Six Short Takes on Six Significant Topics

We have a bumper crop of short takes on significant topics ranging from cat (catastrophe) bonds to hail this month.
It’s going to be all the news that fits, we print.

Cat Bond Issuance Sets First Quarter Record of $2.2 Billion Despite Fall in Interest Rates

Cat bonds once again set a quarterly record in the first quarter of 2016: $2.2 billion, despite the drop in interest rates. For example, in 2011 Chubb paid an interest rate of 6.65% when it sold a $250 million northeast hurricane bond that also covered earthquake and winter storm risks. When the bond renewed in 2015, the interest rate fell to 3.75% and the perils were broadened to include wildfire, volcanic eruption and meteorite impact. Like premiums, interest rates are higher for higher risk bonds, but the interest rates fell also. Florida hurricane cat bonds sold by Citizens Property Insurance Corp., the insurer of last resort in the Sunshine State, carried an interest rate of 17.75% in 2012, but renewed for 7.5% interest in 2014, and $1.5 billion in bonds were sold instead of the original offering of $400 million.1

Interest rates are comparable to the premiums charged by reinsurers; the fall is due to the dearth of high quality, high interest short term investments (as of May 6, 2016, US Treasury bonds paid under one percent on three-year bonds). Another factor is the broadening of the market as institutional investors gain an understanding of cat bonds as a safe place to earn higher interest rates.

You might think that the comparison with US government bonds isn’t valid because there’s almost no credit (default) risk with US government bonds. However, there’s little credit risk with cat bonds. The insurance company sets up a special trust that holds the investments until they are either disbursed at maturity or used to pay claims. The trust is obligated to invest in only the highest quality investments. The reason for the higher interest rates paid on cat bonds than on other high quality investments is the risk of the occurrence of an event insured against (e.g., a hurricane). That can cause a loss of principal and interest.

Reinsurance premiums have also fallen sharply in the last three years. This is good news for insureds with good loss records. For those insureds, premiums should stay low.

Sonoma Valley Bank Executives Settle With FDIC—We Don’t Get No Respect

The newspaper headline was: “Sonoma Valley Bank executives settle with FDIC over bank’s collapse.”2 The lead paragraph talked about a $5.4 million payment that settled the FDIC’s claims against three officers of a failed California bank. The third paragraph reads: “It calls for payments from the bank’s former president and chief executive officer, Sean Cutting, as well as former CEO and director Mel Switzer and vice president and chief loan officer Brian Melland.”3

Only when you get to the fourth paragraph, do you discover that the payments were funded by insurance (presumably directors and officers coverage). With apologies to Rodney Dangerfield, we don’t get no respect.

Federal Court Rules CGL Insurance Covers Data Breach—Don’t Rely On It

In a decision that has legal eagles salivating, a Federal appeals court affirmed a lower court ruling that the CGL policy may cover liability for a data breach. A Travelers insured, Portal Healthcare Solutions, was hired by Glens Falls NY Hospital to do electronic medical recordkeeping. The hospital’s records were hacked and posted on the Internet, resulting in a class-action lawsuit against the hospital. The hospital in turn claimed against Portal. Travelers rejected the claim against its insured stating that the CGL policies it had issued to Portal did not require it to provide defense for this claim.4

The court ruled that the CGL policy may cover data breach liability, and the appellate court affirmed. The decision runs counter to decisions in New York, Connecticut, and other states holding the CGL policy does not cover data breach liability. That’s good news for attorneys; conflicting decisions create more lawsuits. However, there are reasons why insureds should not rely on this decision for data breach coverage in a CGL policy:

• The Travelers policy wording differed from ISO. Travelers policy covers “electronic publication of material that…discloses information about a person’s private life.” ISO’s policy includes in the definition of personal and advertising injury coverage for claims arising out of “oral or written publication, in any manner, of material that violates a person’s right of privacy.” Coverage territory includes for: “Personal and advertising injury offenses that take place through the Internet or similar electronic means of communication.”

It can be argued the net effect of the differing wording is the same, but that overlooks the cases holding that “written publication in any manner” refers to publication by the insured, not by someone else, such as hackers.

• The Portal case only dealt with coverage for defense costs. It did not settle whether there would be coverage for a judgement or settlement. The court cited the familiar phrase that the duty to defend is broader than the duty to indemnify. That means the insurer may still deny coverage.
• ISO has introduced an optional endorsement CG 21 06 05 14 (Exclusion – Access Or Disclosure Of Confidential Or Personal Information And Data-Related Liability – With Bodily Injury Exception). It excludes coverage for injury or damage claims arising out of any access to or disclosure of any person’s or organization’s confidential or personal information. If there are more decisions that the unendorsed CGL covers data breach, ISO will undoubtedly incorporate the exclusion in the CGL form.
• In any event, a lawsuit is a terrible way to obtain coverage. The winners are the attorneys; the insurance company and the insured lose even if the decision is in their favor.

Despite this decision, don’t advise clients to rely on CGL policies for data breach coverage. They need cyber insurance.

Designated Premises Endorsement Again Snares the Insurance Company, Not the Insured

I hate the designated premises endorsement. It unreasonably narrows CGL coverage. I’ve railed about this endorsement in several prior columns, but now we’re seeing decisions that may give insurers second thoughts about adding the endorsement to their insureds’ policies.

In some cases, the courts are reading the endorsement to expand coverage. In June 2015, I wrote about a Hawaii case holding that a CGL policy with a designated premises endorsement covered bodily injury and property damage liability from a dam collapse on property that the insured had sold many years before.5 The court explained that the designated premises endorsement includes coverage for: “the ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises (emphasis added).” The court ruled that the use of corporate offices (the designated premises in the policy) to make decisions about the dam triggered coverage.

In a recent decision in a convoluted State of Washington case involving the use of an auto, the court awarded CGL coverage based on the designated premises endorsement. The new decision quoted so liberally from the Hawaii case that Randy Maniloff, a frequent commentator on insurance issues and a prolific blogger, wrote: “In reaching this conclusion, the court quoted several pages from the Hawaii Supreme Court’s decision in C. Brewer. I’ve never seen a court quote verbatim, to such extent, from another court’s decision.”6 Randy headlined his article “ISO Take Note.” I hope ISO takes Randy’s advice and does something about the designated premises endorsement or, better yet, gets rid of it.

Last Year’s Top 10 Equal Employment Opportunity Commission Claims

Every year, the EEOC (Equal Opportunity Commission) publishes a list of the top 10 EEOC charges in the prior year.

Here’s the latest list:

·       Retaliation: 39,757 (included in 44.5% of all charges filed)

·       Race: 31,027 (34.7%)

·       Disability: 26,968 (30.2%)

·       Sex: 26,396 (29.5%)

·       Age: 20,144 (22.5%)

·       National Origin: 9,438 (10.6%)

·       Religion: 3,502 (3.9%)

·       Color: 2,833 (3.2%)

·       Equal Pay Act: 973 (1.1%)

·       Genetic Information Non-Discrimination Act: 257 (0.3%)

(The percentages total much more than 100% percent because many complaints cite more than one type of offense. For example, retaliation claims often accompany other complaints–the employee may claim that s/he was discriminated against because of race and that the employer then retaliated when the employee filed a complaint.)

Many, perhaps more, employment practices claims are made without filing EEOC charges and the fact that the EEOC took no action on the complaint does not prevent the employee from pursing it further.

Even so, the list of claims is useful information for clients; it may alert them to the exposures they face and encourage them to purchase employment practices liability insurance.

Hail, Hail, The Gang’s All Here–Together With Insurance Claims

I am referring to the frozen stuff that falls from the sky. We do have hailstorms in the NY Metro area, but they pale compared to those in the mid-west.7

The National Weather Service has size rankings for hail going from BB (less than ¼ inch in diameter) through half-dollar (1-¼ inches) up to compact disk DVD (4-¾ inches). My favorites are golf ball, billiard ball, tennis ball, baseball and softball.

In April, the San Antonio, TX area was struck by a hailstorm with baseball-size (2-¾ inch diameter) hail. Amazingly, the insured damage is expected to exceed $1.36 billion.8 In absolute dollars, it’s the most expensive in Texas history, but a 1995 hailstorm in the Fort Worth area, which did $1.1 billion in damage, would come in at $1.6 billion when adjusted for inflation.

Makes our area look good for insurers. I’ve never had a client with a hail claim and our area doesn’t have tsunamis or typhoons, and suffers little damage from tornadoes and earthquakes. What’s that you say? What about Sandy? Oh.

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1 Matthew Lerner, “Investors Undeterred By Lower Catastrophe Bond Yields” Business Insurance April 5, 2015