the chemicals used in fracking is very high.  The fracking liquid along with the wastewater that is produced from this type of procedure is known to infiltrate nearby wells thus severely effecting local communities’ water supplies.  Wastewater from hydraulic fracture drill sites is commonly  stored in disposal wells which themselves have been blamed for causing “micro earthquakes” in areas such as Youngstown, Ohio which experienced a light, magnitude 4.0 quake in 2011 due to large volumes of wastewater in a nearby fracking disposal well.  Many residents close to fracking sites have filed suit over drinking water contamination and well damage (well explosions) caused by the methane gas that is one of the chemicals used in the fracking fluid.  The chemicals used in fracturing fluid have been known to spread into outlying areas and groundwater supplies further contaminating local water supplies.

Against fracking (Photo credit: Bosc d'Anjou)

The sheer amount of water usage alone for this type of drilling has raised concerns over fracking as well.  A typical hydraulic fracturing drill requires 3 to 5 million US gallons of water over the course of its operational lifespan.  The transport and storage of such large amounts of fresh water raise concerns from many different angles.  Can the municipal systems support such a large use of local water?  In a world consistently headed toward natural resource decline, this would seem to be an irresponsible use of one of our planet’s most valuable resources.  Other concerns such as the dependability of well casing design, and transport of chemicals (possible chemical spills) seem relevant given the recent mishaps by large oil companies struggling to contain massive oil spills in the Gulf of Mexico.  The EPA is currently shaping its policy regarding fracking and is taking in stories/research from both sides of the spectrum concerning the process with many saying this scrutiny by the agency is long overdue.   Recently two environmental groups filed federal suit in Sanford, New York after the town banned discussion of hydraulic fracking at city board meetings.   The town’s attorney has stated that in the minds of the board members, residents had “monopolized discussion” during the public participation of meetings thus hindering the board from addressing other business.  Gov. Andrew Cuomo is expected to decide soon whether to lift a 4.5 year old moratorium on hydraulic fracking in the state.  There is intense support on both sides of the issue as energy company lobbyists go head to head with local residents over the controversial drilling technique.

Business Risks

Energy company risks:

Insurance companies offer very little when it comes to coverage for hydraulic fracturing risks.  Many have issued statements expressing a lack of information and or claims experience regarding fracking and therefore do not and will not write coverage for this specific type of risk.  Many energy companies currently rely on limited pollution coverage under their policies due to the reluctance of insurers to write hydraulic fracturing risks into their policies.  Most environmental impairment liability policies that are written are for well owners and contractors with very large fracking operations.  Insurers are still very choosy as to what risks are written and rates generally depend at least partly on geographical locations and the size of the operation.  Many energy companies still avoid spending the money on this type of coverage and instead rely on their general liability policies for coverage.  Insurance underwriters are mainly concerned with well integrity, fracking processes, and the number of drills at each fracking site when evaluating and writing risks.  Pollution coverage can sometimes be covered in a general liability or commercial lines policy if the well blowout and resulting pollution were “sudden and accidental” and if the incident is reported to the underwriter within 90 days.  As with any type of coverage, policy wording is complex and different events will trigger different coverage.

From the property owner’s viewpoint:

Oil and gas company drill leases currently do not contain provisions for liability on the part of the drilling company.  Property owners should be sure they are named as additional insured on all energy company policies if drilling is to occur on their land.  That alone however is not enough.  When the insurance company is left to choose they will most likely use a very narrow additional insured provision in the hopes of limiting their exposure to risks.  It is best to set the terms of the additional insured provision with as much specification as possible as to the amount of coverage in the event of contamination by pollutants or damage to property buildings, homes, existing water wells etc… caused by the drilling.  Most commercial general liability policies include pollution exclusions that the insurance companies rely on to deny coverage for the contamination by pollutants due to drilling.  Energy companies can (and should) obtain specialty insurance for their specific (fracking) type of operation which does not include pollution exclusions or at least contains limited ones.   Property owners and municipalities should stress this type of coverage before signing leases with drilling companies in order to avoid coverage denial due to pollution exclusions.  The more involved property owners are in the writing and implementation of coverage the more prepared they will be if and when a loss occurs due to hydraulic fracturing.  The only way for property owners or municipalities to be sure the energy company’s insurance policies meet their coverage standards is to obtain and review copies of all policies in effect regarding the drilling that is to occur.  Another valid concern are the effects/damages that do not manifest during the duration of coverage but instead begin to show several years after drilling has occurred.   Liability for these long term effects will very likely be a grey area when it comes to coverage and therefore should be addressed when shaping your policies.

Hydraulic fracturing has potential to provide large amounts of usable energy that is literally right underneath us.  But it will not come about without environmental, societal and business risks.  Attentive risk evaluation and management can and will help reduce risks to all of the parties involved.  From property owners, municipalities and residents close to drill sites to energy companies and the insurers who are underwriting the risks, we are all involved in the proper assessment and implementation of risk management as well as environmental awareness when it comes to this type of procedure and the effects it has on us and our planet.

Related articles

• Clashing beliefs on controversial ‘fracking’ practice take center stage at Ada town hall (mlive.com)
• Aversion To Fracking Continues In Illinois Despite Compromise Bill (progressillinois.com)
• Fracking and California: A three-part editorial (utsandiego.com)
• Seven Reasons Why Your Foundation Should Pay Attention to Fracking (hefn.org)
• Maryland Researchers Issue Fracking Recommendations (insurancejournal.com)
• Anti-fracking forces to rally at Illinois Statehouse (stltoday.com)

Click the link below for more details/registration form for the event.

Insurance experts Jay Feinman and Michael Childress set to speak in Christchurch

Sinkhole (Photo credit: Salim Virji)

Sinkholes are depressions or holes in the Earth’s surface caused by the dissolution of a layer or layers of soluble bedrock, usually carbonate rock such as limestone.  Subterranean drainage wears away at these layers, carrying away sediment and eventually causing the area above to collapse.  These sink holes can be very dramatic, as we’ve seen in Florida recently, they can occur in populated areas resulting in structure collapse and human casualties.  Sinkholes are common in the state of Florida due to the geographical makeup of the land.  They can occur gradually over time or very quickly causing damage from as little as cracks in the sidewalk to swallowing up portions of homes and cars.  Florida law requires insurers to cover “catastrophic ground cover collapse” but that does not necessarily mean damage caused by a sink hole will be covered by your policy.  Florida law defines catastrophic ground collapse differently from sinkholes.  As per usual the policy wording is complex with catastrophic ground cover collapse defined as “geological activity that results in all of the following:

1) The abrupt collapse of the ground cover.

2) A depression in the ground cover clearly visible to the naked eye.

3) Structural damage to the building including the foundation.

4) The insured structure being condemned and ordered to be vacated by the government agency authorized by law to issue such an order for that structure.”

Therefore if your home or commercial property sustains damage from a sinkhole but does not meet all four of the catastrophic ground cover collapse definitions (e.g. structural damage sustained but building is still livable/operable) your insurance may deny your claim if you do not have additional sinkhole coverage.  Florida (and Tennessee) insurers are required to offer additional sinkhole insurance as an addendum or rider to an existing policy and for an additional premium.  If you have additional sinkhole coverage and sustain damage from a sinkhole, your insurance company will likely order a geological report that will dictate the cause of damage.   By law you are entitled to an unbiased evaluation if you are in conflict with your insurer over whether or not damage was caused by a sinkhole.  Sinkhole insurance in Florida has been a difficult issue for policyholders and insurers alike.  Premiums for sinkhole coverage have increased significantly last year, with Citizens Property Insurance jumping their rates 50% in some sinkhole prone areas of Florida.  Private insurers have been reported hiking rates up to 200%.  The reason for rate hikes according to insurers is due to the sheer amount of sinkhole related claims received over the past 5 years.  Florida’s porous limestone underground contributes greatly to these types of natural disasters.  It is always a good idea to review your coverage and the risks associated with your building’s location (geographically speaking), with the hope of bettering your chances of compensation in the event of these types of disasters.

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• Sinkholes: common, costly and sometimes deadly (cnn.com)
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• Florida is the sinkhole king, but Alabama is not far behind (al.com)

I. Introduction

The insurance industry operated for centuries under certain fundamental principles. An insured, looking to minimize its own risk, looks to purchase an insurance policy.  The insurer issues the policy and remains profitable by spreading risks over as large a population as possible.  In the event of a loss, the insurer and insured give effect to the policy terms.

In recent years, however, insurers have employed a cornucopia of cost saving tactics that have turned this elementary understanding of the insurance process on its head.  Brokers work to benefit the insurance industry while insurers analyze risk only after issuing policies and shift that risk back onto the insureds.  The supposed camaraderie and commonality of interest touted by insurers gives way to an increasingly adversarial process that treats the insured as a foe.

Following a loss, insurers lowball and coerce vulnerable insureds into signing releases and waivers.  Insurers cry wolf following a natural disaster and claim that bankruptcy is inevitable if they are compelled to pay claims on a large scale.

Highlighted by recent natural catastrophes such as Superstorm Sandy and the series of Christchurch, New Zealand earthquakes, the insurance industry is in desperate need of reform.  Governments across the world have attempted to step in and provide relief for the insureds, and individual states in the U.S. have promulgated statutes aimed at disincentivizing such insurer conduct.  These answers have been met with varying success.

II. Disaster Background

Natural disasters are occurring with increased frequency.  900 natural catastrophes caused $160 billion in overall loss worldwide in 2012,[1] and 2011 saw 820 catastrophes cause $400 billion in overall loss.  Compared to the 30 year average, which included 650 events and $115 billion in overall loss, natural disasters have also become more destructive.[2] Eight of the ten costliest natural catastrophes since 1950 occurred in 2004 or later and none occurred prior to 1992.[3] Violent hurricanes continue to hit the United States, New Zealand has suffered a series of earthquakes, and Australia has experienced  bushfires spanning five states,[4] a “major flood crisis” in Queensland,[5] and a cyclone.[6]

And yet the insurance industry is thriving.  Insurance premiums represented 8.1% of the United States’ GDP in 2011.[7] The first three quarters of 2012[8] saw U.S. property and casualty insurers enjoy a dramatic post tax net income increase, rising 221.7 percent to $27 billion.[9] Over the same period insurers’ underwriting losses tumbled 81% to $6.7 billion, while premiums grew 4.2 percent.[10] Australian insurers earned $21.21 billion and averaged a net loss ratio of 65.66% in the first three quarters of 2012.[11] Between July 2011 and June 2012, Australian homeowner insurers received $66 million in premiums and paid only $29 million in claims.[12] New Zealand insurers had loss ratios of 55.65% and 62.30% for material damage and business interruption policies and domestic buildings and contents policies, respectively.[13] The parent company of Vero Insurance, one of the biggest property insurers in Australia and New Zealand, saw its stock outperform the ASX 200[14] index “despite five years of disaster recoveries.”[15]

III. Insurance Background

The concept of insurance is not new or novel.  In ancient times, farmers of China sent their crops to market on boats. Inevitably, on occasion a boat sank along the way. The farmers began spreading their crops among numerous boats, so that if one boat sank, any one family would only lose a small portion of their crops, thus avoiding financial devastation. The loss was spread among many families, and was therefore manageable for each one.[16]

Actual insurance contracts originated in the 13th century with ship owners who wanted to protect themselves against the possibility of catastrophic losses. As before, ships were inevitably lost at sea from time to time. The owners were aware of this, but they could not foresee which ships would be lost at what time. Wealthy individuals agreed to receive a certain amount of money from each ship owner in exchange for a promise to pay for the loss of a ship when it occurred. Insurance is, in actuality, a social vehicle for spreading the risk of financial loss among a large group of people, thus making a loss manageable for any one person of that group.[17]

The purpose of insurance is to restore the insured to their original financial position. Over the years, its basic premise remains unchanged: to spread risk, thus making loss, when it occurs, manageable.[18] Moreover, the purpose of the Unfair Claims Settlement Practices Model Act (1972) is to set forth standards for the investigation and disposition of claims. This Act requires insurance companies to promptly investigate claims and settle claims in good faith by effectuating prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.[19]

IV. Tactics Employed by Insurers to Deny or Minimize Claims: Hidden Conflicts

A. Broker Underwriting Interference

Insureds often have no contact with the entity actually providing insurance, but instead exclusively meet with insurance brokers or agents.  As such, the broker and not the insurer explains what the policy includes and excludes and deals with the insured in the event of a loss.  These brokers furthermore act under the guise of being a friend to the insured; the insured is lead to believe that the broker acts in the insured’s best interest, finds the best coverage, and stands up to the insurer.  Unbeknownst to the insured, however, the insurer spares no effort or expense in turning a broker into its own surrogate.[20]

Conflicts of interest manifest themselves in a variety of circumstances and at various times throughout the insurance process.  A common representation to an insured comes as the broker promises to scour the globe searching for the most comprehensive coverage at the most reasonable price.  What the insured does not know, however, is that insurers send more attractive brokers – those that minimize claims and costs – on lavish vacations in return for the broker’s client list and loyalty.[21] Faced with such added perks, brokers often only refer the insured to one or two choice insurers.

Insurers also achieve broker loyalty by basing the broker’s compensation on the insurer’s loss ratio.  In essence, insurers base brokers’ compensation not only on the number of clients provided but also on the amount the insurer pays out in claims; the more the insurer pays the insured, the less the insurer pays the broker.  Such payment schemes naturally result in a strong incentive for brokers to act in their own self interest and keep claims and payments down and premiums up.

When a loss occurs, the brokers or agents are the first line of defense against claims.  Notice of a claim must be given to the broker.  The brokers will, at that point, give an opinion of coverage or worthiness of the claim.  Fear of increased premiums, cancellation or inability to find cover, is often suggested.  The value of loss is minimized prior to and without any investigation of the visible damage let alone evaluation of any hidden damage.  Policyholders are encouraged to walk away.

This is all the more true after a wide spread disaster.  Many disasters include some type of water damage.  Water damage is often a covered and uncovered peril depending on the source.  This creates uncertainty and doubt about coverage which is seized on to create doubt about whether to proceed with a claim at all.

B. Post Loss Underwriting

In an ideal world, premiums and coverage are based on risk factors.  Before issuing an insurance policy, an underwriter or agent examines the property’s potential for loss and issues a policy with premiums based on the potential for loss.  However, through a process known as post-loss underwriting, insurers insure a building without first examining its risk factors.[22] The insurer quietly collects premiums and permits the insured to operate under the assumption that the property is sufficiently insured.  In the insured’s mind, any property defect would have been raised by the insurer or broker and attended to in the policy.  However, in such a situation it is only after a loss occurs that the insurer finally gets around to analyzing the risk, at which point the insurer knows precisely what it has to exclude.  The insurer can point to a perceived construction defect as the sole cause of the damage and deny the insured’s claim, despite the defect having existed well before the insurer issued the policy.  The insured could have taken appropriate action had it known at the outset that its property suffered from a construction defect, yet post loss underwriting’s tendency to lull the insured into a false sense of confidence often prevents the insured from becoming so informed.[23]

C. Claims Handling Practices: Shifting Risk Back onto the Insured

An insurer has but two basic obligations.  First, the insurer must provide services, the least of which encompasses conducting a reasonable investigation following a loss.  Second, the insurer must pay claims pursuant to the policy.  And yet, with increasing frequency insurers are conducting superficial investigations or forcing the insured to bear the cost of the investigation, whether directly (by demanding the insured pay the costs) or indirectly (through “broad information requests propounded upon the insured as part of a ‘claims’ investigation”[24]).

1. Running and Gunning

Following a publicized calamity such as a hurricane or earthquake, insurance companies are eager to acquire some positive media coverage.  After all, video of newly-homeless hurricane victims whose insurer refuses to pay a claim can hardly be good for business.  Insurers attempt to avoid this negative PR by engaging in a practice known as “running and gunning,” under which an unqualified adjuster slaps a Band-Aid on the damage and is never seen again.

Large scale natural disasters cause insurers to suffer somewhat understandable headaches.  Hundreds if not thousands of insureds become effectively homeless overnight and the insurer needs to send claims adjusters en masse to examine the affected properties.  The demand for qualified adjusters quickly eclipses the supply, and in their haste insurers send anyone into the field that can simultaneously walk and chew gum.  These individuals come from all walks of life and lack any formal training, yet are entrusted to assess intricate damage done to properties.  Furthermore, these adjusters’ salaries are commensurate with the number of properties examined and not the quality of work, making a methodical investigation all the less likely.

It is in this context that “adjusters” visit properties in the aftermath of a hurricane, conduct a quick and dirty investigation, and give a token check to the insured on the spot.  Video of an insured receiving a $5,000 check five days after a hurricane surely creates great publicity for the insurer, but the cameramen eventually leave and fail to record the adjuster never returning to the property.  Instead, the insurer’s claims department simply pays – or refuses to pay – the insured based on photos taken by the unqualified adjuster.

Such practices seem to fly in the face of various state Unfair Claims Practices Acts, which prohibit an insurance company from failing to adopt reasonable standards for the prompt investigation of claims and from refusing to pay a claim without first conducting a reasonable investigation.[25] These Acts have regrettably produced little effect on running and gunning, which continues unabated after every natural disaster.

2. Reinterpreting the terms after the fact

Most individuals purchasing property insurance are not experts and acquire insurance under the assumption that they will be covered if a flood or hurricane damages their property.  Insurers add to this belief by erecting barriers to the insured’s ability to examine the policy prior to issuance[26] and by including policy language subject to incredible interpretation.  As such, although an insured does not expect its insurer to contest a claim arising from water damage, the insurer can point to a provision distinguishing among various types of water damage, reinterpret the provision any way it so chooses, and deny the claim.

3. Limiting risk through underpayment and releases

One of the most effective tactics employed by insurers is also among the simplest: underpay the insured.  Following a natural disaster the insured’s property is often severely damaged or destroyed.  As a result, the insured is vulnerable and desperate to receive some payment in order to afford temporary housing or prevent its business from going under.  The insurer, acutely aware of the insured’s precarious situation, quickly offers a meager payment that will only cover a fraction of the cost to repair or replace the property.  The insured, already exposed and facing a lengthy court battle, reluctantly accepts this lowball offer.

Many insurers are not content to stop after receiving such a bargain.  Instead, the insurer will often make this payment contingent on the insured signing a document that categorizes the payment as the full and final settlement and releases all future claims the insured might have under the policy.  The insurer accomplishes this feat without providing separate consideration for this gratuitous release and despite the fact that the policy does not require a release in exchange for a claim payment.  In essence, then, the insured releases its rights without receiving consideration in order to obtain performance to which it is already entitled.  The insured’s need for immediate funds to house his family or keep her business afloat thus results in the insured receiving pennies on the dollar and being unable to properly repair its property.

Underpayment occurs with alarming frequency.  In 2007, the ten largest insurers in the United States paid out in benefits only about half the money they received in premiums.[27] Underpayments are also becoming more prevalent, as payouts from property and casualty insurers decreased from 67 cents for every premium dollar in 1987 to 53 cents per dollar in 2006.[28]

D. Using the law and the system to the fullest extent possible and thereby punishing the claimholder

Many insurance companies came to view claims procedures from the 1970s and 80s as undisciplined and overly reliant on an individual adjuster’s discretion.  Believing that these practices resulted in consistent overpayment of claims, insurers renewed their focus on the bottom line, standardized practices and removed any semblance of discretion.  This had the immediate effect of creating a new breed of adjustors who deny claims as a matter of right and, despite lacking a law license, interpret policies to exclude coverage.

Adjusters were not the only professionals to experience the ramifications of this profit-driven strategy, as it eventually came to affect the insurer’s attorneys.  Although insurers tend to express no reservations with litigating claims into oblivion, pursuant to this redeveloped strategy insurers now examine their attorneys’ billable hours with increased scrutiny.  The attorneys in turn are forced to find new ways to create revenue, and often end up taking unprincipled stands in court in order to prevent an early disposition of the case.  Every motion is contested, requests for production go unheeded, and interrogatories are met with objections or left unanswered.  As a result, settlements today are few and far between and previously routine coverage disputes now wind up in protracted litigation.

This increasingly adversarial process is further aggravated by an unexpected culprit: tort reform.  The reduction of available damages in tort in the 1980s caused an exodus of litigators away from the tort world and into to the contract world.  Little cordiality ever existed in tort litigation, so when these attorneys began litigating contract claims what little congeniality was left disappeared.

As a result, what used to be a levelheaded process has deteriorated to the point where insurers view their insureds with the utmost contempt.  Insureds can no longer expect a straightforward or fair clams adjusting process and instead must prepare to meet heavy resistance at every step.

Uniformly, adjusters and experts for insurance companies limit their investigations to visible damage.  This leads the insured to believe there is no further damage.  The results of hidden damage often manifest long after the claim is closed and the policyholder has no further remedy.  The fact is most policyholders never know the true value of their losses or what they are really owed.

E. Schemes of Arrangement

Perhaps the most facially persuasive argument insurers make in the wake of a catastrophe is that they simply cannot afford to pay all the claims.  The insurers point to the swath of devastation incurred, shrug their shoulders, and claim that paying every claim would render them bankrupt and subsequently cause thousands of insureds to lose coverage.  Insurers made these claims after Hurricane Katrina and the New Zealand earthquakes, and likely will make these claims following Superstorm Sandy.  Insurers have found general success in this regard, as governments effectively bail out insurers and reduce consumer protections[29] while insureds accept reduced payments.  Similarly, insurers use these catastrophes as grounds for raising premiums, which increased an average of 30% in New Zealand following the series of earthquakes.[30]

If these claims were accurate, they would indeed be compelling.  However, in reality insurers are “paying out lower claims, charging consumers higher premiums, reaping greater profits, and are more financially solid than at any other time in history.”[31] The stability of property and casualty insurers following a catastrophe is perhaps best demonstrated by U.S. insurers’ financial conditions post Hurricane Katrina.  A straightforward indicator of how much an insurer pays in claims is the pure loss ratio, which compares total losses incurred in claims plus adjustment expenses with total premiums earned.  If an insurance company pays $75 in claims for every $100 collected in premiums, for example, the loss ratio is 75%.  Accordingly, lower loss ratios represent higher earnings for insurers.  The following chart represents U.S. property and casualty insurers’ pure loss ratios from 2000 to 2006:

The pre-Katrina ratio average is 67%, yet the years including and following Katrina see the ratio dwindle to 61.5% and 53.3%.  Similarly, 2006 was the property and casualty insurance industry’s best year since 1988.[33] Property and casualty insurers had a $600 billion surplus in 2006-07, while Hurricane Katrina resulted in $28.6 billion in damages after taxes.[34] The net premiums written to surplus ratio provides further insight.  The insurance industry over time has varied in expressing what it considers a prudent ratio, with most experts comfortable with ratios under 1.5 to 1 (1.5) or 3 to 1 (3). Property and casualty insurers’ ratio was 0.8 in 2005 and 0.7 in 2006.[35] Simply stated, the insurance industry became more profitable following Katrina, and reports of financial calamity are grossly misleading.

A more contemporary example can be found in insurer Ansvar’s conduct following the series of earthquakes that hit Chirstchurch, New Zealand in 2010 and 2011.  Ansvar, which subsequently changed its name to ACS (NZ) Ltd, insured churches and historic buildings throughout Christchurch.[36] Following the earthquakes, Ansvar pursued a unique strategy of officially claiming solvency yet planted seeds of doubt by withdrawing from New Zealand,[37] cancelling all insurance policies, threatening higher premiums[38] and asking insureds to agree to a contingency plan in the event of insolvency [39] (in turn causing the New Zealand Reserve Bank to voice concerns over the fairness to insureds who take longer to settle claims[40]).  Ansvar’s CEO even went so far as to suggest that those who settle their claims early – before Ansvar becomes insolvent – would receive a larger settlement.[41] Feeling this pressure exerted by Ansvar,  many insureds scrambled to settle and opted to receive a discounted claim rather than “risk” getting nothing at all.[42] Ansvar, perhaps unsurprisingly, remains solvent to this day.

V. Solutions

A. Government Answers

1. New Zealand: Earthquake Commission

Well before the Canterbury earthquakes of 2010 and 2011, New Zealand enacted the Earthquake Commission Act 1993.[43] Following a natural disaster, the Act provides monetary relief for damage to residential buildings and personal property for individuals who already have insurance.[44] Although the Act has eased tension on some New Zealand insureds, others are left exasperated with the process[45] and the cost weighs heavily on the state.  The Earthquake Commission paid over $4.1 billion as of January 2013,[46] the state’s reinsurance premiums more than tripled in the earthquake’s aftermath, and the EQC has suggested that private insurers have attempted to shift costs onto the state.[47] Furthermore, the EQC’s efforts have not ameliorated the ills inherent in the property insurance industry, as fewer than 300 houses were estimated to have been replaced in 2012, insurance payouts moved at a “sluggish” pace,[48] and a 2012 survey reported that 80% of respondents experienced delay in rebuilding and many worried about “the death of elderly property owners exhausted by perceived dishonesty, dubious tactics and double-dealing on the part of both EQC and insurers.”[49]

2. Australia: Financial Ombudsman Service

The Financial Ombudsman Service was established in 2008 in order to resolve disputes between consumers and financial service providers such as insurers.  If an insured believes its insurer underpaid or wrongfully denied its claim, the insured can lodge a dispute with the FOS.  If the insurer and insured are unable to resolve the dispute directly, the FOS resolves the dispute through negotiation and conciliation;[50] if the parties still have not reached an agreement, FOS will issue a determination that reads like an informal court opinion.[51]

Home building and contents insurance disputes constituted slightly over 10% of all disputes in 2011-12. [52] A majority of the disputes in this arena arose from insurers denying claims, making lowball offers or delaying the handling of claims.[53] However, the FOS has received an influx of natural disaster related claims since 2010, which has in turn delayed the processing of non disaster related claims.[54] FOS resolved approximately 70% of the 1,772 accepted natural disaster disputes over an 18 month period from 2011 to 2012.[55]

B. Washington Insurance Fair Conduct Act: Five Years Later

Perhaps recognizing the difficulties insureds face in dealing with property insurers, state legislatures have promulgated statutes aimed at punishing and preventing improper insurer conduct.  In 2007 Washington passed perhaps the most comprehensive of these statutes,[56] despite the insurance industry spending millions of dollars to force a referendum.[57] The statute forbids insurers from engaging in “unfair methods of competition” or “unfair or deceptive acts,” and prohibits an insurer from “unreasonably deny[ing] a claim for coverage or payment of benefits to any first party claimant.”[58] An insurer that unreasonably denies a claim is liable for actual damages and attorneys’ fees and litigation costs, and may be further liable for treble damages.[59] This approach has been generally received as a more effective method to deter insurer misconduct.[60]

Has this been effective to balance the playing field?  Time will tell.

VI. Conclusion

Property insurers continue to exceed profit expectations despite natural disasters increasing in both number and destruction.  Although common sense dictates that property insurers should struggle in a disaster’s wake, insurers have avoided paying claims through developing techniques that are sometimes subtle, sometimes obvious, and always novel.  Having lived through a hurricane or earthquake, insureds are often ill-equipped to properly handle these tactics, and insurers – despite state efforts at curbing such behavior – walk away unscathed.

Wednesday, 20 March, 2013

Events:

5:00 – 7:00pm NZ Property Council South Island Branch Monthly Meeting

Keynote Speakers:  Jay Feinman – Author of Delay Deny Defend

Michael Childress – Partner of Risk Worldwide NZ

- Radio Live (national)

Interview with Duncan Garner

Thursday, 21 March, 2013

Events:

12:00pm Seismics and The City Conference Christchurch – Keynote Speech

Session:  “Clearing the Decks”

12:00 to 12:15 Presentation by Jay Feinman

12:15 to 12:25    Dialogue conversation between Jay Feinman and a local lawyer Sarah Miles, who wrote a book called “The Christchurch Fiasco and the Insurance Aftershock”.

12:35 to 1:00       Panel Discussion

Moderator – Brendon Burns  – former Christchurch Central Labour MP and also a former journalist.

Panelist: Jay Feinman

Tim Grafton – New CEO of the Insurance Council

Katherine Smith Dedrick – RWW Partner

Sarah Miles – former investment banking lawyer and psychotherapist

1:30 to 2:00         Lunch

2:00 to 2:40         Workshop session – where conference participants can chose this work stream or others to attend and hear more from the speakers.  Jay and Katherine Smith Dedrick will participate in this session.

5:00-7:00pm       Networking Cocktail Evening for Seismics and the City Conference

http://www.delaydenydefend.com/

http://thechristchurchfiasco.wordpress.com/tag/christchurch-fiasco/

We all know now that climate change is increasing the frequency and intensity of natural disasters, and have seen these disasters occurring all over the globe.  The link between a company’s product and its consumer market can easily be disrupted in various ways due to these unforeseeable, natural events.  Risk assessment, modeling, and preparedness will prove to be vital for companies as they manage their global supply chains.  Many insurers provide corporate business supply chain coverage or “all risks” policies intended to protect businesses from some of these risks.  Many companies suffering business delays resulting from damage to a third party facility do not realize that they may be protected by their insurance policy.  Corporate business interruption and extra expense insurance policies can be incredibly complex in their wording once again highlighting the importance of policy interpretation and comprehension when leveraging a claim with your insurer.   Risk management again takes center stage as we continue to observe the mix of turbulent weather patterns and global business networking.  How will your company respond in the case of a natural disaster?  We, of course, feel that a well thought out, actively integrated risk management plan is essential for business survival in this new era of uncertain, and devastating natural events.

English: Risk management sub processes (Photo credit: Wikipedia)

Related articles

• Supply Chain Disruption a Major Threat to Business (forbes.com)

• Emerging contingent business interruption risk modeling practices hold promise: report

Aftermath of September 4th Earthquake in Christchurch, NZ. (Photo credit: Wikipedia)

The city of Christchurch, NZ has endured somewhere around 30 aftershocks since the Feb 22 2011 earthquake that devastated much of the city.   With so much seismic activity occurring in one area, it is impossible to ignore the effects brought on by such events on the residents of Christchurch.  A recent study found that people’s levels of ‘post-traumatic growth’ are higher depending on the amount of traumatic events they have experienced.  Post-traumatic growth refers to a positive psychological change in a person or persons as a result of the struggle with a highly challenging life circumstance.  These circumstances represent significant challenges to the adaptive resources of the individual and pose challenges to the individuals’ way of understanding the world around them and their place in it.  Rebekah Smith, a student at University of Otago, studied post-traumatic growth among Canterbury residents and found 92 per cent of participants reported being stronger after the earthquakes.  Some had said they changed their priorities in life because living through the earthquakes had made them understand what was really important to them.   The study linked a higher number of traumatic events with higher levels of post-traumatic growth, perhaps suggesting the people of Christchurch have undergone a massive re-alignment of life values and priorities.   Results seen in people that have experienced PT growth include: a greater appreciation of life, changed sense of priorities, warmer, more intimate relationships, greater sense of personal strength, and recognition of new possibilities or paths for one’s life and spiritual development.

English: The cathedral’s fragile facade (damaged by earthquakes) is temporarily held in place by shipping containers and haybales. (Photo credit: Wikipedia)

Anxiety (Photo credit: Rima Xaros)

While some residents experience this post traumatic growth, it has been reported that the children of Christchurch are still suffering high levels of anxiety even two years after the earthquakes.  Researchers at the University of Canterbury are conducting a study into the effects of vitamins and minerals, using them to help treat psychological and psychiatric symptoms, such as stress, mood and ADHD.  While some children remain anxious or worried about earthquakes in particular, others have shown signs of stress and anxiety in different facets of their lives such as, friendships, school performance, and overall happiness.  Common symptoms of anxiety in children include sweating, feelings of choking or dizziness, shortness of breath, heart palpitations, being easily startled, restlessness, difficulty concentrating, headaches, stomach aches, body aches and tiredness as well as behavioural symptoms including clinginess, tantrums, withdrawing from friends and family, avoidance of places or objects, not wanting to go to school, shyness and perfectionism.  Researcher Ellen Sole is searching out a small number of children who are willing to try the vitamins and minerals for two months in order to conduct the study.  “Certainly Christchurch children have had to cope with much more than a lot of children do, so we would expect that some of these children will struggle,” she said.

Related articles

• Earthquakes trigger ‘post-traumatic growth’ (stuff.co.nz)
• Posttraumatic Growth following a Relative’s Illness (drvitelli.typepad.com)
• Quake kids still stressed (nzherald.co.nz)
• Alcohol not crutch for quake victims (stuff.co.nz)
• Effects Of Post-Traumatic Stress Disorder (casapalmera.com)