PLUS Conference

Three Pain Points

Practitioners urge the professional liability markets to throw off an 'antiquated mindset.'
By: | November 2, 2015 • 9 min read

From dealing with multi-million dollar claims by private equity funds to assessing the risk profiles of telehealth providers, professional liability (PL) underwriters and practitioners across a broad spectrum of sectors have plenty to ponder.

Ahead of this year’s Professional Liability Underwriting Society’s (PLUS) annual conference in Dallas, we asked a selection of PL experts to outline the key issues in their respective fields.

Cyber Cover: To Buy or Not
to Buy?

Sarah Stephens, partner and head of cyber, technology, and media E&O at broker JLT, is on a panel discussion entitled “When David Fells Goliath — Small Companies’ Role in Large Breaches,” which explores the threat that inferior IT networks of vendors, service providers and other counterparties can pose to larger, seemingly more secure organizations.

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According to Stephens, PL practitioners need to be aware of the resource pressure on small vendors, while navigating a “web of interconnectedness” in both the liability and insurance arrangements of the various companies in the technology supply chain.

While large companies’ cyber insurance policies tend to cover them for expenses and third-party liability resulting from another vendor’s error or omission, small tech vendors are often required to buy tech PL liability insurance under their contract with larger vendors.

Stephens said it is important that practitioners help these vendors establish exactly what is and isn’t covered under their own policies, and whether procuring additional cover is necessary — particularly as in some cases, a small vendor may require tech PL cover with limits that far exceed the size of their own business.

Sarah Stephens partner and head of cyber, technology, and media E&O at JLT

Sarah Stephens
Partner and head of cyber, technology, and media E&O at JLT

“A vendor whose revenues are $5 million may, for example, provide niche services to a larger vendor and be handling the personal data of millions of retail customers,” Stephens said.

“It can be a real challenge for a broker to go to the market on behalf of a company whose revenues are $5 million and requests $20 million professional liability cover, but the exposure is real. This is the cost and reality of doing business if you are a small tech vendor.

“If I were a large company drafting the insurance requirements for my vendors, do I want PL coverage or do I want cyber coverage, or do I need both? And is it acceptable to request PL that includes cyber coverage?” Stephens asked.

“I think more education is needed as you don’t want to be requiring companies to buy cyber policies when they already have that coverage under a tech PL policy. A better understanding of the coverage and how people buy it will drive efficiencies for both large and small vendors.”

A broader industry challenge, Stephens said, is the overlap where third-party cyber liability coverage meets PL. With some doubting underwriters’ pricing sustainability, modelling and claims-paying ability, Stephens noted there has been a flight to quality cyber carriers with enough capital to pay large limit claims without being scared away from the risk or making knee-jerk price hikes.

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“From a practitioner’s point of view, my focus is to help insureds choose a market that will be there in five or 10 years and will be relatively consistent rather than reacting unreasonably to inevitable claims in the market,” she said.

According to Stephens, the nature of a company’s business should probably determine whether they choose stand-alone cyber insurance. It makes little sense, she said, for tech/IT companies to buy stand-alone cyber coverage as cyber risk runs through all of their professional risks, while other sectors with long-established PL histories may be advised to buy separate cyber policies — not least for the valuable crisis response services that usually come as standard with this coverage.

Stephens also raised the question of whether simply not having a cyber exclusion in a PL policy (as opposed to affirmative language outlining specific cyber risk triggers) offers assurance of coverage.

“Some companies choose to rely on the breadth of silence in the PL contract; others aren’t comfortable with that uncertainty as they don’t want to have to litigate a claim, so they opt for a separate cyber policy,” she said.

Financial E&O: A Volatile Subprime Legacy

According to lawyer James Skarzynski, principal of Skarzynski Black and president of PLUS, there is also an overlap at the intersection between cyber policies and D&O coverage. Skarzynski focuses primarily on D&O and E&O in the financial sector — a segment experiencing some of the most volatile and expensive PL claims.

“There are still some fairly significant subprime credit losses being litigated and it is taking time for practitioners to sort through all the issues,” he said.

James Skarzynski President of PLUS

James Skarzynski
President of PLUS

“One issue is the inter-relatedness of multiple claims within large towers of insurance. There could be multiple unrelated claims in several years of the tower, and when you have tower limits of quite easily $100 million, $200 million or more, this becomes a very substantial issue,” Skarzynski said.

These situations are being dealt with on a case-by-case basis, often with the help of mediators.

“The worst outcome is to fail to reach a resolution. It serves no one’s interest to have a dispute linger on, so that factor helps drive the parties to reach resolutions on how to allocate loss.”

But even if all parties agree and it is in their collective best interests to avoid litigation and reach a commercial resolution, negotiation challenges remain.

“Not surprisingly, the carriers at the top of the insurance towers think there should be full exhaustion of the claim from the ground up, while the insurers at the bottom of the tower may argue that if the claim would fully expose the limits of the entire tower, payment of the loss should be made pro rata so the tower shares equally in the loss.”

Even if the carriers at the top of the tower are willing to compromise and agree not to enforce full exhaustion from the ground up, they may insist that carriers in the lower portion pay a much higher proportion of their limits, Skarzynski said.

“These disputes can be very complex to resolve, and I and others in the D&O space have spent many hours in mediations, negotiating over how claims will be allocated as a prelude to mediating the underlying claims themselves, as you can’t resolve the underlying claim until you have agreed how funding will occur,” Skarzynski said.

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Another post-crisis issue, he added, is the significant increase in regulatory investigations, with E&O insurers seeing the fees incurred reaching levels comparable to or above those in major 10B-5 securities litigations.

“Many years ago, no one would ever have guessed we would be routinely seeing seven- or eight-figure fees from regulator investigations and proceedings,” Skarzynski said, adding that variances in policy wordings mean that these governmental fees are not always covered under an E&O claim.

Meanwhile, increasing private equity in the corporate landscape has led to insurance around private equity “taking on a life of its own” — often involving large, volatile dollar sums.

“Private equity plaintiffs are often very serious about getting a large dollar recovery and the values can at times be proportionately higher than the recovery on losses to shareholders in a 10B-5 securities case,” Skarzynski said.

Health Care: An Evolving Risk Landscape

“Increasing settlement verdicts, hardening of the market, and a changing model of how health care is delivered through telehealth or retail clinic settings make a busy, swirling bucket for PL underwriters to get their heads around and put the right premium/price on the table,” said Bill McDonough, managing principal and broker for Integro’s national health care practice, who will be on a panel discussing whether the PL industry can keep up with “The Brave New World of Medicine.”

“The delivery of medicine is moving much quicker than how we analyze, underwrite and understand these risks.” — Bill McDonough, managing principal and broker for Integro’s national health care practice

“Whether it’s individual insureds or the lead layer for a large system, there’s a lot of moving parts. Underwriters have to be smarter and rethink how they have been underwriting for past seven or 10 years.”

The primary shift in the U.S. medical landscape is in the delivery of care, which is evolving from “brick and mortar” bedside care to “retail care” available in shopping centers other walk-up venues, and more recently “telehealth” platforms — through which the diagnosis and prescription of treatment is administered by practitioners via phone, computer or other smart technology.

“Now people are receiving care without ever being in front of a provider,” said McDonough.

“It’s a huge issue for PL underwriters. The concerns revolve around whether there are appropriate controls around the delivery of telemedicine care, whether underwriters can accurately measure the risk and understand how the risk differs to the risk they’ve been writing for the last 30 years.”

McDonough said the PL insurance market including brokers, underwriters and consultants needs to let go of its “antiquated mind-set” in order to redefine health care risk profiles, taking into account the new setting in which health practitioners — who in the case of retail and telehealth are primarily nurses rather than physicians — are operating and delivering services.

“The delivery of medicine is moving much quicker than how we analyze, underwrite and understand these risks,” he said.

“In the next three, five or 10 years, there will be a different way not only of delivering care but also in how we define that risk and insure it. As patients increasingly seek quicker, cheaper and more readily accessible health care, I believe a locus of control is being lost.

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“Practitioners can operate very independently, and my sense is that offering cheaper and quicker care is going to lead to more risk.”

Yet, McDonough said, telemedicine nurses continue to be covered under the same PL policies that brick-and-mortar practitioners have been insured under for years — either from the PL market or through captives owned by health systems and providers.

“We have to think about the adequacy of coverage with the new risk profile we’re dealing with,” McDonough said.

He added, however, that practitioners are also concerned about the adequacy of coverage — primarily regarding the size of limits they can obtain.

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Emerging Risks

Stadium Safety

Soft targets, such as sports stadiums, must increase measures to protect lives and their business.
By: | January 10, 2018 • 8 min read

Acts of violence and terror can break out in even the unlikeliest of places.

Look at the 2013 Boston Marathon, where two bombs went off, killing three and injuring dozens of others in a terrorist attack. Or consider the Orlando Pulse nightclub, where 49 people were killed and 58 wounded. Most recently in Las Vegas, a gunman killed 58 and injured hundreds of others.

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The world is not inherently evil, but these evil acts still find a way into places like churches, schools, concerts and stadiums.

“We didn’t see these kinds of attacks 20 years ago,” said Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services.

As a society, we have advanced through technology, he said. Technology’s platform has enabled the message of terror to spread further faster.

“But it’s not just with technology. Our cultures, our personal grievances, have brought people out of their comfort zones.”

Chavious said that people still had these grievances 20 years ago but were less likely to act out. Tech has linked people around the globe to other like-minded individuals, allowing for others to join in on messages of terror.

“The progression of terrorist acts over the last 10 years has very much been central to the emergence of ‘lone wolf’ actors. As was the case in both Manchester and Las Vegas, the ‘lone wolf’ dynamic presents an altogether unique set of challenges for law enforcement and event service professionals,” said John

Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services

Tomlinson, senior vice president, head of entertainment, Lockton.

As more violent outbreaks take place in public spaces, risk managers learn from and better understand what attackers want. Each new event enables risk managers to see what works and what can be improved upon to better protect people and places.

But the fact remains that the nature and pattern of attacks are changing.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility, in terms of behavioral patterns or threat recognition, thus making it virtually impossible to maintain any elements of anticipation by security officials,” said Tomlinson.

With vehicles driving into crowds, active shooters and the random nature of attacks, it’s hard to gauge what might come next, said Warren Harper, global sports & events practice leader, Marsh.

Public spaces like sporting arenas are particularly vulnerable because they are considered ‘soft targets.’ They are areas where people gather in large numbers for recreation. They are welcoming to their patrons and visitors, much like a hospital, and the crowds that attend come in droves.

NFL football stadiums, for example, can hold anywhere from 25,000 to 93,000 people at maximum capacity — and that number doesn’t include workers, players or other behind-the-scenes personnel.

“Attacks are a big risk management issue,” said Chavious. “Insurance is the last resort we want to rely upon. We’d rather be preventing it to avoid such events.”

Preparing for Danger

The second half of 2017 proved a trying few months for the insurance industry, facing hurricanes, earthquakes, wildfires and — unfortunately — multiple mass shootings.

The industry was estimated to take a more than $1 billion hit from the Las Vegas massacre in October 2017. A few years back, the Boston Marathon bombings cost businesses around $333 million each day the city was shut down following the attack. Officials were on a manhunt for the suspects in question, and Boston was on lockdown.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility.” — John Tomlinson, senior vice president, head of entertainment, Lockton

“Fortunately, we have not had a complete stadium go down,” said Harper. But a mass casualty event at a stadium can lead to the death or injury of athletes, spectators and guests; psychological trauma; potential workers’ comp claims from injured employees; lawsuits; significant reputational damage; property damage and prolonged business interruption losses.

The physical damage, said Harper, might be something risk managers can gauge beforehand, but loss of life is immeasurable.

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The best practice then, said Chavious, is awareness and education.

“A lot of preparedness comes from education. [Stadiums] need a risk management plan.”

First and foremost, Chavious said, stadiums need to perform a security risk assessment. Find out where vulnerable spots are, decide where education can be improved upon and develop other safety measures over time.

Areas outside the stadium are soft targets, said Harper. The parking lot, the ticketing and access areas and even the metro transit areas where guests mingle before and after a game are targeted more often than inside.

Last year, for example, a stadium in Manchester was the target of a bomb, which detonated outside the venue as concert-goers left. In 2015, the Stade de France in Paris was the target of suicide bombers and active shooters, who struck the outside of the stadium while a soccer match was held inside.

Security, therefore, needs to be ready to react both inside and outside the vicinity. Reviewing past events and seeing what works has helped risk mangers improve safety strategies.

“A lot of places are getting into table-top exercises” to make sure their people are really trained, added Harper.

In these exercises, employees from various departments come together to brainstorm and work through a hypothetical terrorist situation.

A facilitator will propose the scenario — an active shooter has been spotted right before the game begins, someone has called in a bomb threat, a driver has fled on foot after driving into a crowd — and the stadium’s staff is asked how they should respond.

“People tend to act on assumptions, which may be wrong, but this is a great setting for them to brainstorm and learn,” said Harper.

Technology and Safety

In addition to education, stadiums are ahead of the game, implementing high-tech security cameras and closed-circuit TV monitoring, requiring game-day audiences to use clear/see-through bags when entering the arena, upping employee training on safety protocols and utilizing vapor wake dogs.

Drones are also adding a protective layer.

John Tomlinson, senior vice president, head of entertainment, Lockton

“Drones are helpful in surveying an area and can alert security to any potential threat,” said Chavious.

“Many stadiums have an area between a city’s metro and the stadium itself. If there’s a disturbance there, and you don’t have a camera in that area, you could use the drone instead of moving physical assets.”

Chavious added that “the overhead view will pick up potential crowd concentration, see if there are too many people in one crowd, or drones can fly overhead and be used to assess situations like a vehicle that’s in a place it shouldn’t be.”

But like with all new technology, drones too have their downsides. There’s the expense of owning, maintaining and operating the drone. Weather conditions can affect how and when a drone is used, so it isn’t a reliable source. And what if that drone gets hacked?

“The evolution of venue security protocols most certainly includes the increased usage of unmanned aerial systems (UAS), including drones, as the scope and territorial vastness provided by UAS, from a monitoring perspective, is much more expansive than ground-based apparatus,” said Tomlinson.

“That said,” he continued, “there have been many documented instances in which the intrusion of unauthorized drones at live events have posed major security concerns and have actually heightened the risk of injury to participants and attendees.”

Still, many experts, including Tomlinson, see drones playing a significant role in safety at stadiums moving forward.

“I believe the utilization of drones will continue to be on the forefront of risk mitigation innovation in the live event space, albeit with some very tight operating controls,” he said.

The SAFETY Act

In response to the terrorist attacks on Sept. 11, 2001, U.S. Homeland Security enacted the Support Anti-Terrorism by Fostering Effective

Warren Harper, global sports & events practice leader, Marsh

Technologies Act (SAFETY Act).

The primary purpose of the SAFETY Act was to encourage potential manufacturers or sellers of anti-terrorism technologies to continue to develop and commercialize these technologies (like video monitoring or drones).

There was a worry that the threat of liability in such an event would deter and prevent sellers from pursing these technologies, which are aimed at saving lives. Instead, the SAFETY Act provides incentive by adding a system of risk and litigation management.

“[The SAFETY Act] is geared toward claims arising out of acts of terrorism,” said Harper.

Bottom line: It’s added financial protection. Businesses both large and small can apply for the SAFETY designation — in fact, many NFL teams push for the designation. So far, four have reached SAFETY certification: Lambeau Field, MetLife Stadium, University of Phoenix Stadium and Gillette Stadium.

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To become certified, reviewers with the SAFETY Act assess stadiums for their compliance with the most up-to-date terrorism products. They look at their built-in emergency response plans, cyber security measures, hiring and training of employees, among other criteria.

The process can take over a year, but once certified, stadiums benefit because liability for an event is lessened. One thing to remember, however, is that the added SAFETY Act protection only holds weight when a catastrophic event is classified as an act of terrorism.

“Generally speaking, I think the SAFETY Act has been instrumental in paving the way for an accelerated development of anti-terrorism products and services,” said Tomlinson.

“The benefit of gaining elements of impunity from third-party liability related matters has served as a catalyst for developers to continue to push the envelope, so to speak, in terms of ideas and innovation.”

So while attackers are changing their methods and trying to stay ahead of safety protocols at stadiums, the SAFETY Act, as well as risk managers and stadium owners, keep stadiums investing in newer, more secure safety measures. &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]