• Bankruptcy and Director and Officer Liability Insurance

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    With Close up of bankruptcy petitionthe rising number of corporate bankruptcy filings and increased bank seizures by the FDIC, the need for D&O coverage has never been greater. Bankruptcy poses the greatest threat of personal financial risk, in addition to the most complicated coverage issues. The effects of the mortgage and credit crisis have had devastating effects on financial firms and bank holding companies contributing to more than half of the top 20 companies to file for bankruptcy. In 2010 alone, the number of all bankruptcies reached $1,593,081 up 8.1% from 2009 according to the Administrative Office of the U.S. Courts.

    Bank Seizures Soar

    Through November 2011, the FDIC had seized 87 banks. That number decreased from 2010 where the FDIC seized 157 banks. Altogether since 2008, more than 400 banks in 40 states have been closed. Due to the dramatic nature of bank collapses, many claims issued by the FDIC have been targeted at the directors and officers of the failed institution. Why? “Regulators want to quell the public frustration and economic anxiety by tapping sources of money to help people survive and businesses to meet their financial obligations.”

    Key Participants in Bankruptcy

    Bankruptcy can dramatically complicate D&O coverage depending on whether it is Chapter 11 or Chapter 7. In either case, bankruptcy significantly alters the rights and remedies normally afforded the insurer and the insureds under a D&O policy because indemnification from the corporation may not then be available. What does this mean for directors and officers? They could potentially be risking their personal assets unless they have D&O insurance with the proper wording in place.

    Automatic Stay

    Anytime a business files for Chapter 7 or Chapter 11 bankruptcy, an “automatic stay” is activated which gives the bankrupt company breathing room from creditors but may also prohibit them from D&O insurance proceeds. This could potentially leave directors and officers with no insurance protection.

    Insured-Versus-Insured and Regulatory Exclusions

    Bankruptcy presents an issue known as Insured-versus-Insured exclusion which precludes coverage for any cause of action asserted by one insured against another. Fortunately, newer D&O policies contain exceptions to the exclusion, addressing claims brought by a bankruptcy trustee, examiner, liquidator or receiver.

    Facts to Consider

    Perhaps the most important thing to remember when purchasing D&O insurance is to know that bankruptcy is where underwriters are scrutinizing their evaluation of risk. Underwriters are more concerned with how the company is going to turn around rather than speculating on the possibility of bankruptcy.

    Blog post summarized from Advisen Management Liability Journal, December 2011, “Bankruptcy Implications”

  • Risky Bets on Healthcare Sometimes Pay Off – Sometimes Don’t

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    SouthCoast Medical Group iStock_000001411901XSmallhad long provided health insurance to its employees the conventional way, paying premiums to an insurance company that covered medical claims. Then in January 2011 the 65-doctor practice with offices in and around Savannah, Ga., opted to take on more of the risk itself.

    SouthCoast thought it could save money by self-insuring, a strategy typically used by much larger companies. Today it pays directly for the medical care of the 280 staffers and family members on its plan, setting aside the cash it would have spent on premiums to cover claims and paying an administrator to process them. To limit its risk, the group also purchased “stop-loss” insurance that would kick in after any individual’s medical bills exceeded $100,000.

    The approach is common for corporations with thousands of employees, where the cost of care and the attendant risk is spread out over large numbers of people. For small employers, though, one car accident or organ transplant can push expenses far above the expected level. Still, with premiums for traditional policies continuing to rise, small businesses are increasingly ready to roll the dice. Some 20 percent of companies with 50 to 199 workers self-insured in 2010, up from 14 percent four years earlier, according to a Rand Corp. analysis commissioned by the U.S. Department of Labor.
    . . .
    Self-insured plans are governed by federal law and not states, which typically oversee health insurance. Some regulators fear that insurers attempting to avoid state taxes on insurance premiums and skirt state laws requiring minimum benefit levels will offer plans that are self-insurance in name only. One way they can do that is with stop-loss policies that start paying out at very low levels, after as little as $10,000 in claims, which sharply reduces the risk companies face. If “the employer is not in fact bearing the risk and the insurance company is, then the states take a look,” says Sabrina Corlette, a researcher at the Georgetown University Health Policy Institute. New York and Oregon already forbid insurance companies from selling stop-loss insurance to groups with fewer than 50 employees, and California’s insurance commissioner wants to outlaw the sale of certain stop-loss policies to small businesses.

    Self-insuring appeals to employers because dollars not spent on medical care stay in the company instead of flowing to the insurance carrier’s bottom line. The approach also gives businesses more detailed information about how their workers use health care. Claims data, which insurers are often reluctant to share, can help companies tailor plans and wellness programs to improve workers’ health by helping them quit smoking or lose weight.

    For small employers, self-insurance programs can bring unexpected problems. In its first year of self-insuring, SouthCoast faced a spike in major claims that ate up 60 percent of its reserves. When the company’s stop-loss policy came up for renewal, the premiums more than doubled, to $250,000, because of the costly claims, even after SouthCoast agreed to take on an additional $25,000 of risk per employee. The total cost to SouthCoast—including claims, stop-loss coverage, and administrative fees—jumped 25 percent, says Chief Financial Officer Gary Davis. Traditional insurance, though, would cost double what the company spent last year, he estimates. “You have to keep your eyes open that it’s a risk,” says Davis. “One out of every five or six years, you’re going to have a bad year.”

    Insurers offering stop-loss policies sometimes protect themselves with what the industry calls “lasering.” That’s when they raise the dollar amount the employer must pay before stop-loss kicks in for certain workers deemed to be high-risk—which can shift even more cost to employers. The practice can be “devastating” to small businesses, says Carl Mowery, a managing director in consultancy Grant Thornton’s compensation and benefits practice. Employers pay more up front for guarantees that they won’t have sick workers carved out later on, but Mowery says small businesses should insist on that protection to avoid being overwhelmed by catastrophic claims. “A premature baby who has a lot of health issues could be a million-dollar claim in a single year,” he says. “That could be twice as much as [small companies] pay in health premiums altogether.”

    Any benefits from self-insurance don’t materialize overnight, cautions Sam Fleet, president of AmWINS Group Benefits, a wholesale insurance brokerage in Charlotte. “You need an engaged employer, and it’s not a one-year savings,” he says. Fleet says small companies drawn by the promise of lower costs may not fully grasp the risk involved. “What scares me is there are a lot of people out there that recommend self-funding to employers,” he says. “It’s really, really important that you understand what you’re getting into.”

    Full Businessweek Article can be found HERE

  • Property and Casualty Rates Edging Higher

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    Some Segments Experiencing Modest Firming but No Uniform Market Hardening

    For the Property insurance market, 2011 was a challenging year,Analyzing the business graph with insured global catastrophe losses totaling $108 billion. Revisions to catastrophe modeling tool RMS 11.0 is also putting upward pressure on rates. Catastrophe-exposed accounts saw rates climb an average of 5%-10% in Q4 2011, with many accounts experiencing increases in the 10%-15% range – a trend that has continued through Q1 2012. While Willis expects rates for catastrophe risk to continue to climb throughout 2012, abundant capacity and the lingering weak economy have tempered upward pressure on a broader level.

    In primary/umbrella Casualty lines, more than 75% of insureds are seeing modest rate increases on renewal, driven by gradual increases in revenues and rating exposures.

    Key Price Predictions for 2012

    Property

    • Non-CAT risks: Flat
    • CAT-exposed risks: +7.5% to +12.5%

    Casualty

    • General Liability: Flat to +7.5%
    • Umbrella: +2.5% to +7.5%
    • Excess: Flat to +7.5%
    • Workers’ Compensation: +2.5% to +7.5%
    • Auto: Flat to +10%

    Executive Risks

    • Directors & Officers: -5% to +5%
    • Errors & Omissions: Flat to +5% with good loss experience; +10 to +20% with poor loss experience
    • Employment Practices Liability: Flat to -5%
    • Fiduciary: Flat to -5%

    Cyber:

    Flat to -5%; more competitive for first-time buyers

    Benefits:

    +8%

    Information excerpted from Yahoo!Finance

  • Check Facebook to Hire Successful Employees

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    A recent study published in the Journal of Applied Social Psychology shows a strong relationship between characteristics revealed on Facebook profiles and success on the job.
    Happy Young Family

    Researchers asked two students and a university professor to spend 10 minutes going through the Facebook profiles of employed college students. They looked at comments, photographs, friends and interests and then answered a series of personality-related questions about the student workers. (e.g., “Is this person dependable?” “How emotionally stable is this person?”)

    A large number of friends and a wide range of interests demonstrated agreeability. The researcher also found that photographs of employees partying were seen as positive because they showed the person was sociable and extroverted.

    Six months later the researchers obtained supervisors’ performance reviews of the students’ work and compared them to the earlier Facebook evaluations. They found a strong correlation between high scores for traits including curiosity, agreeability and conscientiousness and successful performance at work. The researchers believe the Facebook evaluations proved to be more accurate than traditional personality tests that employers often use to gauge potential employees. “Your Facebook profile ‘can help predict your job performance,'” www.economictimes.com (Feb. 23, 2012).

    Link HERE to read full article in Chubbworks.