Claims Made Bites: The Good Old Days (of Package Policies) and Why We’ll Never Get Package Policies Ever Again

Risk advisors today really have their work cut out for them. Their job entails:

• Forecasting risk trends and selling their analysis to their chain of command
• Ensuring compliance up and down the corporate hierarchy
• Locating the best risk transference strategies, measuring the cost of transferring risk vs. self insuring.

They’re essentially professional prophets. But they can’t settle for writing “The Risk Draweth Nigh” on a piece of cardboard and yelling at passersby like a doomsday prophet might. They have to package their prognostications into actionable items AND guide upper management into purchasing the correct risk transference product (insurance).

Selecting which insurance products to purchase is a real challenge, especially today. I’ve written before about how absolute exclusions makes seeing which exposures have actually been transferred to the carrier seem more confusing than ever. Risk advisors for an environmental consultant can look at an E&O quote, see coverage for consulting on environmental matters is named in the professional services description and reasonably conclude that this product transfers their hazard of providing these services to the carrier. They don’t think that the existence of the absolute pollution exclusion will interfere with their efforts to procure coverage until after the claim is denied.

The Unavoidable Drawback of Exclusions

Why might an errors & omissions policy contain an absolute pollution exclusion? To clarify that the E&O policy is not doubling up as a pollution policy. The E&O policy is not designed, not rated for exposures related to the insured’s potential liability around their pollution exposures, and without an explicitly written exclusion, an otherwise creative plaintiff bar may find a way to trigger the policy and produce coverage where coverage was never meant to exist. If you want pollution coverage, then get a pollution liability policy.

This makes sense on the surface; exclusions need to clarify what the policy is not doing. Otherwise the product will become unsustainable if it’s pulled to cover exposures that were never contemplated. But the obvious problem is: what happens when a claim hits two exposures? What if the E&O claim is related to pollution? As Ground Down Engineering vs. James River Insurance Company taught us, the clear and unambiguous language of the exclusions takes over. If the pollution policy excludes E&O claims, and the E&O policy excludes pollution claims, then an environmental consultant who is sued for negligence as it related to their consulting on pollution conditions will be functionally self insured, even though they have a pollution and an E&O policy.

This is the problem with using monoline policies to transfer risk appropriately. A risk advisor can find the most competitive pollution carrier and the most competitive E&O carrier and transfer each of their respective risks to these carriers thinking their risk transference job is done. But without appreciating the broadness of each of these carriers exclusions, risk advisors may not realize that they’re functionally bare instead.

It makes you wonder: what if you had one carrier who could cover all of the business liability under a single policy? No conflicting exclusions, no piecemeal portfolios of insurance policy. One carrier, one claims adjustor, one point of contact should anything go awry.

The sad truth is, this product actually existed at one point in time in the 20th century. It was very popular and very successful. Until it wasn’t. And the conditions that caused them to disappear will likely keep package policies in the annals of history, never to be deployed to the commercial public ever again.

Risk Advisor’s Golden Years

The Commercial General Liability (CGL) policy was a thing of beauty. Now you had a single policy from which you transferred your risks arising from all of your business liability (unless it was excluded). That means all of your business’ general liability was considered under a single policy, a single carrier, a single point of contact should a claim arise.

Think about how amazing this is for a risk advisor. “Did we purchase a CGL policy? Are the limits we purchase high enough? Check, and check.”

E.W. Sawyer is often credited as the architect of the first iteration of the CGL back in the 1930s. He saw an insurance industry that was fragmented by insurance products written for particular classes of businesses which only covered particular exposures in particular ways. You had theater liability, automobile liability, physician’s liability, team’s liability, and elevator liability as a few examples. Instead of a theater policy that only covered some of the theater’s exposures, what if you had a policy that covered everything that the theater might be liable for? Sawyer first crafted this policy in 1939 with a full rollout in 1941. Eventually this became the dominant coverage form. Insurance consumers were less interested in maintaining a running accidents schedule and opted instead to purchase a risk transference tool that was always there, barring an explicit exclusion.

This new product took off, and by 1955 you had a steady refinement of the CGL forms and the “accident” trigger for coverage. Risk advisors had a simple job when it came to risk transference analysis. Did we purchase a CGL policy? Do we need higher limits?

Then came the asbestos claims.

And the product liability claims.

And the pollution claims.

Suddenly you had astronomical tails attached to occurrence form policies that were inadequately priced for these massive legal liabilities businesses found themselves saddled with.

Package policies became economically untenable. If you write everything, then you’re bound to get hit with something. Better to specialize in a particular product and let other carriers handle the exposures you don’t want.

Do Insurance Consumers Win With Laissez-Faire Fragmentation?

Insurance consumers for the most part haven’t questioned this model. Let’s carve up a business’s hazards into several chunks and allow multiple markets to compete for each chunk. Let the carrier with best pricing/coverage win for each respective chunk!

But as we discussed earlier, it’s not that simple at all. Each carrier is going to protect their chunk of the exposures by using clarifying exclusions, normally written in an “absolute” manner, in order to cover only what they intend to cover. Unfortunately these exclusions can be used to carve out coverage everyone assumes is covered. Far from being a competitive substitute to the package policy, the hodge-podge portfolios actually contain a lot of holes, coverage gaps where exposures that hit two seemingly covered areas fall in-between, lost to the abyss of uncovered claims.

What’s the right solution? Bring back package policies? From the consumer’s perspective, this is the most obvious and advantageous solution. But I am very pessimistic about the prospect of carriers lining up to offer real, broad package policies ever again for two reasons.

Two Roadblocks to Package Policies

Number 1 is inflation continues to rise. Covering claims, indemnifying policy holders and impacted third parties will always be a challenge when the costs associated with this indemnification continue to inflate year after year after year. This, of course, is not an impossible hurdle to mount if you have the right actuarial team, but it’s a hurdle nonetheless.

Number 2, and I think the biggest hurdle, is nuclear verdicts. Nuclear verdicts are jury awards exceeding $10 million. They continue to trend higher in both frequency and award amount. This is especially challenging to price for. Try telling an actuarial team to price for a package policy that, in these litigious times, will most likely get dinged with claims here and there through the life of the account. Then have them also forecast the chance that somewhere along the many coverages the package is offering is the next nuclear verdict.

You have to price for nuclear verdicts somehow. There’s no sign that they’re going away. I believe nuclear verdicts are a part of our societies’ way to delineate populist justice into systems we all deem broken, unjust and inefficient. Let me explain.

Let’s imagine for a second a violent criminal getting a 10-year sentence for his crimes. You might think this is adequate or you might think the sentence was too lenient. Regardless, you hear later this criminal becomes a victim of abuse by his fellow inmates. Generally speaking, does the plight of this criminal garner sympathy in the eyes of the public? Not at all! If anything, the public is pleased when we hear stories about criminals’ lives being subjected to hardship and cruelty within the prison’s walls. It makes up for the lack of justice we feel the justice system is withholding. The abuse at the hands of the inmates compensates for an institution that cannot or will not punish the criminals appropriately.

There’s a similar sense of poetic, populist justice the general public feels when we see a large nuclear verdict being slapped against a giant, faceless corporation like an insurance company. While this study is about health insurance specifically, it does reflect general attitudes Americans share towards the insurance industry as a whole. Americans do not feel like insurance carriers are looking to take care of their policyholders. They instead feel like insurance carriers seek to extract as much premium as possible while providing as little coverage as possible. So when a large company gets hit with a massive nuclear verdict AND an insurance carrier is on the hook! That’s icing on the populist cake.

As long as consumers feel indifferent or satisfied about nuclear verdicts, then nuclear verdicts will never go away. And insurance carriers will respond by carefully carving out which exposures they want and explicitly carving out the exposures they don’t want. The incentives to offer a superior package policy product are stifled by the unpredictability of inflation and the rise of nuclear verdicts.

What possible solution can there be for these dilemmas? I’m not going to pretend I can solve inflation, but I have an idea about nuclear verdicts. Do insurance consumers understand that these nuclear verdicts have trickle down effects that ultimately land on their doorstep?

Do Homeowners Budget for Nuclear Verdicts?

I recently came across  a story of a rural Oklahoma town whose property taxes increased by 75% due to an abuse case from the local school district. While not a nuclear verdict by definition, the $7.5 million settlement stemming from a former girl’s coach grooming and sexual assault charges will now be serviced by the taxpayers.

One resident noted, “Those who caused this situation are in jail. They’re not going to be paying this penalty. We are. And that’s tough for everyone to swallow.”

Residents who were already living paycheck to paycheck will not have to consider other measures in order to keep a roof over their head.

Please understand: I am not saying this settlement was unjust in any way. I’m saying oftentimes the general public does not consider where these settlements come from. Someone has to pay these settlements. And even when it’s cases where the big bad insurance carrier is footing the bill, the costs end up being borne by the consumers. If claims costs go up, then rates will have to follow. If rates rise, then premiums rise. If premiums rise, then cost of services rises. If costs of services rise, then business owners have to find a way to pass those costs to their customers or risk running unprofitably until they can no longer pay their bills.

The ubiquity of yesteryear’s package policies are not coming back tomorrow. But perhaps there’s a way for the insurance industry to better educate the general public about the ramifications of these massive nuclear verdicts. If costs can be more reliably predicted, perhaps then the viability and tenability of package policies could be on the table. Then risk advisors can simply purchase a good policy and set about focusing on firsthand risk mitigation strategies instead of hundreds and hundreds of insurance documents to make sure that their insurance works as ordered.

But if I were a betting man, I would NOT wager that this package policy is coming back in my lifetime. I think the legislative hurdles to enact tort reform coupled with the general public’s dissatisfaction with insurance and retribution against what they feel is an unjust and uncaring system means nuclear verdicts are here to stay – and evolve. This means risk advisors will have to sharpen their insurance comprehension skills in order to successfully navigate their respective firms through these litigation-seeking waters that is the American economy.

Meet the Author

Lucas Roberts

Management Liability Broker, Burns & Wilcox