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The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | April 7, 2017 • 4 min read

Court Limited Extra Expenses

In 2012, Welspun Tubular, which manufactures pipes in Little Rock, Ark., was contracted by Enterprise Products Partners to manufacture 180 metric tons of pipe for a pipeline from Cushing, Okla., to Houston, Texas.

Production was supposed to commence on July 25, 2012, with final delivery on Aug. 31, 2013, but a fire damaged the facility on July 14, 2012. Welspun and Enterprise agreed that a portion of the production would shift to Welspun Tradings, an affiliated company in India.

Welspun had a commercial insurance policy issued by Liberty Mutual Fire Insurance Co., which covered property damage, loss of business income and extra expenses at the Little Rock facility. A forensic accountant calculated the lost business income at $28 million, direct mitigation expenses of $13.4 million and nearly $500,000 in indirect overhead costs.

Liberty paid about $415,000 as “extra expenses” in reimbursement of a portion of the direct costs, leaving unpaid $13 million, as well as nearly $500,000 in indirect overhead costs.

A partial settlement was reached, and Liberty Mutual paid Welspun $22.3 million in lost business income and $1 million for “extra expenses,” to cover direct costs, based on a $1 million policy limit.

Because they disputed the amount owed Welspun for mitigation expenses — which Welspun claimed were $13.5 million to shift production to India so the entire order was not lost — both parties filed suit.

A U.S. District Court judge in the Eastern District of Arkansas ruled on Feb. 2 that the insurer did not have to “pay more than it would have paid had the business loss occurred rather than been averted.”

He granted Liberty Mutual’s request to dismiss the case.

Scorecard: The insurance company does not have to pay Welspun $13.5 million.

Takeaway: The issue revolved around the amount the insurer would have paid if Welspun had been unable to make up the lost production.

Professional Services Not Included in Coverage

On April 22, David McBride was using a cutting torch to remove bolts from a “digester lid” as part of a project to upgrade a wastewater treatment plant in Dexter, Mich.

Sparks from the torch ignited methane gas inside the tank and caused an explosion that injured McBride and killed Michael Koch, a pipefitter.

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After the accident, McBride and the estate of Koch filed a wrongful death action against Orchard Hiltz & McCliment (OHM), the engineering and architecture firm that designed the upgrade and was project engineer for the construction.

XL Specialty Insurance Co., which had issued professional liability coverage to OHM, defended it in the lawsuits.

OHM, which was listed as an additional insured on the policies of two contractors involved in the project, filed a lawsuit seeking pro rata defense and indemnification from those insurance companies: Phoenix Insurance Co. (which provided commercial general liability coverage to A.Z. Shmina, the project’s general contractor) and Federated Mutual Insurance Co., (which provided CGL coverage to Platinum Mechanical — the employer of Koch. Platinum subcontracted with Regal Rigging & Demolition — the employer of McBride.)

Both Phoenix’s and Federated’s policies excluded professional services, and the U.S. District Court for the Eastern District of Michigan dismissed OHM’s suit.

On appeal to the U.S. 6th Circuit Court of Appeals, OHM argued the professional services exclusion did not apply because “some of the underlying allegations implicate ‘general project operations and work place safety’,” which OHM was not responsible for.

The appeals court said the policies issued by Phoenix and Federated “were never intended to cover professional negligence claims.”

“The substance of the underlying claims is that OHM is liable for failing to properly plan for, and take preventative measures to ensure, the safe removal of the digester tank lids it required as part of the overall treatment plant upgrade project,” according to the court’s opinion on Jan. 20.

Scorecard: The CGL carriers will not have to contribute to indemnify or defend the engineering firm.

Takeaway: The failure to supervise worksite safety was part of the firm’s professional services.

Malicious Acts Not Covered

For several months in 2015, Catalent found softgel capsules in the wrong place at its manufacturing facility in France. One batch of capsules was found in another batch of product, and capsules were found on an empty shelf on the floor. Catalent believed the incidents were “deliberate, malicious acts,” as part of a plan to extort money.

Because of the misplacements, the French pharmaceutical regulatory agency closed the facility for five months, leading to a loss in excess of $10 million.

Catalent filed a business interruption claim with U.S. Specialty Insurance Co., which denied the claim. The insurer then sought court approval of that denial. Because Catalent never received a demand for money, the U.S. District Court for the Southern District of New York upheld that denial.

The court said the policy unambiguously required that any alteration of stock be combined with a threat “made specifically against the insured,” with a loss defined as money “surrendered by or on behalf of the insured as an extortion payment … .”

Scorecard: The insurance company does not have to pay $10 million for business interruption.

Takeaway: No coverage existed because there was no extortion money requested or paid.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]