2nd Quarter Insurance Risk Newsletter 2021

what's new

What’s New: Umbrella & Excess Liability

The story of the casualty market in the first quarter of 2021 has similar themes to the end of 2020. While primary General Liability remains fairly flat, rate continues to be the driving force in the Umbrella and Excess Liability marketplace. “In the excess market, the average rate increase over the last 12 months has been over 50%. And we have seen increases as high as 300% in certain industry segments,” says Tom Dillon, Amwins National Casualty Practice Leader.

 

Years of soft pricing, low interest rates and “nuclear” verdicts – generally defined as verdicts and settlements of $10 million or more – continue to drive pricing increases. Catastrophic liability events stemming from auto accidents, wildfires, active shooter events and opioid claims are contributing to Excess Liability losses. Additionally, nuclear verdicts are on the rise across all industries. Several societal trends have created increasingly anti-corporate juries – these trends are often called “social inflation.”

 

Social inflation is a term used to describe the results of increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions and larger compensatory jury awards. The median value of the top 50 U.S. verdicts in 2019 is estimated to be $88 million, which represents an increase of 62% compared to 2018, according to legal defense firm Lewis Brisbois. These massive verdicts are the result of an increasingly anti-corporate sentiment among jurors and litigation funding.

 

Third-party litigation funding involves a third-party source funding a plaintiff’s court costs to receive a portion of jury awards. When a plaintiff has a third party’s financial backing, they are much more likely to hold out during the litigation process, which generally means a higher verdict or settlement.

 

But rate increases aren’t the only way that carriers are responding to these litigation trends. Many insurance carriers are attempting to limit their exposure to nuclear verdicts by cutting policy limits, even for accounts with no recent claims activity. This reduction in capacity, and in terms and conditions, makes procuring appropriate coverage limits difficult and costly. Adam Wise, Vice President at Hull & Company, shares the need to build Excess “towers” to reach the limits desired has dramatically increased over the past year. He says, “Towers of $25M in Umbrella/Excess liability are seeing the most rate increases.”

 

Hard market conditions in the casualty marketplace are expected to continue for at least several quarters. “Eventually, capacity coming into the sector will likely provide some rate relief, but the forces driving the price increases haven’t let up,” says Dillon. “Unless there is some meaningful tort reform, or until carriers gain more of a comfort level in certain segments and are able to avoid large verdicts and settlements, we will see a continuation of these challenging conditions.”

risk management

Risk Management: Renting a Vehicle for Business Use

Now that companies are opening business travel, it’s important to review your procedures and provide the following information about renting a vehicle, safely operating a rental vehicle and what to do in the event of an accident.


Basic Rental Procedures

  • List both the company name and renters name on the rental agreement.
  • List business address, not renters home address, on the rental agreement.
  • If physical damage coverage for company’s commercial auto policy is not necessary, waive the coverage.
  • Do not purchase gas from the rental agency. Rather, fill the vehicle prior to returning it.  
  • When traveling for business, always carry the company’s auto identification card.


When Driving a Rented Vehicle

  • Use seat belts at all times. Let other workers ride with you only if the vehicle has a seat belt for each person.
  • Before you begin driving, check your map and become familiar with vehicle’s mirrors, lights, wipers, windows and other components and make adjustments as needed.
  • Do not use your cell phone while driving. 
  • Always drive the speed limit.
  • If you start to feel tired or drowsy while driving, stop and take a break.
  • In bad weather conditions, slow down and drive cautiously. If the weather becomes too severe to safely drive, pull over at the nearest safe place and wait it out.
  • Do not drink and drive.


In the Event of an Accident

  • Stay calm. Do not argue with others involved in the accident.
  • Call an ambulance if anyone is injured. Assist those injured but do not administer first aid unless you are qualified. 
  • Call the police. Do not discuss what happened with anyone except the police.
  • Do not admit responsibility for the accident or sign a statement.
  • Do not disclose policy limits to anyone.
  • Contact company representative and fill out the company’s Vehicle Emergency Accident kit. Please reach out to the Brown & Brown Risk Management team to obtain these kits.

Employee Benefits: ACA – Here to Stay?

On June 16, 2021, the Supreme Court released its long-awaited decision regarding the constitutionality of the Affordable Care Act (ACA). This is the third time ACA has come before the Court. 


In 2019, the “individual mandate” which required most Americans to have health insurance or pay a penalty was essentially repealed when the penalty was changed to $0. With the removal of the individual mandate, some states argued that it invalidated the entire ACA. In a 7-2 decision, the Court decided to not address the constitutionality question and instead focused on the fact that the state of Texas, the other joining states, and the two joining individuals lacked standing to challenge the law.


It is impossible to know whether this is the end of the ACA litigation, but it is certainly the end of this chapter. The ACA will remain the law of the land for the foreseeable future. The decision, in conjunction with the Biden administration’s focus on bolstering the ACA, means plan sponsors should continue to be vigilant about their ACA compliance, especially since increased enforcement of the different provisions of the ACA is not unimaginable.

Personal Lines

Personal Lines: Homeowners Insurance and the Rising Cost of Building Material

Recent findings from the National Association of Home Builders (NAHB) confirmed that household construction costs have surged over the past year. This rise in construction costs is directly tied to soaring building material expenses—namely, the price of lumber. According to the NAHB, current lumber costs are up 340% from 2020. What’s more, lumber prices have already risen by an additional 67% since the beginning of 2021.


There are several reasons for these higher expenses. Specifically, both the COVID-19 pandemic and the presence of historically low interest rates have contributed to a rise in home purchases and renovation projects—thus elevating the demand for building materials. Nevertheless, this increase in demand has been met with supply shortages throughout the construction industry. In the midst of greater demand and lower supply, building material prices have subsequently soared.  


Unfortunately, this surge in costs could pose coverage consequences for homeowners across the country. After all, increased building material and construction prices could lead to higher homeowners insurance claim expenses, seeing as it would currently cost more to repair or rebuild a home following a loss. 


As a result, homeowners could discover that their existing policy limits and coverage features no longer offer adequate protection—leaving them financially vulnerable in the event of a loss. Further, homeowners insurance carriers may increase policyholders’ premium costs to account for the risk of elevated claim expenses.


In light of these ongoing cost concerns, it’s important for homeowners to respond accordingly. Consider taking the following measures: 

  • Review your homeowners insurance policy to be sure you fully understand what is covered. Take note of whether you have replacement cost coverage (which can offer compensation for the cost of replacing or rebuilding your home as new) or actual cash value coverage (which can offer compensation for the depreciated value of your home). Ensure your policy provides a correct replacement cost or overall value for your home.
  • Consult a trusted insurance professional to help you determine whether you need to adjust your policy to have sufficient coverage in the event of a loss. This may entail changing your policy’s valuation method, increasing your current limits, obtaining specialized coverage or implementing a policy endorsement. 
  • Make sure to inform your homeowners insurance carrier whenever you conduct renovations or implement other improvements in your home (e.g., adding a new deck or remodeling the bathroom). Update your policy as needed.


Please reach out to us for any personal risk management guidance you need.

SuretySurety: An Alternative to Letters of Credit: Be Efficient with Your Capital Utilizing Surety Bonds

Utilizing surety bonds can enable your organization to take cash-collateralized Letters of Credit debt off your balance sheet. Replacing Letters of Credit with surety bonds allows them to be treated as off-balance sheet items and not debt. By taking the debt off the balance sheet, capital can be utilized more efficiently and more economically than with Letters of Credit.

 

Types of Letters of Credit

There are two main types of Letters of Credit (L/C):

  • Commercial L/C is utilized to pay sellers for goods purchased – this type of L/C is drawn upon as expected. 
  • Standby L/C is not anticipated to be drawn upon because it is used to support financial and/or performance obligations. 

 

When Can a Bond Be Used in Place of a Letter of Credit?

Whenever a standby L/C is provided by a bank, there may be an opportunity to provide a surety bond in place of the L/C. These include:

  • Collateral obligations to insurance carriers such as high deductible or paid loss retrospective rated programs 
  • Performance obligations such as leases, environmental financial guarantees or decommissioning plans 
  • Workers’ compensation self-insurers’ obligations
  • Captive obligations 
  • Compliance obligations to meet governmental or regulatory requirement

 

What Are the Advantages of Using a Bond vs. a Letter of Credit?

  • Credit Availability: An L/C ties up the company’s credit capacity. Surety bonds are not credited against a company’s bank line but do require an indemnification. 
  • Default Instrument: A bank L/C is a demand instrument whereas a surety bond is not. An L/C may be drawn down at any time without proof of default or reason. In the case of a surety demand, the Surety requests proof of a company’s default from the beneficiary. This protects the company from the beneficiary collecting on the surety bond without substantiation. 
  • Rates: L/C rates will fluctuate based on interest rates and other marketplace factors. They may also have issuance, utilization or commitment fees. Surety rates are based on credit strength of the company and do not fluctuate based on financial marketplace conditions. In addition, surety bonds have no additional fees outside of the direct cost of the bond. 
  • Security/Collateral: Banks often take a security interest in the company’s assets. This security is generally perfected through a UCC filing, which acts as a lien to protect the bank’s financial interest. A Surety is an unsecured creditor and does not obtain a UCC filing but rather obtains a general agreement of indemnity.
  • Covenants: Banks may have restrictive covenants as part of the bank line of credit or L/C credit program. Surety agreements do not encompass covenants.

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