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Will the Parachute Open?
Avoiding "Coverage Nullification Through Litigation"
By Robert N. Hughes, CPCU, ARM
Robert Hughes Associates Inc.
I once heard Pat Summerall, of CBS and Fox Sports fame, describe alcoholism as "the only disease of which the victim doesn't want to be cured." To a certain extent, something similar can be said about insurance. Insurance is one of the few services or commodities that you purchase but hope never to use. Most individuals never do use the stuff. Most companies don't use their liability coverage often, either, but when they do it is often years after the policies have expired.
I was taught by an economics professor at Southern Methodist University (who must have been a genius since I actually remember it) that the true value of a commodity or service could only be determined when it was put to use. The example he used was a parachute. You can feel very secure having the thing strapped to your back, but the only way to tell if it is worth a darn is to jump out of the plane and pull the rip cord.
Many of the consultants at RHA, Inc., myself included, are spending a great deal of their time serving as expert witnesses in insurance coverage cases. One of the most amazing aspects of the phenomenon is the effect that the insurance companies' affirmative defenses would have, if successful, on coverage that was negotiated and paid for years ago … in some cases, decades. This begs the question, "How do you know what coverage you really have?" or, "Is that parachute really going to open?"
Since this is the "maiden" issue of this electronic newsletter, I wanted to be sure that my first contribution was on a subject which I consider to be of most dramatic importance to our friends and clients. This issue of "disappearing coverage" (or as a lawyer friend in New York puts it, "nullification through litigation") involves, for certain, billions of dollars and possibly even trillions. Last August, A.M. Best announced in one of its publications that the total ultimate incurred value of the environmental and asbestos claims being litigated in the U.S. is $2,000,000,000,000. Yes, that's two trillion bucks. Furthermore, it is estimated that the discounted present value of that figure is 72 percent of the entire insurance industry's capital and surplus. /FN 1/ If you add to that the billions of dollars of premises, operations, products and completed operations claims that are currently outstanding, the mind boggles.
Who's going to pay? Will it be the world of commerce and industry, or will it be the insurance industry? The jury is still out, so to speak, and it will take years to know the final answer. In the meantime, however, there are lessons to be learned and precautions to be taken to eliminate, or at least reduce, the chances that, in the future, your own coverage will be decimated or nullified when the insurance company says, "You don't have any coverage and if you don't agree, just sue us." (That presumes the company hasn't already sued you to void the coverage.)
Where to start is the problem. I think the best place to start is to try to buy your insurance from companies that pay their claims and avoid those that don't. Sounds simple, doesn't it? Not so … the process is complicated -- first, by confusion over real value versus cost (remember our parachute) and second, by a lack of easily accessible data. To illustrate the first point I will use an actual example. (No names, of course, to protect the guilty.) There is a prominent insurance organization that has a reputation for providing coverage in circumstances and at prices that cannot be duplicated by their competition. So, great! You save $20,000 per year on your $5,000,000 excess of $10,000,000 umbrella layer. The fact is, however, you won't even know for years whether you have any claims that will penetrate this layer. The other fact is that this company to which I refer simply doesn't pay large commercial liability claims without a long, protracted legal battle with its policyholders. I was recently retained in a case in which a major U.S. corporation was litigating a $10 million umbrella layer. Finally, it settled for $5 million. When the smoke cleared it was revealed that, between the two sides, $27 million had been expended in legal costs. I don't care how cheaply the policyholder bought that $10 million layer -- it not only wasn't worth anything at all, but it cost them more than $10 million in legal fees to prove it. Crazy!!!
As far as the second problem is concerned, all I can say is, "We're working on it." We have so far been somewhat successful in analyzing certain aspects of Schedule P in insurance company annual statements to determine whether they pay their claims. Probably the most dependable source for information in this regard, however, is "the street." Brokers and agents know who is paying their claims and who isn't … they just don't want to get into it unless you ask them. Lawyers specializing in insurance litigation also know who's saying "sue us," so you might ask them. (Actually, if you should decide to tell your agent/broker that you want a policy that costs more, he or she might suffer a heart attack, so be careful.)
Seriously, however, it is imperative that all policyholders concern themselves with real value, particularly in the liability area. If you fail to do so, you might find that instead of a parachute in that sack on your back, it was really only someone's lunch. And guess what -- when you hit the ground you won't need a sandwich.
I'm out of space for this edition so I'll have to go. In future editions I'll talk about such things as "Notice of Loss," "Definition of Occurrence," "Occurrence vs. Claims Made Coverage," "Lost Policies," etc. Stay tuned.
FN 1: BestWeek, March 28, 1994, ©1994, A.M. Best Company, Inc.
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