Chris Christian on July 28th, 2010

Tomorrow’s Knowledge Knugget will address the difference between mortgage brokers and mortgage bankers both in exposure and in coverage availability.  Mortgage bankers being incorrectly — or inadequately — insured as mortgage brokers is not uncommon.  But even more common are carriers saying they’ll write “mortgage brokers/bankers” when in fact they will only write the mortgage brokers.  This perpetuates confusion for the agency plant as to what’s acceptable to submit, what coverage is available, and what, if any, difference there is between the two.  Sign up for Knowledge Knuggets to get the answers!  (If you miss the cut-off and don’t receive the 7/29 Knugget, email me separately, and I’ll send it to you.  chrisc [at] usrisk [dot] com.)

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If your insured is in acquisition, sale or merger mode, they have exposures that are suitable for framing – inside a D&O policy. Here are a few of the larger exposures that warrant your attention, and bringing up a D&O policy as a probable solution:

 1.  If your insured is in acquisition mode, during the due diligence process they will come into contact with sensitive information regarding the potential seller’s business processes, trade secrets, and key personnel.  If the deal does not go down, and the insured continues operations in the same industry as the potential seller — or starts such operations if they were not pre-existing — the seller can allege that the insured misused its sensitive data.  This misuse of data and violation of the confidentiality of the due diligence process is a classic scenario for D&O coverage.  These days, some of the allegations regarding pure data could be covered under a privacy liability policy.  But most privacy liability policies will exclude claims involving Ds, Os, or senior management misusing data, so chances are no coverage would pertain.

 2.  If your insured does not obtain 100% shareholder support for the acquisition, minority shareholders who do not like the outcome can bring suit against the Ds & Os for the management of the acquisition, or more likely the amount of money paid for the acquisition.

 3.  If the acquired company does not agree with the management of the acquisition, or the insured’s execution of all terms of the agreement, they can bring suit against the Ds & Os.  Sometimes this would be a pure breach of contract action, but more frequently, there would be accompanying allegations of misrepresentation, possible fraud, inducement, etc., that would trigger a D&O policy.

 4.  If your insured is the selling company, the representations made during due diligence can come under fire if the sold company does not perform as expected.

 5.  Many purchase agreements require the sellers to set aside a portion of the proceeds to secure future unknown contingencies.  A D&O policy can be used to fund this obligation, with the buyer’s agreement.

 All of the above pertain to either side of a merger, as well as a pure sale of shares, or sale of assets.

 Two logistical things to note:

 1.  The breach of contract exclusion in a (privately-held) D&O policy must be carefully analyzed to make sure it does not exclude claims for which we would be seeking coverage.  The more narrow the wording, the more likely there is to be coverage if a claim arises from an agreement integral to the purchase contract.

 2.  It is possible to secure a D&O policy after the transaction takes place.  Generally, more possible if the insured is the seller, than the buyer.  There is a good handful of companies that will write standalone “run-off” policies. If they’re put in place at the time of acquisition, so much the better.  But there is a window of opportunity of a few months where it’s reasonable for the insured (and his agent) to realize that D&O might be appropriate and to go looking for coverage.  This is especially the case when the D&O is sought to secure contingency obligations.

 Of course, it’s best if ALL your insureds have their D&O in place at all times — but we know that isn’t always the case.  Keep trying, though!!  Remember — I can supply an indication based on five simple data points:  Name, location, nature of operations, number of employees, and asset size. 

 Although I did just learn in the school of hard knocks — please be sure to disclose if the prospect is in bankruptcy.   Lack of such disclosure will lead to frustration and disappointment for all.

Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers760-415-4213 or for TN agents 615-273-3451

Knowledge Knuggets do not constitute legal advice, nor are they the opinion of US Risk. 

Please feel free to suggest future Knowledge Knugget topics.

Submissions:  chrisc [at] usrisk [dot]com

Consulting/Expert Witness requests: chris [at] pltidbits [dot] com

I am accepting new agent appointments, so please give me a call or send submissions if you feel I can be of assistance with your complex risks.  Or, if you just like working with propellerheads – let’s chat.

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Chris Christian on July 18th, 2010

Every month I put a product line or class of business “on sale” and pay an additional 2.5% commission to my agents who submit or bind a qualifying risk during the promotional month. 

My technical support has been lacking the last few months, so I’ll be posting the promotions here as well as notifying agents through any other means available. 

So, this month (and due to notification issues, I’ll extend this promotion through August 31) – I’m providing 2.5% additional commission on all environmental risks.

This includes risks such as:  Environmental contractors, environmental consultants, contractors pollution liability for non-environmental contractors, mold coverage on anyone who needs it, restoration contractors, inspectors, and site pollution risks. 

Lines of business that qualify would be Professional Liability, Contractors Pollution Liability, CGL (in combo), and any executive protection lines such as D&O, EPL, or privacy liability.

Send risks!  And if you would like a list of upcoming promotions, please shoot me an email (chrisc [at] usrisk [dot] com) and I’ll send you my campaign schedule.

Stay tuned for more info….

I recently presented a webinar on Kidnap, Ransom & Extortion for the Insurance Journal Academy, and since my mind was on the topic I also posted a 3-part Knugget about it.  The Knuggets are posted below in consolidated fashion.  If you’d like to hear and see the webinar, go to www.ijacademy.com to register for the archived version.  Use the discount code “education” for a 25% savings.

Kidnap & Ransom — the Real “Executive Protection” coverage –  consolidated re-post of 2/25 – 3/11 Knowledge Knuggets 

A while back I posted on Twitter regarding my Executive Protection Checklist.  Interestingly, a couple days later I was being followed by an Executive Protection expert — a bodyguard firm.  I had never thought of “Executive Protection” that way, but certainly the purest form of Executive Protection is that of the Executive himself or herself against bodily harm.

One of the lines of business within any good Executive Protection program is Kidnap and Ransom coverage (sometimes also referred to as “Kidnap, Ransom & Extortion” coverage).

First thing to know is that K&R coverage is not nearly as mysterious as it initially appears.  It can be very cloak and dagger, but in its most straightforward incarnation, it is simply a reimbursement policy for ransom monies paid to kidnappers, or attempted to be delivered to kidnappers. 

Now, assuming that anyone who has enough money to attract kidnappers would also have enough money to pay them, this becomes merely balance sheet protection, and that in and of itself has a great deal of value.  Typical insureds for this would be bank executives, CEOs of large companies, and especially wealthy executives that travel to foreign lands.

However, a policy does more than just pay ransom or extortion monies.  Once an insured has a policy in-hand, they also get the benefit of having someone to lean on if and when the unimaginable happens.  All the major K&R carriers have contracts with companies that specialize in executive protection (bodily) and they have extensive experience in negotiations, extractions, repatriation, and delivery.

The four major coverage parts found in most policies include:  Kidnap, Extortion, Detention, and Hijack. 

Extortion can pertain to threats to do bodily harm, threats to impair property, and threats to harm data.  The harm done can include not only damage to the property or data, but also reputational harm evolving from the publicity about same.

Detention refers to circumstances where the insured person is detained by the authorities (or sometimes others) in a country due to an actual or alleged violation of some kind.  If the insured person truly is in the country illegally or engaged in illegal activities, the policy tends to exclude coverage.  However, if the insured was not blatantly violating laws, the policy would generally respond.

Hijacking refers to insureds being nabbed in their vehicles for a quick return on the kidnapper’s investment of time.  Small demands, ATM withdrawals, or just the taking of whatever valuable possessions or money the victim has on his or her person at the time may satisfy the kidnappers.

The types of expenses covered by these policies can be mind-boggling.  A short list includes:  ransom, of course; crisis management expenses, negotiators’ expenses, legal expenses, medical expenses, psychiatric aftercare, family travel expenses, the insured company’s travel expenses, salary of the victim, salary of a replacement worker for the victim, reward for informant, advertising costs, and legal liability should the insured company be sued by the victim or his or her estate.

Who can be insured under these policies?

The company, its executives, or even all employees, if desired.  Also included are family members, guests, domestic workers.  Some policies include all ancestors and all lineal descendants.  Others limit coverage to grandparents and grandchildren — no “greats” or “great-greats” included.  Coverage can be written on a scheduled basis, if desired, and some policies are purchased as individual or family policies without regard to any corporate entity.

One outlier of coverage is found in “child abduction” coverage.  This coverage is generally used for hospitals in case someone abducts an infant or toddler from the facility.  This is specialized coverage because these abductions frequently do not result in any ransom demand so otherwise would not trigger coverage.  Limits may be different from the main coverage part, so consider carefully what’s needed.  Ransom is not usually what will eat up the limit, but there are other expenses to contemplate.

So how do you identify who among your insureds should carry this coverage?  Think about:   

  • Insureds with significant personal wealth
  • Insureds working for very large, high-profile or controversial companies (banks, oil/gas developers, chemical plants, etc.)
  • Insureds who travel abroad
  • Insureds who live or work near the southern border
  • Insureds with family that travels
 
It’s relatively simple to get a ballpark indication for your insureds for a whole year or for a particular trip.  All you need to know is how many people travel to where and for how long.
 
So, for example, if you have a wholly domestic insured in a low-hazard location, but the principal’s family is going to go to China for two weeks for vacation, you could easily get an indication for that trip.  The policy could be purchased by the company, and the company could then reap some of the benefits of coverage.  Or, a less expensive policy could be purchased by the family. 
 
Alternatively, your insured might be located on the border and do business with points south.  You can get terms for the scheduled executives and the five managers that work outside the US.  Provide the underwriters with the headcount, locations, and they might want to know if there’s a lot of traveling back and forth, and then you can get some ballpark terms.
 
Piece of cake.
 
Last suggestion — don’t input these policies in your system under “Kidnap & Ransom”.  Use something a bit more discreet, and store the list of covered persons away from the policy itself.  No sense in courting trouble, right?
 
Chris Christian on February 5th, 2010

This topic created a lot of discussion on LinkedIn, and I thank all the participants.  Great input!

Below you will find my recent Knowledge Knugget discussing the dangers of agents serving on boards.

I’m adding a new danger here, thanks to a discussion with one of my favorite agents in CA who noted a particular problem.

What happens if the agent has to make a claim against his insured, on whose board he sits?  There are not many circumstances under which this could happen, but it is a possibility.  How does he reconcile his duty of loyalty under those circumstances?  And I cannot imagine the befuddlement of the carrier that receives a claim on an insured where the agent who placed the business is the claimant.  And what if there’s no coverage, and the agent then gets sued by the client, yet he’s the claimant in the first place?  Theoretically, at that point, they would stop the insanity, consider the claims to be offsetting and dismiss the whole thing.  But maybe not.

The particular situation that brought this topic up had to do with a potential personal injury claim against an entity.   But I’ve also contemplated — what happens if an agent’s on the board of an entity, and the entity doesn’t pay its premium, and the agent needs to take action to recover the premium?  As you may know, defaults can be subject to a D&O policy if the Ds & Os knew they were misleading the creditor at the time credit was granted.

What if the agent director was kept in the dark and thus extended credit (ordering coverage bound, let’s say, on a policy with 25% minimum earned — like a non-standard condo HOA), and now is stuck with that 25% minimum earned because the insured’s check bounced.  How is he going to unravel that?  What if there’s an uncovered claim due to the policy being cancelled and they sue him, and he feels he must counter-claim against them to protect himself?  How do you explain that to the carriers you just bound the insured with, and your E&O carrier?  Weee, What a Predicament! (as John Travolta exclaims in Face-Off, one of my all time favorite movies).

Imagine how complex it could get if an agent sat on the board of the HOA where he lived and wrote all their coverages and had a property or GL claim.  Covered or uncovered.  Wow.

Anyway, chew on all that (yes, I know — I worry too much) while you read the below Knugget, and let me know your thoughts….

* * * * *

Twice last week I had occasion to discuss the topic of agents writing insurance for entities on whose boards they sit.  This is a common road to production for many agents, but let me share with you why it might not be an course of conduct in which you want to engage:

First problem –

If you’re sitting on a board, it is your duty to put loyalty to that entity above any loyalty to yourself.  If you are placing insurance for this entity, can you honestly say that you are doing the very best for this entity that can be done?  Do you have all the markets that are appropriate for its business?  Are you giving up your commission so as to procure the lowest possible pricing?  Are you doing what it takes to ensure the entity buys all needed insurance, even if you are not overly familiar with some lines of business?

Can you possibly ever avoid the inherent conflict of interest that comes with making money off of a service you provide the entity?

To complicate matters, what happens if you’re also on the board of your agency?  How can you reconcile those two entities’ needs?  You can’t.  You have to put loyalty to one above loyalty to the other, and therein lies the rub.

If the question ever arises as to whom you placed first, you will have very few defenses.

Solution?  Possibly, you could hand the account to someone else in your agency and act only as a referral resource.  Your agency would still make the revenue, and if you don’t profit personally from the placement, you will be at less risk.  Still, not completely free of risk because at the end of the day, your agency, and the coverages and pricing it can provide may not be deemed as the best possible for the entity.

Second problem –

Check your insurance agents E&O policy, and you may find that claims arising from your services rendered to any entity for which you are a director are excluded.  This is not an uncommon exclusion.  There is usually some form of exclusion that eliminates coverage at least for claims made by entities over which you exercise control (by ownership or by directorship), and sometimes the exclusion extends to all services rendered to, not just claims made by, those entities.  That means you may have no coverage even if a third party makes a claim against you, rare though that might be.

So if the worst case scenario occurs, and your entity has an uncovered claim, there will be no coverage simply because you sat on the board.  No coverage for you, and most of the time, no coverage for the agency.  How, then will you resolve that claim?  Out of your own pocket?  Scary stuff.  And again, what if you’re on the board of the agency?  How could you have exposed it to such financial harm?  Now you’ve violated your duty of loyalty and duty of care to the agency.  Not good.

My recommendation both from an agents E&O risk management perspective and from a D&O risk management perspective is that you should not place coverage for any entity on whose board you sit.

If sitting on boards is a large part of your networking and business-building process, use it for networking, and write every other board members’ coverage, and that of all their friends.  But when it comes to the entity’s coverage take the high road, and advise the board that you cannot write the entity’s coverage yourself without creating an inherent conflict and sacrificing the protection of your E&O policy, and refer them to another agent or three.  You’ll sleep better at night if you do.

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