Capstone Blog
There are many elements to consider when choosing to first purchase or renew a directors & officers liability (D&O) policy. These include the limit of insurance you wish to carry, whether that limit will be shared with other coverages such as employment practices or fiduciary liability, and how much risk you wish to retain via a policy retention. However, there are many other provisions of a D&O policy that warrant taking a closer look at when final decisions are made. In this article, we will review retroactive dates, the duty to defend provision, and the hammer clause.
As you may be aware, a majority of D&O policies are written on a “claims-made” basis. This means that in the event of a claim, it will be the policy in place at the time the claim is made that is responsible for providing coverage (if in fact it is a covered claim). Because of this open-ended period of coverage, many insurance companies will add a “retroactive” date to the policy. This establishes a starting line for the period of coverage for incidents that could give rise to a claim. In many instances, the retro date will be the inception date of D&O coverage and will remain the same even as the policy renews each year. With this, it is very important to ensure that the retroactive date is not amended if D&O coverage is moved to a different carrier. Lastly, while retroactive dates are common when writing a claims-made policy, there are some insurance companies that will provide “full prior acts” coverage, which do not restrict past events by way of a retroactive date.
The second two coverage provisions apply to the defense of a covered D&O claim. The first is the Duty to Defend Provision, which at a high-level is simply stating who is responsible for defending a claim. This is usually the first item addressed in the Defense Section of the Policy Conditions. When a policy is categorized as “Duty to Defend,” it is the insurance company that has the right and duty to defend a claim. The other option is a Duty to Indemnify or Reimbursement Policy, where it is the responsible of the policyholder to defend a claim. The main impact of this provision pertains to which party chooses defense counsel. If a policyholder would prefer that the insurance company take charge when a claim is made, then they are well-suited with a Duty to Defend policy. However, if they would like to take ownership of defense, or have preferred legal counsel that they would like to use, subject to carrier approval, then they would be better suited with a Duty to Indemnify or Reimbursement Policy. With that said, both Duty to Defend and Duty to Indemnify policies require the policyholder to cooperate with the insurance company in the defense of claims.
The final coverage provision is the Hammer Clause. This provision is similar to coinsurance on a property policy, where it shifts more risk onto the policyholder in certain claim scenarios. It states that the insurance company must obtain consent from the policyholder to settle a claim. However, if the policyholder does not provide consent to settle, then they will be responsible for a set portion of defense costs and paid judgment beyond the original settlement offer. For example, ABC Advisors has a D&O claim, and their insurance company is recommending they settle for $100,000. ABC does not wish to settle, but also has an 80/20 Hammer Clause on their policy. If the claim eventually settles for $175,000 plus an additional $25,000 of defense expenses, then ABC Advisors would be responsible for $20,000 of the additional claim costs.
As you can see, there is much more to a directors & officers liability policy than what is listed on the declaration page. If you have any questions, or wish to discuss the coverage in greater detail, please contact a member of our Commercial Property & Casualty Team.
In the wake of the collapse of Silicon Valley Bank, the Federal Deposit Insurance Corporation (FDIC) has been brought to the spotlight. The FDIC provides certain levels of insurance for depositors in case their bank fails, becomes insolvent, or goes out of business.
Over the last few days, our Capstone Team has fielded questions regarding similar scenarios in which insurance companies fail or become insolvent, and protections or backstops that might be available to insureds in those situations. Those questions lead to an important distinction between: Admitted vs. Non-Admitted insurance carriers.
Admitted Insurance Carriers
Admitted insurance carriers are insurance companies that are licensed by the state government to sell insurance within the state. They are required to comply with state regulations and file their rates with the state's insurance department. Admitted carriers must also participate in state insurance guaranty funds, which provide coverage and steps in the pay claims in the event the insurance company becomes insolvent; similar to the FDIC insurance we’ve been hearing about recently.
Advantages of Admitted Insurance Carriers:
Regulated by the state: Admitted carriers must comply with state regulations, ensuring that they follow fair and consistent underwriting practices.
Participation in insurance guaranty funds: Admitted carriers participate in state insurance guaranty funds, which provide protection to policyholders in the event the carrier becomes insolvent.
Higher level of consumer protection: Admitted carriers must comply with state regulations, providing an additional layer of protection to policyholders.
Disadvantages of Admitted Insurance Carriers:
Limited flexibility: Admitted carriers must comply with state regulations, which can limit their ability to tailor policies to meet specific needs.
Limited availability: Admitted carriers are only licensed to operate within specific states, which can limit policy options for businesses with multi-state operations.
Non-Admitted Insurance Carriers
Non-admitted insurance carriers are insurance companies that are not licensed by the state government to sell insurance within the state. They do not have to comply with state regulations and do not participate in state insurance guaranty funds.
Advantages of Non-Admitted Insurance Carriers:
Greater flexibility: Non-admitted carriers are not subject to state regulations, allowing them to offer more flexible policies to meet specific needs.
Broader coverage options: Non-admitted carriers are not limited to state-specific regulations, allowing them to offer coverage in multiple states.
Disadvantages of Non-Admitted Insurance Carriers:
Lower level of consumer protection: Non-admitted carriers are not subject to state regulations, providing less protection to policyholders.
Higher risk: Non-admitted carriers are not required to participate in state insurance guaranty funds, increasing the risk of financial loss in the event the carrier becomes insolvent.
More expensive: Non-admitted carriers may charge higher premiums due to their increased risk exposure and lack of state oversight.
Which Option is Right for You?
Most businesses carry several different types of commercial insurance policies. Some policies may be through an admitted carrier, others may be placed through non-admitted carriers it’s not a “all or none” situation. Deciding between an admitted or non-admitted insurance carrier will depend on a variety of factors, including the types of coverage needed, the specific needs of the business & industry in which you operate, and the organizations’ level of risk tolerance. For businesses that require coverage in multiple states or have unique or higher-hazard operations, a non-admitted carrier may offer greater flexibility. However, for businesses that prioritize consumer protection and the assurances of the state guarantee fund, an admitted carrier may be the better option.
In conclusion, admitted and non-admitted insurance carriers offer distinct advantages and disadvantages. The correct direction differs on a case-by-case, and even a policy-by-policy basis. It's essential to work closely with your trusted insurance & risk management advisor to carefully evaluate the specific needs of the business and level of risk tolerance, and understand the options available to you, before selecting an insurance carrier for all lines of coverage.
Introduction
Since 2019, the commercial insurance industry has been grappling with a hardening marketplace, one characterized by increased premiums, stringent underwriting criteria, restricted terms of coverage and less competition amongst insurance carriers. This was caused by a combination of increased claim frequency and severity, increasing jury awards in liability cases, lasting complications created by the COVID-19 pandemic, evolving cyber security threats and natural catastrophes causing large-scale property damage.
Trends to Watch
As we enter 2023, developing trends such as labor shortages, supply chain disruptions, and inflation issues will continue to have a direct impact on insurance buyers. However, for the first time in three years we are seeing such volatile industry conditions begin to stabilize for organizations with above-average risk profiles or exposures. When looking ahead, there are some notable trends that are impacting insurance buyers across many industries.
Labor Shortages – Labor shortages continue to present challenges for employers, impacting businesses of all industries and sizes. A recent survey conducted by Provident Bank identified that 75% of businesses have been affected by current worker shortages. To help combat various workforce movements, many employers have adjusted their hiring and retention strategies.
Supply Chain Disruptions – While most businesses have resumed normal operations and increased production levels since the dark days of the pandemic, consumer demand in many industries continues to outweigh inventory and shipping capabilities. Rising fuel costs, the ongoing shortage of labor, and extreme weather events have only added to the supply chain bottlenecks mostly impacting employers in the manufacturing, construction, and retail sectors.
Inflation Issues – Labor shortages and supply chain disruptions have largely contributed to rising inflation concerns in the commercial insurance industry. According to recent BLS data, the 2022 consumer price index (CPI) for urban consumers increased by 9.1% year over year in June 2022, a 40-year high. The elevated CPI has driven up claim costs across several lines of insurance, inflating the total loss experience of the property & casualty industry.
Notable Coverage Lines
Certain coverage lines such as Property, Umbrella, Employment Practices Liability (EPLI), and Cyber liability will continue to drive hard market conditions while others such as Workers Compensation will provide opportunities to leverage market competition.
Property – The economic trends described above are directly impacting construction costs and property replacement values. Significant natural events including Hurricane Ian, flooding in Kentucky and Tennessee and wildfires in the Northwest have also contributed to rate increases. It’s imperative to individuals and corporations review their property coverage limits and make adjustments according to replacement costs in today’s dollars. The Council of Insurance Agents & Brokers (CIAB) Q3 2022 Property & Casualty Market Report indicated a 11.2% average increase in commercial property rates.
Auto – The auto insurance market has experienced substantial challenges in recent years stemming from surging accident frequency and severity, numerous road safety challenges, widespread driver shortages, and the increase of nuclear jury verdicts. These trends have led to poor underwriting results for insurance companies, resulting in 45 consecutive quarters of auto premium increases passed onto insureds, according to CIAB. The CIAB Q3 Property & Casualty Market Report indicated a 7.6% average increase in commercial auto rates.
Umbrella – The umbrella and excess liability markets continue to be adversely impacted by large claim trends. Social inflation, third-party litigation funding and tort reform have accelerated the frequency of large settlements and jury verdicts. The CIAB Q3 Property & Casualty Market Report indicated a 11.3% average increase in commercial Umbrella rates.
Employment Related Practices Liability (EPLI) – Labor shortages in some industries, coupled with recent mass layoffs in others, has already resulted in an uptick of Employment-related claims. In response, underwriting is beginning to tighten for both first-time buyers as well as on renewal policies. When providing information that may be perceived as unfavorable to underwriting (i.e. recent downsizing), it’s important to provide additional details of why decisions were made and the steps your company has taken to avoid potential litigation from current and former employees. Consider including a narrative attached to general application submissions.
Cyber – Cyber insurance has been a source of pain for many employers in recent years. Ransomware attacks and data breaches have led insurers to drastically increase premiums, limit coverage, and demand greater network security requirements from employers. According to recent CIAB industry data, many insureds experienced 50%-100% rate increases in 2022. All organizations, regardless of size or industry, should continue to prioritize their cyber hygiene and network security.
Workers Compensation – Workers Compensation rates are expected to remain stable in 2023, as underwriting results have been favorable in recent years. Carrier competition for this coverage line is strong, which will continue to drive down rates and offset increases in other challenging lines. The CIAB Q3 Property & Casualty Market Report indicated a -0.7% average decrease in Workers Compensation rates.
Tips moving forward
While the insurance market outlook has been grim in recent years, we expect the turmoil to marginally stabilize in 2023. For employers, it’s important to focus on what you can control. That is, implementing solid risk management strategies to minimize claim history and improve your risk profile. It is equally important to align yourself with an experienced insurance broker who will proactively differentiate your business to the underwriting community and evaluate alternative risk financing options where appropriate.
Vice President - Property & Casualty
Office: 215-542-8030
Author: Erin Saunders, Account Executive - Personal Insurance/Private Client
Many personal insurance policies (Home, Auto, Umbrella, etc.) are set up for automatic renewals. Meaning these policies will often renew each year, or every six months, without having the opportunity to review coverages, costs, or to update personal information or report life events.
While we encourage reporting all major life events to your insurance advisor to update policies accordingly, at a minimum we recommend reviewing your policies annually to make sure you and your family continue to receive the most comprehensive and cost-effective coverage available. This is especially true today as we continue to be faced with macroeconomic challenges that could certainly have an impact on your personal insurance policies, such as:
Increased cost of building materials - How much would it cost to rebuild your house today as compared to when the policy was first written?
Increased interest rates - Would a loss impact your current mortgage or lease agreement?
Supply chain & continued difficulties in procuring new and used automobiles - Does auto policy account for increased cost of vehicles? Do you need to increase rental reimbursement coverage if you can’t get a replacement right away?
To help get you thinking, here’s a list of possible questions to consider as you approach your next renewal cycle:
Automobile Checklist
Are all vehicles you own insured; did you purchase a new car this year has it been added to your policy?
How are your cars valued on your policy? Actual cash value, Replacement Cost, Guaranteed Value? Know the difference
Does your policy include rental car coverage? With costs of current rental cars, you may need to increase this coverage for less out of pocket costs at the time of a claim.
Do you have any students away at college? Possible discounts
Do you have a teenager that is going to get their license in the next year?
Have you recently paid off your car loan?
If your car is towed, would you like coverage that would reimburse you for that? Did you know that towing reimbursement coverage on an automobile policy generally costs less than $10.00 per year?
Are you interested in adding or increasing your Accidental and Death Benefit Limits? Did you know that some of the most important coverages on an automobile policy are the least expensive, such as property damage coverage?
Do you wish to add income loss to your policy? Have you retired and income loss need to be removed?
Do you own a pickup or a van that contains customized equipment?
Do you own a mini bike, moped, motorized scooter or motorcycle?
Do you own any ATV's, boats, snowmobiles, jet skis or motorhomes?
Do you drive a company car?
Homeowners Checklist
Would it cost more to rebuild your home and replace its contents today than what it is insured for?
Have you made any changes to your home; additions, added garage, or a finished basement?
Do you own any of the following: Pool, trampoline, or recreational vehicles? Understand all exclusions
Does your home have a sump pump or drain to remove excess water?
Do you have a whole house generator?
Do you own any property that you rent or lease to others?
Do you own a second home such as a Coastal home?
Did you know flood is excluded on most homeowners policies? Understand the risks and available coverages
Are you running a business out of your home?
Have you acquired any collectables (jewelry, fine art, guns, antiques)? Understand coverage limitations
Have you added a new security or fire alarm system to your home?
Do you own pets or animals at your home? Certain dog breed exclusions
Have you recently updated your roof, heating, plumbing, or wiring?
Has your mortgage changed or been paid off?
Finally, after receiving the new declaration page you may discard any prior terms or policies. No need to hold on to them. And speaking of paper, many of our carriers have paperless options, one less thing to clutter up your counter!
As an insurance advisor, I can best assist my clients and recommend coverages if I know of changes that take place between renewals. Give your agent a call so they can make sure your policies are up to date and inform you of any new coverages being offered.
Erin Saunders
Account Executive - Personal Insurance
Email: Esaunders@capstonegrp.com
Phone: 215-542-8030
Capstone Group is pleased to announce the promotion of William Mooney to the position of Director within the firm’s Commercial Property & Casualty division, effective October 1, 2022.
Bill joined Capstone in 2016 as an Account Executive and has since been promoted to Senior Account Executive. Over the years, Bill has been involved in the onboarding and ongoing management of key accounts within the firm’s Commercial Property & Casualty division. As the team has expanded, Bill has served as a mentor for new hires and continues to be a technical resource for all team members.
“Bill joined Capstone nearly 6 years ago, when our firm was still very much in our infancy,” remarked Kevin Fox, Managing Partner of Capstone. “Since then, Bill has not only helped advance our Commercial Property & Casualty division but has helped shape our firm’s overall approach to account management and what we consider to be the optimal client experience. As we plan for our next phase of growth, Bill’s experience, technical expertise, and his passion for teaching, make him a perfect fit for this new position to help lead our Commercial P&C division moving forward.”
In his new capacity as Director, Bill will be responsible for overseeing the account management and customer service team within the firm’s Commercial Property & Casualty division. Bill will be working closely with Vice President of Commercial Insurance, Greg Chaples, to ensure the team is equipped to properly manage evolving client needs and execute on divisional growth goals and long-term initiatives.
About Capstone Group:
Founded in 2013, Capstone Group is an independent risk management, employee benefits, and insurance brokerage firm. As an emerging firm in a mature industry, Capstone's mission is to provide results-driven solutions that transcend what our clients have come to expect from traditional insurance and benefits brokers. To accomplish this goal, Capstone’s efforts begin and end with attracting and retaining the very best industry experts and client service representatives as a part of the team. To learn more about Capstone or submit an inquiry, visit: www.capstonegrp.com
Introduction
The commercial insurance marketplace is cyclical. A “hard market” is characterized by rising rates and premiums and a tightening of capacity, or an insurers unwillingness to provide coverage and limits they were previously comfortable providing. For the first time in nearly 20 years, the insurance marketplace began to harden in 2019 and has only been exasperated by recent current events, i.e. supply chain issues, political & social unrest, inflation, and general economic uncertainty.
A hard insurance market impacts all consumers of traditional commercial insurance products: small and large businesses, for profit and non-profit, private, and publicly traded organizations. Some industries and lines of coverage are impacted more than others. This article is intended to educate business owners and executives on how to properly prepare and identify a few strategies to consider to best navigate these challenges.
Hardest-Hit Coverages
Coming into 2022, most analysts were predicting between 12% - 15% price increases across all lines of commercial insurance. The lines driving those increases include:
Commercial Property: Fueled by continued increases in damages caused by weather & climate-related disasters. Especially for higher-value property schedules and higher-hazard operations.
Umbrella/Excess Liability: Historically pricing has been lower-cost, more stable. Recent trends such as nuclear verdicts and litigation funding are resulting in exceptionally high jury awards that drastically increase claim costs.
Management Liability (D&O and Employment Practices Liability): Driven by many socioeconomic factors, including: increased M&A activity, Pandemic-related layoffs, and “social inflation”
Cyber Liability: Cyber insurance is experiencing a hardening market on rocket fuel. We are seeing unprecedent sharp increases in claims activity, rate increases, and coverage changes in a relatively short period of time. It’s more important now than ever to work with forward-thinking insurance advisors who understand the evolving coverage forms and have access to a broad range of cyber providers to adequately navigate these challenges. To read more on this topic, check out our article published by the Delaware Valley Family Business Center.
Navigating Choppy Waters
While the outlook may seem grim in the short-term, there is hope for those organizations willing to prioritize their risk profile and align themselves with an advisor who will strategically approach the marketplace and prepare alternative options on their behalf. The current market conditions make alternative funding options, such as large deductible or Captive arrangements, viable and attractive solutions for many organizations looking to regain control of their insurance costs.
Prioritize Your “Risk Profile” – As insurance carriers look to recover losses from rapidly increasing claim activity and historically underpriced polices, underwriters are under immense pressure to carefully evaluate each renewal. The carrier’s pricing and coverage offerings will be heavily influenced by your “Risk Profile”. That is, the frequency and severity of claims along with the presence of proactive risk management and loss control programs. If you have experienced claims in the past, consider what could be done to prevent such incidents from reoccurring in the future. It’s also a great time to revamp (or implement) a strategic safety & loss control program that addresses exposures unique to your organization. Best-in-class organizations, when presented as such to the insurance carrier community, receive the best pricing and coverage.
Start Early, Have a Plan – Many organizations scramble to find alternatives after receiving unfavorable, last-minute renewal quotes from incumbent carriers. Often, these unpleasant surprises come with little warning or justification. For this reason, it’s important to start the process early, particularly when involving multiple carriers in the quoting process. Equally important is the quality of information being submitted to the insurance company when quoting. The “submission” should be detailed, accurate and complete, ultimately telling a favorable story about your organization to the underwriting community. This process creates competition amongst insurance carriers, giving you confidence that you’re receiving the best pricing and coverage terms available in the marketplace.
Identify “Softer” Lines - Fortunately for consumers, not all lines of coverage are hardening at once. Our team continues to deliver more manageable increases, and even rate decreases, in select coverage lines that should be negotiated aggressively during annual renewals in order to help offset any unavoidable increases in the lines mentioned above.
Consider Alternative Risk Financing
As stated in the beginning of this article, a hard insurance market impacts all consumers of traditional, “guaranteed-cost” commercial insurance. So, what about non-traditional or alternative options?
Alternatives such as self-insurance and Captive Insurance Arrangements (“Captives”) can certainly provide a hedge against fluctuating market cycles. On a basic level, a captive is an insurance company that is wholly owned and controlled by its insureds. Thus, giving control and potential underwriting profits back to the organizations themselves as opposed to the insurance company.
In response to rising rates and dwindling capacity, our team has certainly seen an uptick in interest in captives, but it’s important to note that these arrangements are not a fit for all organizations. For starters, there are minimum premium thresholds for most captive programs (starting at $100,000 in combined workers compensation, general & auto liability premiums). Additionally, due to funding arrangements and the risk-sharing nature of group captives, these programs are only advantageous for financially stable, well-run organizations with a dedicated focus on safety and a favorable claims history.
Conclusion
While we hope we are starting to turn a corner in the hardening market cycle, we are still diligently guiding our clients through challenging 2022 renewals that will likely extend into next year. Please consider us a resource and feel free to reach out to discuss your organizations’ unique situation.
Contact Us:
Kevin M. Fox, CIC
Managing Partner
kmfox@capstonegrp.com
Office: 215-542-8030
October is National Cybersecurity Awareness Month. During this annual event, government and industry leaders come together to raise awareness about the importance of cybersecurity. #BeCyberSmart
Insight Provided by NortonLifeLock
Most cybercriminals are master manipulators, but that doesn’t mean they’re all manipulators of technology — some cybercriminals favor the art of human manipulation.
In other words, they favor social engineering, meaning exploiting human errors and behaviors to conduct a cyberattack. For a simple social engineering example, this could occur in the event a cybercriminal impersonates an IT professional and requests your login information to patch up a security flaw on your device. If you provide the information, you’ve just handed a malicious individual the keys to your account and they didn’t even have to go to the trouble of hacking your email or computer to do it.
As with most cyber threats, social engineering can come in many forms and they’re ever-evolving. Here, we’re overviewing what social engineering looks like today, attack types to know, and red flags to watch for so you don’t become a victim.
We are pleased to announce the promotion of Thomas Fox to the position of Risk Management Advisor within Capstone’s Commercial Property & Casualty division, effective March 1st, 2021.
Since joining Capstone in 2019, Tom has been an integral part of Capstone’s client services team, serving as both an Assistant Account Manager and an Account Executive. In those roles, Tom was responsible for overseeing the day-to-day insurance and complex risk management needs of corporations and non-profit organizations of all sizes.
Through his training and experience, Tom has developed a skillset that makes him an asset to Capstone’s current and prospective clients, including but not limited to: safety & risk assessments, contract reviews, claims management, cost & coverage analysis, and carrier negotiations.
In his new capacity as a Risk Management Advisor, Tom will be responsible for business development and identifying organization that would benefit for the products and services offered by Capstone’s Commercial Property & Casualty division. In addition to making connections within his personal network, Tom will also represent Capstone within the many organizations and associations the firm currently supports, including the Philadelphia Chamber of Commerce, the MidAtlantic Employers Association, and Life Sciences PA.
Tom is a graduate of St. Joseph’s University in Philadelphia and currently resides in the city’s Fairmount neighborhood. He is passionate about expanding his knowledge and following trends of the evolving insurance industry and was recently awarded the Commercial Lines Coverage Specialist (CLCS) designation.
The COVID-19 pandemic has brought the discussion of “presumption laws” to the forefront, as states examine whether workers’ compensation should cover workers if they contract COVID-19 on the job.
A presumption law describes the conditions where an employee injury is presumed to have happened on the job and should be compensable under workers compensation coverage. The burden of proof for most work-related injuries typically rests on the injured worker. However, under presumption laws, the burden falls on the employer.
A key exclusion for nearly all presumption laws in the past is that they have not covered infectious diseases, since proving that a person was infected on the job is typically very difficult. With so many frontline healthcare and other essential workers infected with COVID-19, many states are moving to add the infectious disease to their list of presumptions, especially for certain occupations.
California (CA) - Recently passed legislation establishes a rebuttable presumption that all employees who are diagnosed with COVID-19 acquired the illness at work. Updated guidance now requires CA employers to report all COVID-19 employee incidents to their workers’ compensation carrier, regardless of occupation. Employers who fail to report “may be subject to civil penalties of up to $10,000.”
Updated FAQ: Workers’ Compensation Presumption (SB 1159) Frequently Asked Questions
New Jersey (NJ) - Recently passed legislation dramatically expands access to workers’ compensation benefits for “essential workers” infected with COVID-19. Retroactive to March 9, 2020, COVID-19-positive workers in New Jersey who qualify as “essential employees” are now entitled to a rebuttable presumption that the employee’s infection is causally related to the employee’s employment, so long as the infected individuals worked somewhere other than their own residence at the time of infection.
Other states with updated WC guidance addressing COVID-19 :
Alaska, Arkansas, California, Connecticut, Florida, Illinois, Kentucky, Minnesota, Missouri, New Hampshire, New Jersey, New Mexico, North Dakota, Utah, Vermont, Wisconsin
States with legislation still pending:
Massachusetts, Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Virginia
If you have any questions regarding your obligations under these updated or proposed guidelines, please contact us:
Business Insurance: commercial@capstoneinsgroup.com
General: info@capstoneinsgroup.com
Home Office: 215-542-8030
