If only one of Target, Snapchat, Facebook, Google, Twitter, Yahoo, Adobe and so on and so forth had suffered a serious data breach within the last few months, that would be sufficiently troubling. Yet data breaches have become so ubiquitous that going a single week (if not days) without one hitting the headlines seems strange. By now, every organization should appreciate that—no matter how robust and sophisticated its network security is—it remains vulnerable to cybersecurity breaches and the host of negative consequences that typically follow, including class action lawsuits (so far, dozens of suits have been filed against Target), substantial breach notification costs and other “crisis management” expenses. These include forensic investigation, credit monitoring, call centers and public relations efforts, as well as potential regulatory investigations, fines and penalties.

This article will briefly look at how an organization’s commercial general liability—specifically, the personal and advertising injury coverage—may currently address privacy risks.

Although there can be substantial overlap between the concepts of cybersecurity, network security liability and privacy, as they typically are understood in the industry, this article will focus on those risks associated purely with privacy risks, or the “unauthorized access, collection, use or disclosure of personal information.” Therefore, we will not be covering those issues related to cyber liability, or “breach-related expenses, including forensic investigations, outside counsel fees, crisis management services, public relations experts, breach notification and call center costs.” This article will also not be addressing the recent first-party bodily injury, property damage and business interruption coverage associated with the damage attributable to unauthorized access of operational technology (SCADA systems).

We will first summarize the current industry standard form key coverage grant, definitions and exclusions. We will then discuss the recent Sony decision and the new 2014 industry form exclusionary endorsements targeted at eliminating coverage for data breaches under standard-form CGL coverage.

Current standard-form CGL coverage

The Coverage B “Personal and Advertising Injury Liability” coverage section of the current standard-form Insurance Services Office, Inc. (ISO) CGL policy states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury,' which is caused by an Id. §1.b.offense arising out of [the insured’s] business.” “Personal and advertising injury” is defined in the ISO standard-form policy to include a list of specifically enumerated offenses, which include the “offense” of '[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.'” The policy further states that the insurer “will have the right and duty to defend the insured against any ‘suit.’” The CGL Coverage B can indemnify and provide a defense against a wide variety of claims, including claims alleging violation of privacy rights, such as data breach cases.

Coverage disputes have generally focused on whether there has been a “publication” that violates the claimant’s “right of privacy”—both terms are left undefined in standard-form ISO policies. Courts generally (although certainly not universally) have construed the language favorably to insureds and have found coverage for a wide variety of claims alleging breach of privacy laws and regulations, including, for example, in respect of claims alleging violations of the Telephone Consumer Protection Act (TCPA), claims alleging violations of the Fair Credit Reporting Act (FCRA), claims alleging violations of the Fair and Accurate Credit Transactions Act (FACTA), claims alleging violations of the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act, claims alleging violations of the California Confidentiality of Medical Information Act (CMIA), and claims alleging violations of the California Lanterman-Petris-Short Act. Courts have found in favor of coverage in data breach cases, although the recent decision in Zurich American Insurance Co. v. Sony Corp. of America et al. highlights the issues that insureds may face in obtaining coverage for data breaches under CGL policies.

Zurich v. Sony

Arguably the most visible legal case surrounding the applicability of the CGL personal and advertising injury coverage to claims alleging data breach came about because of Sony’s massive 2011 PlayStation data breach. Zurich American and Mitsui Sumitomo had issued primary CGL policies to Sony. In April 2011, hackers broke into Sony networks and stole personal and financial information of more than 100 million users.

Sony was named as a defendant in numerous class actions immediately following the breach. Mitsui denied coverage, and Zurich responded by filing a declaratory relief action seeking a declaration that Zurich had no duty to defend.

At issue in the case is whether Sony or the hackers were responsible for the actual “publication” of the personally identifiable information (PII). A New York court recently held that there was no coverage, essentially because it was the perpetrators of the breach who ultimately “published” the private information, rather than Sony itself. Legal experts have argued both in favor of and against the court’s decision, arguing, among other things, that the trigger for the personal and advertising injury coverage must be an affirmative act by Sony or, conversely, that coverage is triggered to the extent Sony has liability.

The case is currently under appeal, and its final decision will potentially be an indicator of how insurers and courts will view data breach coverage under the personal and advertising injury coverage.

In the meantime, however, the decision underscores the difficulties that insureds can face in pursing data breach coverage under their traditional CGL policies.

Although this endorsement appears to have quietly flown in under the radar, it in reality is even more sweeping than the 2014 data breach exclusionary endorsements because it entirely eliminates coverage in the first instance.

Conclusion

Over the years, the commercial general liability policy has been the proverbial “catch all” for claims subsequently determined to be outside the intent and scope of the underwriters. Past examples have included pollution liability, asbestos, employment practices liability and professional liability. Cyber and privacy liability may well be heading in the same direction. Insurers are stating publicly that this exposure was never contemplated when the policy language was drafted. And, of course, cybersecurity and privacy liability has recently risen to potentially catastrophic levels of potential liability (e.g., Target). Insurers, therefore, are increasingly seeking to separately insure the risk, subject to separate underwriting criteria.

In the end, before a cybersecurity or privacy incident, companies should take the opportunity to carefully evaluate and address their risk profile, potential exposure to cyber and privacy risks, their risk tolerance, the sufficiency of their existing insurance coverage and the potential role of specialized cyber risk coverage.

Like anyone, insurers need certainty that the rules put in place to manage risk, pay claims and protect policyholders won’t change unexpectedly and immediately after Mother Nature plays her game.

After a natural disaster, “Monday morning quarterbacks” both proliferate and pontificate. Some of this can be positive. In fact, staring down disaster and deciding not to be a victim twice often triggers community conversations that lead to infrastructure improvements to help prevent such a scenario from ever getting a replay. However, not all hindsight is helpful, particularly when the rules going into the “game of risk” are not the same rules in the immediate aftermath. Think about it this way: You’ve got a team that runs drills, budgets for expenses and asks players to follow a certain game plan in preparation for the big football game. But on game day, the team arrives on the field to discover it’s not football they are playing, but lacrosse.

Of course, most rules have elasticity. Yet when the rules of insurance are changed after a hurricane, tornado, earthquake or flood, what sounds like a consumer-driven move often has unintended short- and long-range consequences that are truly not consumer-friendly.

States make the rules

Contrary to public perception, insurance companies don’t set the rules. State legislators and regulators make the rules, which are codified within state statutes and the insurance contract. Often, post-disaster moves result in actions that make it hard to figure out if anyone wins.

The most recent example is Superstorm Sandy. In New York, there were nearly 500,000 claims resulting from the October 2012 storm. Yet regulators mandated that claims adjusters needed to inspect properties within six days, rather than the 15 days that was in the rulebook before the storm. That may not sound like a big deal, but insurers weren’t handling Sandy claims in New York alone. There were almost as many claims in New Jersey and more than 60,000 claims in Connecticut. Getting to New York claimants faster made sense to New Yorkers, yet it sapped resources from deserving claimants in other states who also needed prompt attention.

Each state understandably, and admirably, wants to take care of its own. But in the immediate aftermath of a multi-state disaster, a stampede of mandates may be as disruptive as the disaster itself.

Policyholders pay the price

Unexpected requirements to hurry up the claims process puts speed at odds with thoroughness. That does not just mean the process is sloppy; rushing to close out a claim also raises costs. After Sandy, there were instances when insurers felt forced to pay out more in claims than what was warranted under the terms of the insurance contract. Insurers want to pay what they owe. No more, no less. Paying more than what is owed raises costs for everyone who was fortunate enough not to sustain damage. While getting more claims money sounds great from an individual claimant’s perspective, these additional, sometimes unwarranted, claims payouts are factored into determining surplus requirements for the next disaster. That makes all policyholders pay the price.

Insurance companies want to settle claims quickly. It’s in our DNA. There is little upside to drawing out the process when cause and effect are clear. But pushing speed over practicality is expensive for consumers and insurers alike.

Another program promulgated post-Sandy by both the New York Department of Financial Services and the New Jersey Department of Banking and Insurance was an emergency measure requiring mandatory participation by insurers in the mediation of non-flood claims if there was a dispute. Policyholders had to request mediation; insurers had to pay for it. It was a well-intentioned idea to keep litigation costs in check. The process was voluntary for policyholders, mandatory for insurance companies and confusing for everyone. Because it was rolled out after the storm, there were a wide variety of interpretations of the process. Some people who were satisfied with their claim thought they had to attend a mediation. Storm survivors without flood insurance thought they had a chance of compensation through mediation. Don’t get me wrong: Mediation is a great option, and many other states have similar programs. However, quickly making a new program mandatory, without proper vetting and understanding by all parties involved, can make things more confusing than they need to be – particularly post-disaster, when less confusion is what is needed.

Catastrophic events bring large losses, which cause insurers to review their underwriting performance. The only natural disaster that we can reasonably predict is a hurricane, and, even before anyone knows exactly where a storm will make landfall, insurers review their portfolio of risk and determine how they’ll respond when the sky calms. Often, insurers will reevaluate their market position, which can lead to requests for rate increases, changes in coverage options, adjustments to terms and conditions and even making decisions to adjust their exposure in the market. These seemingly prudent moves aren’t easy to do and are made more complex after a large-scale disaster.

After Sandy, New York regulators toyed with the idea (and rejected it) of restricting insurers from non-renewing no more than 2% of their book of business per territory. The current non-renewal limit is 4% on a statewide average. The swithch that New York contemplated is not unlike forcing someone to put a purchase on their credit card that they know they can’t afford. Insurers decide to enter a market – or expand there – based on the rules and regulations currently in place. Where there is a pattern of restrictive, sudden rule changes post-disaster, few companies would choose to invest more capital there.

If an insurer decides to retreat from or exit a market, it’s not personal – it’s prudent. Restricting the ability to adapt to changes in risk exposure makes the market constrict. Florida’s experience is the test lab, if anyone is in need of proof.

The whole market suffers

The severity of losses following Hurricane Andrew in 1992 caught everyone by surprise. And, the resulting market crisis got worse when the insurance industry got bushwhacked. During a special session in 1993, the Florida legislature imposed a six-month moratorium on cancellations and nonrenewal of personal property insurance policies. Then, things got worse. The moratorium was followed by a three-year phase-out plan that allowed an insurer to non-renew only as many as 5% of its property policies within a 12-month period. That meant insurers were required to continue providing coverage at rates below what they needed. Yes, it was more than two decades ago, but we have long, painful memories and existing residual damage to show how those actions forced companies to remain strict on underwriting, even today. States that have imposed exit restrictions in the past may find that insurers do not want to enter or grow their business in the future.

It’s not only insurers that suffer financially from unanticipated actions. State resources suffer, too. In another special legislative session, the Florida Llgislature changed the rules governing hurricane deductibles. Some people had the unfortunate experience of being hit by more than one storm during August and September 2004. To alleviate the financial hardship those storm victims were experiencing, the legislature nixed the per-event hurricane deductible. The change cost the state of Florida money because reimbursements for multiple deductibles came from the Florida Hurricane Catastrophe Fund – the fund providing reinsurance for all insurers doing business in the state – reducing its assets by millions of dollars. It cost all taxpayers dearly, including those who had no storm damage.

Unlike most other states, Florida’s largest insurance carrier is the state itself. Citizens Property Insurance Corp. was designed to be a state-run insurer of last resort; however, the company experienced tremendous growth following the 2004/2005 hurricane seasons when multiple storms hit and private insurers once again reevaluated their portfolios. The retreat was compounded by the fact that, in many areas of the state, Citizens was charging below market rates. The gap has been narrowed significantly in recent years, but it still exists. The politicization of insurance in Florida is what made Citizens grow into the ninth largest insurer in the U.S. in 2012. Among the top 10 writers of insurers nationally, Citizens is the only insurer with all its business - and all its risk - in a single state.

Typically, insurers are expected to raise rates following a natural disaster if what happened seems to show that there is a greater chance for such an event to occur again. Florida’s hurricane history demonstrates it’s either boom or bust for insurers, and many carriers have posted losses even in the years that are hurricane-free.

Making sense out of chaos

Natural catastrophes are called disasters for a reason. It’s organized chaos – and sometimes it’s unorganized chaos. To try to get their arms around the enormity of an event, regulators ask for claims data from carriers – and the thinking seems to be that more data is always better. The truth is that more data is expensive and time-consuming to collect, especially when the requests entail delving into files that may not be catalogued in a format that insurance departments demand. Providing information for data reports is often not optional, and what regulators ask for after a major event is as changeable as the weather. Following Sandy, New York regulators made one-time data requests and gave insurers only a few hours to respond. Requests such as these could mean that the important work of handling claims gets delayed while employees have to divert their attention from taking care of people to taking care of paperwork.

Property insurance markets do benefit from regulation, but rules that change like the wind don’t help.

Natural disasters trigger emotional responses, and those responses are helpful in that they drive volunteers to show up to give both financially and physically to start the recovery process. But it’s the rational responses that bring the economic resources necessary to rebuild after disaster. The very rational action of paying claims that are owed is a responsible way to fulfill the parameters of the insurance contract in place at the time the disaster occurred.

What lawmakers and regulators should know is that working according to predictable outcomes is the key to balancing the needs of policyholders and businesses focused on recovery, and insurance is one of those businesses. There will always be multiple points of view, as well as numerous options. But disaster response and recovery should not be viewed as opposing forces protecting self-interest. Our collective focus should be on agreements in advance that serve everyone in the best way possible, knowing that the real risk and true costs of natural disasters remain unknown.

As we enter yet another hurricane season, it’s worthwhile to take a look at both market reaction and regulatory mandates that have proven to be, in effect, another disaster in the making.

This article first appeared in PropertyCasualty360.

Instead, this bundling is encouraging consumers to buy insurance based on price – rather than on what should be the real goal: shielding a home or other valuable asset from loss. The upshot: Consumers are focusing on the minimum amount of insurance they may be required to hold, say, to secure a mortgage or own a car. It’s a situation that ultimately doesn’t benefit the consumer – or the insurer’s bottom line.

Insurers can change this so that bundling is a win both for themselves and for their customers. To begin, insurers must help guide consumers to think more about protecting themselves and their assets. Companies could then recalibrate their own business model and focus more on providing advice to customers on what insurance meets their actual needs.

Some companies – including Allstate and Progressive – are taking steps in the right direction. But they’re doing so for narrow, tactical reasons. Instead, they must act strategically and become genuine partners that provide customers with the coverage they truly need to safeguard their financial security. Such an approach would set these companies apart from rivals – and arrest the downward price spiral that has turned their bundled offerings into a commoditized product.

Insurers don’t need to discard the concept of bundling to achieve this. The thinking that goes into unbundling can actually help, because it forces companies to break products down to the granular level. Those pieces can then be reassembled into packages customized to the needs of each customer.

Does discounting reflect the true value of product bundling?

Currently, insurers offer a bundling discount, also known as a cross-product discount, and position the value to the customer as “saving money.” The approach may look like a no-brainer, thanks to the marked success of the current model of selling two products together as a bundle, with the “discount” as the differentiator. Consider the following:

• Insurers selling two products together have long seen customer retention improve. Customer retention rates are higher among renters who bundle an auto policy: 91% among those who bundle vs. 67% among those who do not, according to J.D. Power.
• The perceived value of a bundle is reflected in the fact that a greater proportion of customers buy multiple products from the same insurer. According to J.D. Power, 77% of customers bundle auto policies with additional policies, and 58% bundle their auto and home insurance policies with their existing insurers.

But when we analyze the factors that go into premium calculation, real savings for insurers depend on many factors that vary greatly between insurers, states, individual customers’ own situations, etc. Those factors can produce inconsistent savings calculations for bundles, varying from 5% to 20%. Consequently, customers need to shop around thoroughly, comparing prices (both for the individual product and the bundle) and choosing the right combination from the right insurer. The various factors can work together so differently that a customer may sometimes save by buying products from two different insurers – rather than a bundle from one.

For insurers, the incremental value in all this translates into higher customer retention. There is no real incremental value realized from the product itself, which is core risk management.

How is the industry responding?

Insurers have been responding to the emerging need to serve as risk managers for their customers. And they’ve been fine tuning their bundling strategy accordingly. Some insurers, for example, have crafted their bundling strategy to make it easier for customers to manage their risk profile through a single insurer; this also consolidates billing and payment. While this is rudimentary, it still provides an easier way to serve the customer – and to increase loyalty.

The following insurers approach bundling by advising customers as well as crafting suitable packages that allow their customers to manage risk:

• Allstate provides an “all-in-one” product through its Encompass unit, which covers homes, cars and home-based business. It’s aimed at wealthier customers. For more mass-market customers, Allstate provides “Bumper to Bumper Basics,” based on states’ minimum requirements for auto insurance.
• GEICO offers an advisory tool allowing customers to build a customized policy based on their individual circumstances.
• Progressive provides a “Name Your Price” feature for its auto coverage, under which the customer states her budget, and Progressive sorts the options based on cost. The plan closest to the customer’s budget is shown first. Progressive states on its website: “Once you fine tune your price, we highlight any areas where you might have too little or too much coverage, so you can get your entire package just right.” The insurer also gives customers the option of bundling both auto and property insurance.
• MetLife Auto & Home’s “GrandProtect” program allows consumers who purchase multiple policies – such as home and auto – to pay one deductible in the event that several of their insured assets are damaged by one event, such as a storm or hurricane.

These examples underscore that while insurers are shifting toward an advisory-led coverage bundling within a product, they’re still beginning from a tactical standpoint. This narrower approach remains limited to customizing coverage within a product and tactically bundling other products with it. Though insurers have been slow to adopt product bundling on a more strategic basis – i.e., being an end-to-end risk portfolio manager – they are actively pursuing the goal of leveraging cutting-edge technical capabilities.

So, where does the potential value reside?

The real value of bundling – for both customers and insurers – lies in the individual insurance products. Every form of coverage within the bundle covers a specific risk, and so is a “mini product” on its own.

However, insurance products have become commoditized as products have become more unified so they can be sold easily to customers over the Internet. There, many customers simply select the desired coverage amount and deductible. “Save Money” and “Discount” marketing diverts customers toward an affordable premium and, often, the wrong coverage – people opt only for those policies mandated by law (like automobile liability insurance) or, in the case of a home mortgage, a lender. The deductibles chosen often are high, which can prove disastrous for a customer if calamity strikes.

Insurers can deliver real value for themselves and their customers by:

• Gathering customers’ relevant information
• Assessing their risk
• Building the right coverage mix to mesh with customers’ needs
• Suggesting customized products based on a customer’s risk profile

How might this work? Say a customer’s car is more than two years old. The insurer could recommend the customer get an extended warranty as well as a roadside assistance plan. The insurer, in short, could deliver real value by acting as the customer’s risk manager. This approach also would help the insurer to select the right customers for the right risk portfolio – and to weigh the moral hazards when a customer opts for a different package or coverage combination.

Once the individual insurance products are de-commoditized and customized to fit the customer’s risk profile, this advice-based approach can be extended to multi-line product bundling. Customers will move from a mindset of, “I’m required to have homeowners insurance to get a mortgage,” to a mindset more in line with, “I need to cover my risks and ensure a financially secure future.”

Customer retention and satisfaction will go up – along with the insurer’s revenue.

How to unlock the true potential of product bundling?

The goal of achieving strategic bundling hinges on insurers’ building their advisory capabilities and customizing coverage and products based on a customer’s risk portfolio. The core building blocks of coverage and pricing will not change – but the superstructure could be anything from a chapel to a cathedral, based on a customer’s risk profile.

Cutting-edge technical capabilities such as mobile communications, sophisticated analytical tools and so-called “big data” are among the options insurers can tap to build their customization and advisory capabilities. Extensive use of external data (e.g., credit scores and medical data) as well as internal data (e.g., loan delinquency rates) along with analytics will help insurers predict a customer’s risk portfolio with fair accuracy. Social media platforms such as Facebook and Twitter are other evolving (though not always reliable) generators of external data that insurers can use to gather customer profile, risk and behavior data.

Strategic bundling from a risk portfolio management perspective also requires customers to share personal information outright. Customers, especially millennials, seem willing to their share personal information in return for personal advice. This offers the potential for insurers to accelerate strategic product bundling.

Insurers can thus capitalize on customers’ need for advice-based risk portfolio management leveraging leading-edge technology to deliver what customers want. Insurers that show agility and speed in building these capabilities can succeed in achieving strategic bundling – and attain the coveted status of a preferred risk portfolio manager.

History tells us that the winners will be companies that are more progressive in their use of new operating models and tools, including advanced data and analytics.

Nigel Morris, managing director of QED investors and co-founder of Capital One, said: “In the late ‘80s and early ‘90s, Capital One was at the vanguard of a revolution deploying data-driven strategies in the credit card industry. . . . I believe that insurance carriers increasingly have the same opportunity to grow the size and profitability of their businesses by more specifically meeting their customer’s needs.”

The credit-card industry shows what might happen in P&C. During that time in the late 1980s and 1990s, new marketing and risk-assessment strategies fundamentally changed the credit-card industry. Technology and information-based companies like Capital One flourished and garnered significant market share while those that clung to traditional methods floundered. The agent of change? Analytics. In 1988, Capital One (originally Signet Bank) was founded because it saw an untapped opportunity to leverage credit-score and consumer-spending patterns to find the best risks within the subprime market and revolutionize the credit-card industry.

Similarly, Progressive Insurance pioneered the use of analytics, also leveraging credit scores, to insure nonstandard risks at profitable rates and shake up the auto-insurance market.

The adoption of sophisticated technologies essentially creates a perfect storm. Those who use the best analytics gain profitable market share. Those who don’t use analytics suffer from adverse selection, ending up with poorer-performing risks because they are working with outdated pricing and risk-assessment strategies.

As Matthew Josefowicz, managing director of Novarica, wrote, “The massive proliferation of easily accessible data combined with the increased power of modern analytical tools has the potential to transform the insurance industry dramatically over the next decade. The strategy and operations of insurers in the near future could be nearly unrecognizable to current market leaders.”

Data and analytics will only continue to evolve and change the way business is done, whether it’s in insurance, banking, healthcare, shopping or another industry; the accessibility to personal information is truly transforming the world we live in and how we do business.  In the insurance world, companies like Valen Analytics are creating solutions and providing insights to help drive overall success, for instance by helping carriers manage and segment their portfolios to drive underwriting profitability.

For the full report on which this article is based, click here.

Insurance is one of the areas where entrepreneurs may try to cut costs, but, to protect your business, you need to have your insurance agent evaluate all the exposures you face and offer solid coverage solutions.

What does the professional liability policy cover?

The consultant and its employees provide a service or offer advice, but what if it is faulty? Any professional consultant needs professional liability coverage, also called errors and omissions.

The professional liability policy may be worded as follows:

"The company will pay on behalf of the insured any loss excess of the deductible not exceeding the limit of liability to which this coverage applies that the insured becomes legally obligated to pay because of claims made against the insured during the policy period for wrongful acts of an insured or because of personal injury arising out of wrongful acts of an insured."

In addition, the policy may say, "Coverage for allegations of bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible property, including the loss of use...."'

This wording shows the limited scope of the professional liability policy. The intent is to cover only negligent professional or “wrongful” acts. The policy also provides limited protection for personal injury, such as libel or slander, committed by the insured against a third party.

What does the commercial general liability (CGL) policy cover?

The CGL covers bodily injury to a person or damage to the property of others caused by a firm's negligence. As courts have ruled repeatedly, the CGL policy is not a performance bond. A CGL policy is not intended to cover the quality of a company's advice or service. This helps constrain the contractor from low-bidding a job, performing poorly and then relying on the insurance carrier to cover that risk.

Look first at CGL policy language under the insuring agreement, the heart of the policy:

"We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of 'bodily injury' or 'property damage' to which this insurance applies."

Here are a few of the exposures covered under the CGL:

• Premises and operations liability for persons injured or items damaged while on your business premises or because of your business operations.
• Additional insured coverage when you sign certain written contracts or agreements such as leases.
• Tenant's liability in the event the business operations, for example, accidentally start a fire in rented premises.
• Host liquor liability if you are not in the liquor business.
• Defense for covered claims.
• Bonds and court courts associated with a claim.
• Limited financial remuneration when assisting your carrier in the defense of a claim.

In addition to bodily injury and property damage, the CGL covers personal injury liability, including libel and slander, as well as advertising injury. The CGL offers consultancies broad coverage and peace of mind. You can run your business knowing that help is available in the event of a broad range of losses.

Althought there is a great deal of uniformity between professional liability forms and commercial general liability forms, all carriers use a variety of forms. Coverage can vary widely from one insurance carrier to another, so an agent should be able to help you determine the coverage differences and help you make a strong choice to protect your growing consultancy.

What are some CGL exclusions?

There are many exclusions under the CGL, and to understand each one is tricky. Forms differ and jurisdictions that hear lawsuits vary greatly. However, here are some general exclusions:

• Intentional injury -- When a business owner acts in self-defense, there is generally coverage. For example, suppose a robber breaks into the darkened firm and brandishes a knife at the owner, who is catnapping. He heaves a computer monitor at the burglar and injures the burglar. Carriers should defend the case unless it appears the insured intended to inflict malicious injury.
• Care, custody and control of property owned by others -- For the consultancy that repairs computers or other equipment, bailee coverage may be necessary.
• Faulty workmanship.
• Liability arising from an aircraft, auto or watercraft -- If you use any of those conveyances in your business, you’ll require specific coverage to protect your assets. However, if you provide an automobile to an employee who gets in an accident, you may have coverage, depending on the coverage form and the jurisdiction.

While the CGL policy offers the majority of consultancies broad coverage, your agent must evaluate each risk carefully to ensure the CGL adequately protects the consultancy's unique exposures.

The CGL may still lack scope

As your consultancy grows, the CGL is only part of your coverage solution. The CGL will not cover every exposure you face, especially once you hire employees.

In most states, after you hire either one or a small number of employees, the state mandates workers' compensation coverage. In addition, employment practices coverage is important in today's complicated employment arena. There is no coverage under the CGL for most employment exposures like a wrongful termination or a discrimination claim.

Your consultancy may start with only one computer and a printer, but as your firm grows so does its personal property. Don’t forget to insure your personal property, as well.

For firms with even the most trusted employees, crime policies are vital. For example, suppose you hire a bookkeeper to assist with accounting and administrative tasks. Unbeknownst to you, she likes to gamble. Over time, she begins to embezzle funds, and, before you know it, you are short thousands of dollars. Crime coverage is designed to defend and pay these types losses. The Association of Certified Fraud Examiners found that firms with fewer than 100 employees were frequently hit by fraud, accounting for 32% of the incidents they surveyed.

Clearly, the CGL offers broad coverage and peace of mind for any consulting firm, but there are many other risks your business faces that may require specialized coverages. An independent agent can help you sort out the risks.

One easy approach to coverage

If you own a consultancy, you may be confused about your unique coverage needs. The way many agents approach your coverage is to tell every new business owner he or she needs general liability coverage. Then they review the consultancy’s business operations to determine what additional coverage, such as professional liability, employment practices or workers' compensation are required.

Because most consultants have auto insurance, to some extent you understand liability coverage. The CGL is more complicated, but the general principles of coverage for bodily injury and property damage are similar to the auto policy. For the new consultant, this comparison may be a good starting point to help you understand your company's need for general liability coverage.

In today's complex business environment, no consultancy should go without two types of coverage -- professional and general liability -- at a minimum. An experienced independent agent can help you ensure your business thrives and prospers in the coming years.

Likewise, for decades, the “experts” have been betting against independent insurance agents, yet agents keep winning. Why? The consultants, finance guys and others who populate the skyscrapers on Wall Street discount the power of the local trusted insurance agent who does business on Main Street.

That’s not to say that the recent report from McKinsey on the future of property/casualty insurance agents should be discounted. It raises some very good points about how insurance agents need to evolve to continue to be the distribution channel of choice in the insurance industry.

McKinsey got some things right, some wrong. Let’s start with the latter.

What McKinsey got wrong

-- The agent’s role hasn’t changed.

Automation has reduced independent agents' role in underwriting and processing, so insurance companies perceive agents are doing less and should get less commission. But the agent’s role has not changed. The client still needs a local, trusted adviser to explain and recommend the proper insurance coverage. Today, that role is valued even more, with trust in big corporations and the government at all-time lows. Cost-cutting is the easy way to increase short-term profits, and the biggest cost for most insurers is commissions. The McKinsey report gives a short-sighted insurance company executive a reason to lower commissions, but companies that reduce commissions will be following a “fool’s gold” strategy producing short-term gains at the expense of the long-term viability of their agent-based distribution.

-- Brand awareness doesn’t translate into customer loyalty.

A talking gecko, the discount double-check, Flo, Mayhem or Farmers University don’t build customer loyalty. They do build customer awareness, so the big insurance companies spend hundreds of millions of dollars on ad campaigns. But being top of mind doesn’t mean the customer will have any loyalty to the company. You can’t create a relationship with a person through advertising. People create relationships--for example, with someone whose son or daughter plays on the same soccer team and attends the same school as the agent's children. The opportunity to establish a relationship is unique to the agency distribution channel. It takes time and effort, but once established the relationship creates strong customer loyalty. That’s why you never see any studies from big consulting firms that ask people whom they trust more – their local agent or the insurance company We all know the answer.

-- Independent agents will gain market share as auto insurance becomes commoditized.

I agree with McKinsey that some parts of the auto insurance market are becoming commoditized but disagree with the conclusion that this will hurt independent agents. Because they can offer multiple carriers, independents will still get the sale. They will just place the business with the best-priced carrier. The big losers will be the captive distribution companies, which will be unable to offer their clients choice.

--A multi-channel distribution strategy ends up cannibalizing agent-based distribution. McKinsey argues that insurance companies must balance their investments among multiple distribution platforms. It sounds reasonable, but in reality it means a company must reduce the amount of money it commits to its agency distribution channel to reallocate its resources to contact centers, web portals, advertising and other costs of building a direct consumer platform. Companies that follow this strategy will discover that they traded valuable multi-line customers for single-product consumers with no company loyalty.

Where McKinsey got it right

-- Agents must evolve in the way they attract and retain their customers.

Absolutely! The cost of technology is dropping so fast that small and mid-sized agencies can now use tools like social media and data analytics that only large companies could afford a few years ago. Local agents need to be able to engage with their customers in real time. That requires they have a digital media and mobile-compatible platform as well as a social media capability to engage with clients and prospects.

-- Agents must be seen as able to handle all of a client’s insurance needs. Product peddlers won’t survive. Agents have to be able to demonstrate the value they add by virtue of their expertise and that their advice can be trusted.

-- Agents must understand the customers they are targeting and stay focused on that segment. One size no longer fits all in today’s insurance market. Independent agents need to understand their target market, the attributes of profitable customers, and how to reach and serve them. Just like the big insurance companies use advertising to create a top-of-mind brand, agents today must become top of mind with their customer segment.

Today, we live in a world that is moving so fast and becoming so much more complicated that people need someone they can trust—and work with conveniently when and where they want. Current trends in the insurance marketplace bode well for the local, trusted, independent adviser who represents the interests of her clients. The McKinsey report supports that conclusion.

I’ve been surprised lately, when meeting with the nation’s leading financial service providers and discussing the tsunami of intergenerational wealth transfer that is upon us. The generation that is now entering (or will soon enter) the work force stands to receive something like $30 trillion of personal wealth over the next 20-30 years. That’s a staggering figure by any measure, but what’s really surprising is the apparent lack of preparedness and stunning dearth of appreciation for the opportunity – and potential threat – this massive wealth transfer represents to stalwart companies and even entire industry sectors.

For context, according to research, there exists roughly $230 trillion of personal wealth around the globe. That’s both financial wealth, like cash and its numerous equivalents, and real and personal property; the figure does not include corporate or public holdings. To give some sense of perspective to the enormity of that figure, just consider that the gross world product (the combined market value of all the products and services produced in one year by all the countries in the world) totaled approximately $85 trillion in 2012. Thinking about the number another way: To accomplish the transfer of $30 trillion over the next 30 years would mean that more than $1.9 million would have to change hands every minute.

By the time the last baby-boomer has shuffled off this mortal coil, about 13% of all global personal wealth will have changed hands in one form or another. Understanding some of the techno-societal distinctions between the bequeathers and the bequeathees should be a discipline required for anyone who aspires to make sense of the opportunities or threats attendant to the wealth transfer.

Because we develop a sort of digital life for the things in our users’ lives (by collecting and digitally managing all the information about those things), Trōv is becoming a technological bridge between the LAGgards, who were born before the digitization of everything, and the emerging generations who are indisputably “born digital.” In our interactions with users and the service providers that are precariously dangling between these two distinct constituencies, we are developing a sense for both parties. A couple of the big thoughts that seem to aptly describe what influences the perspectives of two groups are at once technological and sociological: the death of privacy and the power of information symmetry.  

Privacy is dead

LAGgards are concerned that their personal information remains private. Okay, this should neither surprise nor irritate any of us. However, the norms for what is considered private are being entirely redefined by the constant revelations of breaches (both nefarious and national) – and the new (ab)normal boundaries of self-disclosure regularly displayed on the massively adopted social media platforms like Facebook, Twitter and their do-alikes.

Just take a peek (if you have the stomach for it) at Instagram’s ersatz cult of spoiled children referenced as #richkidsofinstagram. Photos are regularly posted depicting the profligate lives of a generation of an über-wealthy and unbelievably overexposed generation reveling in their latest acquisitive binge or imbibing impossibly costly libations.

As Robert Scoble, one of the oracles for the emerging generation of Digital Natives, intimated to me, privacy is all but dead, and it is no longer a core issue of the emerging generations. So what? Self-disclosure and widely available information about all connected people and institutions will make a profound impact on reputations: personal, corporate and governmental, and if you’re attempting to engage the new generation of wealthy, transparency is mere table stakes, at best.

Information symmetry -- your advisor is dead (he just doesn’t know it, yet) 

Information symmetry will be the death of intermediated businesses. When Netflix started shipping CDs and DVDs to homes throughout the U.S. in the late 1990s, the writing was on the wall for the leading distributors of home video. And, as cloud storage and high-bandwidth digital pipelines became ubiquitous and increasingly affordable, Blockbuster (as a proxy for all things analog) scuttled its storefront retail business – bowing out because its distribution channel was obliterated by technology’s relentless march.

Retail auto sales have undergone a somewhat similar coming-of-(digital) age, as well. For years, LAGgards have been subject to the demeaning process of haggling over price, because details about costs were kept intentionally opaque, giving the salesperson the information advantage. (This imbalance in access to data is sometimes referred to as information asymmetry). The sales process was successfully upended when data from the likes of Carfax and Kelly Bluebook were made instantly accessible to anyone with an interest and a browser. 

For roughly similar reasons, LAGgards have grown dependent on trusted advisers, various specialists and brokers to make decisions about many of their important investments, risk, spending and even medical choices. Data asymmetry is at the very center of the LAGgards’ dependence on these data-equipped intermediaries, and models for business -- even entire business sectors -- have been built on its expected continuation. 

But make no mistake, these intermediated, information-unbalanced businesses are (or soon will be) in trouble; their added value questionable. With massive data availability, the information-scales are being leveled, and with instant, mobile connectivity, the generation-digitalis is no longer apt to transact or make decisions through a human intermediary. The generations of Born Digitals demand immediate, hands-on, intermediary-free access to nearly all aspects of their lives. 

So what? If your livelihood assumes that your clients will be dependent on you because you alone hold the magic elixir of unique information, beware. You might need to consider embracing the new models of info-egalitarianism rather than resisting them. 

To wit, we recently began testing an in-app capability to insure a newly acquired item at point-of-sale with literally the push of a button. This action alerts the broker-of-record to information that had been previously unavailable and carries tremendous customer-retention and quality-of-service implications (not to mention risk management and potential revenue upticks).

I have been perplexed by some brokers, who appear more concerned about the incremental work that this might create than the expansion and quality of their service. Powered by data accessibility, irrespective of our entrenched operations, the march toward disintermediation is inexorable.

Although these two ideas -- personal privacy and disintermediation –- may appear to be distinct families of thought, they are much more than distant cousins. Indeed, they are utterly related and perhaps alone frame the most important distinctions between the LAGgards and the Born Digitals.  

If you depend on your intermediated services and expect them to remain relatively unchanged, you may be setting yourself up for incalculable risk (and you’re most likely a LAGgard). However, if you are comfortable with gobs of information floating around in the cloud and are adopting the tools that help you benefit, then you are likely going to survive the turbulence.

The opportunities arising from the merging of data and disintermediation are just becoming evident – and these trends will entirely reshape seemingly unassailable businesses and entire industries. 

As the fabric of personal information privacy becomes increasingly threadbare, the expectation for transparency in all segments of commercial life will be elevated to a prerequisite for any type of engagement. And as new generations of shoppers, investors and the “serviced” become less concerned about privacy and more connected to -- and facile with -- data, business as usual will be anything but.

(This article first appeared in JetSet magazine.)

KitchenAid was praised for responding quickly. But the outrage about the tweet was overwhelming, if only for a short period, and underscores that companies need to consider their potential liability from ill-advised tweets.

A bit of background: Libel (written) and slander (spoken), collectively known as “defamation,” which is the general term used internationally, are civil wrongs (sometimes carrying criminal penalties) that harm a reputation, decrease respect, regard or confidence or induce disparaging, hostile or disagreeable opinions or feelings against an individual or entity. If the allegedly defamatory assertion is an expression of opinion rather than a statement of fact, defamation claims usually cannot be brought because opinions are inherently not falsifiable. However, some jurisdictions decline to recognize any legal distinction between fact and opinion. 

Contrary to a general belief that insulting tweets (or comments online through Facebook, online message boards, etc.)  are exempt from libel laws because they are fleeting, libel laws apply to the Internet the same way they do to newspapers, magazines, books, films, etc. The same technology that gives you the power to share your opinion with thousands of people also qualifies you to be a defendant in a lawsuit.    

In considering your legal exposure if an employee may have committed libel, you must consider the country you live in, as well as your exposure to libel laws around the world.

U.S.

The medium for communication is irrelevant; even an email to a single person can be libelous if the sender knew a statement to be false, acted with reckless disregard for the facts or was otherwise irresponsible. To be libelous, the statement must also cause some damage.

United Kingdom 

The basis of British libel law is not substantially different from that in the U.S.: to protect the reputation of an individual from unjustified attack. In British law, a person is defamed if statements in a publication expose a person to hatred or ridicule, cause a person to be shunned, lower a person in the estimation in the minds of "right-thinking" members of society or disparage a person in his work. In the U.K, though, the burden of proof is with the defendant, while in the U.S. the plaintiff must provide the proof. Unlike in the U.S., there is also no provision in the U.K. that makes it harder for public figures to win a judgment--in the U.K., a public figure does not have to prove a statement was made with malice.

Almost all of the rest of the world

There is ever-expanding concern about the use of social media, especially Twitter, to post harassing, offensive and false statements that are defaming or invade another’s privacy. As one judge said: “Twitter as we all know is widely used by individuals and organizations to disseminate and receive information. It is inconceivable that grossly offensive, indecent, obscene or menacing messages sent in this way would not be potentially unlawful.” ([2012] EWHC 2157 (Admin) at {23}. In India, amendments to the Information Technology Act, 2000 (IT ACT) specify that defamation via a computer or communication can lead to a prison term of three years and a fine. (The United Nations Commission on Human Rights ruled in 2012 that the criminalization of libel violates the right to freedom of expression and  is inconsistent with Article 19 of the International Covenant on Civil and Political Rights. The impact of this ruling, if any, is not part of the discussion in this article.) 

Now, let’s consider liability if you or an employee is the “retweeter”:

U.S.

If you retweet a libelous statement in the U.S., you or the company you work for  may be protected from defamation liability based on Section 230 of the Communications Decency Act, which states, “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” Simply put, this means you cannot be sued for something you retweet, even if the original tweet is libelous, so long as the libelous content was created by a third party. However, if you did have control (it was KitchenAid’s corporate Twitter account)  or you add something defamatory, you could be held responsible. 

United Kingdom

Keir Starmer QC was addressing the London School of Economics about social media in 2012 when he was asked: “Is it an offense to retweet something grossly offensive?" He replied: "You retweet, you commit an offense under the Act.”

The “Act” is the Communications Act, which outlaws sending a tweet that is “grossly offensive or of an indecent, obscene or menacing character.” A person can be prosecuted if he "causes any such message or matter to be so sent.”

For example: In 2012, the British Broadcasting Corporation settled a libel suit for about $300,000 with a UK politician. (The BBC reported that he was involved in a child sex abuse scandal but should have known the statement was false.) The UK politician then sought libel damages from at least 20 “high profile” people who tweeted and retweeted the report. 

Because tweets cross borders so easily, Twitter users in the U.S. and elsewhere should take the UK law into account.

India

Some legal scholars in India say that even accidentally retweeting an offensive tweet can create liability.

Freedom of Speech?

While freedom of speech in the U.S. is a constitutional right, legal exceptions make that right limited. For example: Speech that involves incitement, false statements of fact, obscenity, child pornography, threats and speech owned by others are all completely exempt from First Amendment protections. The U.S. Supreme Court has ruled that the First Amendment does not require recognition of a privilege for those stating opinions. Therefore, the  position that nothing should stand in the way of unabashed free speech on the Internet is like the ostrich with its head in the sand. Defamation and speech intended to inflict severe emotional distress is not protected.States can and do regulate this type of speech.

So here is the takeaway:

If you or an employee tweets or retweets something defamatory, you may face a libel claim. It doesn't matter how quickly you delete the entry or whether you follow up with a correction or an apology. It also doesn't matter where in the world you are.

Disclaimer: The information contained in this article is provided only as general information and may or may not reflect the most current developments legal or otherwise pertaining to the subject matter hereof. Accordingly, this information is not promised or guaranteed to be correct or complete, and is not intended to create, or constitute formation of an attorney-client relationship. The author expressly disclaims all liability in law or otherwise with respect to actions taken or not taken based on any or part of this article.

Core IP, which defines and individualizes the company, is most often the company’s inventions — patented machinery, devices and technology. But it could be something as seemingly simple as the copyrighted graphics and designs on a wildly popular designer handbag or a top-selling toy. Trademarks can be invaluable IP — for instance, Coca-Cola’s trademark is recognized worldwide.

Because IP is intangible, it can be easily stolen — though the proper term, “infringement,” sounds more polite, theft is often what it is. An engineer can walk out the door with knowledge about your patented technology and trade secrets. A counterfeiter can copy your designs and trademarks as fast as a computer or photocopier works. The Web, of course, is paradise for infringers.

On the other hand, your company can stand accused of infringing someone else’s intellectual property. Let’s say it’s a series of patents on complex machinery. You’re convinced the suit is groundless, but you still have to hire an expensive law firm and bring in expert witnesses. In the end, you win. Congratulations. You’re still out a few million dollars in legal fees.

Your general liability policy gives you very limited coverage for your liability for your alleged infringements against others. (It’s generally restricted to infringing copyrighted advertising materials.) And it gives you no coverage to sue infringers. If you want significant coverage, you have to get a special policy. 

Given the amount of litigation — for example, 2,830 patent cases in 2006 — IP insurance is well worth considering.

Because there are two potential money pits — someone ripping off your IP and someone accusing you of ripping off theirs — there are two distinct types of IP insurance.

Defensive IP policies take effect when someone sues you for infringing their intellectual property. Even if your company is scrupulous, inadvertent infringement can happen. These policies are also sometimes called "IP infringement defense insurance” or "IP liability insurance.” They cover both your legal costs and the cost of the judgment if you lose. Judgments can run into the millions, and, besides paying out damages, you’ll be forced to stop making the infringing product.

A defensive policy kicks in when another party demands either money from your company or non-monetary relief, such as an injunction. Only a handful of insurers offer these policies. Depending on the carriers, you can buy coverage limits of anywhere from $5 million to $15 million. Minimum deductibles vary, and some insurers also insist on coinsurance, meaning you would pay larger out-of-pocket expenses.

Offensive IP policies are effective when someone else infringes your intellectual property. That is, the policy will provide money so your company can hire a law firm to sue the company that infringed your patent, trademark or copyright or stole your trade secrets. You will have to get permission from the insurer to hire a law firm and start litigation.

Why would you need an offensive policy? Unlike personal liability lawyers, who get paid by taking a percentage of the settlement if they win, IP law firms generally demand cash on the barrelhead for their services. If your company is a startup or a small organization without a lot of money in the bank, you might not be able to afford to hire a topnotch IP litigator to go after the bad guys. If you have a trademark or copyright case, the legal fees might be manageable, but going after a patent infringer takes millions. Your IP could be stolen by a bigger company, and there’d be little you could do about it. If the infringed patents are your competitive advantage, your company might even be forced out of business eventually. There’s only one known insurer that underwrites offensive IP insurance.

Do you need IP insurance and, if so, how much of what kind? There are no cut-and-dried answers. If your company manufactures generic goods like plywood, you may not need it, unless your manufacturing process is a trade secret. But if your company’s inventions, designs and trademarks are crucial to your company’s success, you may. Start by assessing how important your company’s IP is, and how vulnerable it is to being infringed by someone else or having someone claim that you’re the infringer. Once you have a clearer idea of the risks and potential consequences, you can start to investigate IP insurance systematically and determine if it’s worth it.

Ultimately, you may decide you don’t need IP insurance. But the time to investigate is now. Once you have been sued or your IP has been infringed, it will be too late. 

Many insurance companies act as if the broker is a fiduciary working for them. This approach provides for a direct conflict of interest that the company ceding responsibility is often totally unaware of.

Deferring reinsurance oversight to the broker is not an appropriate course of action. 

The misunderstood relationship with the broker

A recent court case (Workmen's Auto Insurance Co. v. Guy Carpenter & Co., B211660 (c/w B213853)) specifically determined that the reinsurance broker does not owe a fiduciary duty to a resinsured company. The court rejected the company's argument that the broker, as the company's agent, had heightened duties including those of honesty, loyalty, integrity and faithful service, as well as a duty to make a full and fair disclosure of facts.

It was asserted that the broker breached its duty by failing to secure timely payments, failing to secure the best available terms of reinsurance and acting with the intent to injure the company by incurring inflated commissions. The court said the question was whether the broker was the company's agent and, if so, whether that agency imposed fiduciary duties on the broker as a matter of law such that the broker can be held civilly liable for breaching those duties.

The court said that an "independent insurance broker is not an agent of the insurer, but rather is an agent of the insured.” But the court also said that a broker "cannot be sued for breach of fiduciary duty in a manner that conflicts with existing insurance law. In reaching this conclusion, we confess that agency law and insurance law are in conflict, resulting in a legal conundrum.”

The company suggested to the court that case law and statutory law involving insurance brokers should not be applied to reinsurance intermediary-brokers because they have far more complex and comprehensive relationships with their clients. The court responded that such an argument should have been brought up sooner and ultimately allowed the broker to prevail because of procedural rather than substantive issues.

Comparing the relationship of an insurance broker with an insured to the reinsurance broker's relationship with a reinsured is amazingly naïve. Somehow, it escaped the court’s attention that the reinsurance transaction is not strictly regulated, and that applying the same rules to a relatively non-regulated transaction was inappropriate at best. Perhaps the court believed that insurance case law developed in a vacuum, and that it was not tempered by regulatory oversight and legislative consumerism.

Still, the author assumes that the court would apply its same “(il)-logic” to other reinsurance brokers.

The aha moment

The broker itself defines “broker” as a reinsurance intermediary that negotiates contracts on behalf of the reinsured. Yet the broker says it does not have the traditional duties imposed in the agency-principal relationship.

The attitude by the broker is, in my opinion, the single biggest takeaway for companies ceding management of their reinsurance. It is confirmation that is incorrect to believe that your broker owes you the duties of honesty, loyalty, integrity and faithful service as well as a duty to make a full and fair disclosure of facts, and that it is acceptable for brokers to generate inflated commissions. It is now been made clear that, when push comes to shove, the standards to which your reinsurance broker is held are not really a whole lot different than when you are buying a used car, where statements made concerning the sale are considered “puffing”; just an opinion or judgment that is not made as a representation of fact.

Companies that delegate reinsurance risk management to a broker may themselves be breaching fiduciary duties to stakeholders. That is, while the case concluded that the broker does not have a fiduciary duty to the reinsured, courts are quick to confirm that officers of the reinsured do have a fiduciary duty to the reinsured.   Obviously, officers cannot meet their fiduciary duties by assigning those duties to someone whom the court has found to have no fiduciary obligation to the reinsured.

I do not fault the particular broker in its defense. The issue is not the particular broker in the case or brokers in general; the real issue is the willful ignorance of the reinsured. Not questioning the motives of the broker is naïve. Remember, the broker, like the used car salesman,  makes his money based on how much comes out of your pocket in the sales transaction.  Risk management requires truly understanding the environment in which you operate.

The above case is not unique in bringing to light the ignorance of courts concerning reinsurance. Judges have been known to throw up their hands when dealing with reinsurance and admit that they do not understand what is being presented.  In the case of Indiana Lumbermans Mutual Insurance Co. v. Reinsurance Results, Inc., in the U.S. Court of Appeals for the Seventh Circuit, Case Number: 07-1823, the court stated:

“The lawyers' oral arguments were excellent. But their briefs, although well written and professionally competent, were difficult for us judges to understand because of the density of the reinsurance jargon in them. There is nothing wrong with a specialized vocabulary - for use by specialists. Federal district and circuit judges, however, with the partial exception of the judges of the court of appeals for the Federal Circuit (which is semi-specialized), are generalists. We hear very few cases involving reinsurance, and cannot possibly achieve expertise in reinsurance practices except by the happenstance of having practiced in that area before becoming a judge, as none of us has.”

Ignorance is only part of the problem

The reinsured holds much power but is afraid of using it. The playing field is certainly not level to begin with, but all too often the ceding company's management exacerbates this lopsided power arrangement. It is amazing how ceding company management knows instinctively that their clients have many alternatives, but somehow believe that they, as a client of the reinsurance broker, have no alternatives. Companies often do everything they can to protect the “long-term broker relationship.”  

This demonstrates a complete lack of understanding by ceding company management of their own fiduciary duties. The fiduciary duties of officers of insurance companies are to the company stakeholders, not to the reinsurance brokers.

This lack of understanding should be of particular interest to regulators overseeing insurance. All states now have a statute or regulation pertaining to recognizing a company in” hazardous financial condition”; one telltale sign is the lack of competence and fitness of those in management. Breaching a fiduciary duty could indicate lack of fitness. 

Most insurance companies are ultimately in business to make money and serve their clients. Mistakenly believing that you are in business to make friends and keep long-term broker relations will put you out of business.  Reinsurance is a commodity. Thinking of it as anything else makes you an uninformed consumer.

Your reality - the Wild West

Your business (insurance) is a highly regulated one that owes a fiduciary duty to its clients. To stay in business, you must depend on reinsurance, offered by an entity (reinsurers) that is, for all intents and purposes, unregulated. Additionally, this commodity must be purchased in certain quantities or an agency (AM Best) that gauges how viable you are will let everyone know that you face questions.  You may have to go through a salesman (broker) that the courts have determined owes you no fiduciary duties, and whose income is based on how much it can sell you. That is, there is no  incentive for “your” agent to advise you of ways to reduce your costs. To people in other industries, it would appear that “your” agent actually doesn't work for you. 

If the commodity you purchased turns out not to be what it was said to be, then you must arbitrate the matter with the entity that offered it. Reinsurance arbitration has proven to be every bit as costly and time-consuming as litigation but offers none of the advantages or safety nets provided by the courts. In spite of naïve judges, the court system is a better option. Judges are naïve only because reinsurance transactions so seldom land in court. Courts are a vastly superior forum that offers reason, rules and stare decisis, where precedent is followed, records are published and the same issues do not have to be determined multiple times. In arbitration, if a decision is made that is unfavorable, you may not appeal the decision. If this same scenario has been arbitrated before, you will never know it, because there is neither precedent nor a record. The outcome will not be determined by legal construction of the commodity you purchased and a set of interpretive construction rules but by the “custom and practice” of the industry, which coincidentally is neither written down nor uniformly agreed upon or adhered to. Arbitration only provides an advantage for the unregulated party to the transaction; it in no way benefits the regulated party. If the commodity you purchased does not measure up to the set of standards your regulator imposes, your regulator will punish you, not the entity that produced the commodity. Additionally, your clients to whom you owe a fiduciary duty have no recourse against the producer of the defective commodity you purchased even if it caused you to go out of business.

Substitute ANY other industry for insurance, reinsurance and broker in this scenario and you will quickly discern the absolute draconian forum in which you must operate.  Now you can see why I don’t believe that the ceding company has a reasonable basis to believe that deferring reinsurance oversight to the broker is appropriate.

The next time you sign your broker-of-record contract, try this experiment:

Ask to insert the clause  - “the broker agrees and understands that it is acting as a fiduciary for the Company in all matters in which it services the Company, with all duties and standards imposed in a fiduciary capacity.” While the court was not willing to assign such duties, the broker is free to contractually assume them!