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

We’ll kick off this year by discussing some quirks in PL placements, which become quickly apparent when an agent or insured expects the same responses from underwriters as they would enjoy from a GL carrier.

For this installment, we’ll review two specific quirks:  Additional Insureds and excess limits.

1.  Additional insureds

As you know, in the world of GL, if you want an Additional Insured added to coverage, you request it, identify the relationship, and you get an endorsement for x amount of money.  The carrier is then willing to notify the AI if coverage ceases and will defend claims against the AI.  Not so in the world of Professional Liability.

It’s rare for there to be Additional Insureds on a PL policy.  There are some exceptions, which I’ll save for a future Knugget.  Here are some reasons carriers will not provide Additional Insured status to Insureds’ clients.

a.  The policy exists to protect the professional — not his clients.
b.  An allegation of professional negligence is needed to trigger coverage, and the client is not the one rendering the covered professional service.  Therefore, tender of a claim against them would not trigger coverage under the insured’s policy.
c.  Defense is within the limits (generally) so providing defense to a third party would erode the insured’s limits.
d.  The Insured v. Insured exclusion in the policy will void coverage for any claim brought against the insured by the AI client.

An outgrowth of this overall reluctance to provide coverage to AIs is further demonstrated by the fact that even those carriers that will add an AI will absolutely decline to comply with an AI’s request to be notified of cancellation of a policy.

2.  Excess limits

In the world of GL, a 4mm xs 1mm limit is available broadly and for pennies on the dollar.  No one thinks twice about it, regardless of the size of the insured or why they want the higher limit.  It’s considered wise to always offer those additional limits to your insured.

In the PL world, carriers are more circumspect about putting up limits.  If you have an insured with, let’s say, 200k, or even 2mm in revenue, and you request a 5mm limit, you will not get it from most carriers.  If you place a 1mm limit, then seek a 4mm xs 1mm, you will likely not have much luck.  Here are some reasons carriers give for not putting up large limits:

a.  PL is a severity line, not a frequency line, so if a claim occurs, it may well exhaust the entire limit
b.  The carrier will not put up limits higher than the insured’s revenue
c.  The carrier will not put up limits higher than the insured’s assets
d.  The carrier cannot get enough rate for the limit
e.  The carrier does not want its policy to be the insured’s biggest asset
f.  There appears to be some correlation between limit availability and loss incurred, so carriers do not want a high limit to be an attraction to plaintiffs.
g.  The carrier will not provide an excess limit higher than the underlyer (i.e., if the primary is 1mm, the most they will put up is 1mm)

Pricing for PL excess limits is much heavier than that of GL.  For example, if a 1mm limit costs $10,000, a 5mm limit is likely to cost $24,000.  (5mm increased limit factors in PL often ranging from 2.30 to 2.45)  The 4mm xs 1mm costs an additional $14,400!   I’ve had agents fall out of their chairs with that kind of pricing because they were expecting a quote for a fraction of the 10k primary premium.  A 5mm xs 5mm limit will range from 40% – 70% of the underlying 5mm, depending on the line of business and the quality of the risk.

This pricing model, again, is largely driven by the fact that PL is a severity line.  In some lines with a tendency to more frequency and a lot of actuarial data, you might see the ratios come down a little.

There are some exceptions to the reluctance to provide higher limits, and in a future Knugget, I will touch on some tricks of the trade to persuading underwriters to put up the limits you need.
Chris Christian, CIC, RPLU
Vice President/Senior Broker
US Risk Brokers

760-415-4213 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.

Visit www.pltidbits.com for archived Knowledge Knuggets and other Important Items regarding professional liability.

chrisc [at] usrisk [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.

Jeff, the speaker, talked about there being four components to an insured making a decision to do business with a particular agent:  Price, Coverage, Relationship, Service.  If we take Price off the table, we must sway the insured with the other three.  However, the prospect cannot experience our service until we are actually doing business, and there is only an incipient relationship, if any, and it certainly cannot compare to the relationship the insured has with the incumbent.

That brings us to coverage as being the preferred (and sometimes the only) way to persuade an insured to bind coverage with us, versus the incumbent, or other competitors.  Of course, if the insured has the primo policy of the world, written absolutely correctly, there’s not much we can do about that.  Jeff recommends then, that we walk away from the quoting process, and stay in touch with the insured for a future try.  Until the coverage situation changes and we can do something to improve their placement, we would not waste our time or our staff’s and carriers’ time, quoting something that we have no reason to believe will bind.

He does recommend that we acknowledge price as an issue and frame pricing as a component of value and commit to deliver value, versus cheap price.

Very interesting approach.  He cautions that our most important diminishing asset is our Time, and this approach will keep us from wasting it, allowing us to devote it to more productive opportunities.  Yes, every now and again we might bind a risk in this situation, but how often do we waste our time quoting risks have a very small chance of bringing us any revenue.

Imagine the level of professionalism and ever-better coverages insureds would enjoy if we all did business this way?  Wow.

I have paraphrased his content significantly, and unfortunately could not get ahold of a handout for the session.  So I offer this just as food for thought about how we frame our relationships with our clients.

I’ve noticed that most, if not all, standard physicians companies offer the doctor a lifetime tail upon retirement.  Sometimes the tail is free, if the doc has been with that insurer long enough.  Other times it’s at a relatively reasonable premium.

I’ve seen this provision in an accountants’ policy or two.

However, I have not seen it extended on architects or engineers policies or in the handful of lawyers professional liability policies I have recently reviewed.

What’s up with that?

Notwithstanding the fact that many of these professionals work in a firm environment and don’t carry individual policies, they still have the issue of coming to retirement age with an incredibly long loss development horizon.  They frequently have no control over the ability to purchase tail on their own, having been just a cog in the wheel of the firm, yet they are personally liable for their professional errors in many jurisdictions.  If the firm does not maintain coverage, or somehow moves to a policy that does not include these hapless retirees, they are bare.

I would love to see the market respond to this issue by providing an individual tail trigger (and quite possibly limit) for professionals reaching retirement age.  Maybe in the next soft market, it will evolve.

One of the things the instructor did *not* touch on is:  Don’t lie to your insured about what’s covered and what isn’t.  You would think that would go without saying, wouldn’t you?

I just lost an order to bind on a piece of business due to the competing agent lying about the nature of the competing coverage.  I was competing against a carrier I represent, so I went to the carrier to confirm what they can and cannot offer in this line.  The underwriter confirmed my suspicions — the coverage the other agent said was provided is not available.  Ever.

I provided the written confirmation from my underwriter to my agent, so he can go back to the insured to enlighten them if he so chooses.  But the real question here is:

What is the insured’s motivation in accepting the warm, fuzzy lie from the one agent versus the cold, hard truth from the other?

Does an insured think things through and realize that if they get the “confirmation” of coverage from the one agent in writing, they can sue him later and recover damages when it turns out there’s no coverage in the form itself?  Or do they believe that ignorance is bliss?  Or does this competing agent seem somehow more trustworthy or more knowledgeable than mine?

In this case, mind, the insured actually paid 25% *more* for the fictitious coverage.  So they have been damaged not only by relying upon a representation of coverage that isn’t there, they have paid more premium for it.

How can this agent live with himself?  And what can my agent do to compete against such an under-handed approach?  I don’t know…yet.  I’m hoping to find out, and that the good guys will finish first.

I can’t even imagine the world in which I would intentionally mislead my insured as to coverages offered, or ignore the black-and-white words on the quote and rely upon a representation from someone else that said what I wanted to hear.  I hope I’m not a rare breed…..

If you would like the checklist in Word format, please email me.

We, as an industry, have to ask ourselves why we allow the 7/1 and 1/1 bottlenecks to occur.

Long ago, when I had my underwriting facility, it occurred to me that I couldn’t possibly do a good job of underwriting an overabundance of renewals at one time.  I decided to ask my agents if they and the insured wouldn’t mind moving the renewal date.  Amazingly, most all the insureds had no issues with moving their dates to a less hectic time, and the agents were relieved to spread their workload out a little bit.

For most lines of business, inception dates are completely random.  Certainly schools seem to cluster around the 7/1 date because that’s when their fiscal year starts, and they want their coverage to coincide with their year.

Back in the day, D&O used to incept along with the fiscal year start, but think about this — the most recent year end financials are one of the most critical underwriting elements.  When are they ready?  Certainly not two or three weeks prior to year end.  They are ready two months after.  So why not have your D&O inception be three months after year-end?  That way, the most recent financial information is easily provided to the underwriter in time for renewal.  And…if your year-end is 12/31, the farther away from that date you are, the less likely everyone will be tied up with vacations.

And speaking of vacations, I had a large, complex risk that used to be a 1/9 renewal.  The only thing worse than a 1/1 or 7/1 is a risk that renews the following week.  Underwriters don’t pay attention to it because it’s not a 1/1, but once 1/1 comes, it’s a holiday, and next thing you know, they’re looking at the risk for the first time on 1/4 with no ability to properly review.  And, the insured’s contact people were frequently on vacation.  So, we moved the inception date to 4/9 and have been much happier with the results and more effective in the management of the account.

Just food for thought about how to avoid the bulge in the snake’s belly.  Think about asking your insureds (or your agents) to consider moving an inception date so you can create a good balance of risks throughout various times of the year.

One of the most challenging parts of specializing in professional liability is that all the forms are different.  All carriers have strong parts and weak parts in their forms.  And what’s strong or weak can change from day to day, depending on the insured’s needs.

As a wholesaler, I very rarely actually speak to an insured, so I have to rely upon my retailers both to get me information regarding the insured’s scope of services and areas of concern, and to advocate for the “correct” coverage.  (”Correct” in this situation means as broad as we can get in ways that are probably relevant to the insured, and which still fall within their price point.)

I had a conference call with an insured today.  They development video gaming software.  We had a 100% variance in pricing between three quotes, but the bells and whistles offered by the more expensive markets just were not relevant to this insured, and the lowest-priced option happened to have some very attractive features that the more expensive markets did not offer.

So in this case, the lowest-priced option is also the best fit for the insured.  How often does that happen?

Luckily, I had a very professional agent who got the insured on the phone so we could review their areas of concern.

Conversely, I recently had a bank bond submission (forms more standard, but often misunderstood) where the incumbent agent would not share the expiring terms with me nor give me any feedback on what the insured needed or wanted.  Even though I provided terms, I couldn’t begin to tell her how our terms were better, worse or indifferent.

Can you guess which agent’s insureds probably got a better product and a more appropriate placement?