Omni Risk Mgmt E‑Newsletter
Summer, 2006 Volume 4, Number 1
In This Issue · Commercial Lines · Personal Lines · Surety Bonds · Life & Health · Construction News Insurance Industry Links www.ambest.com Lines Of Business Bonds Property Work Comp Commercial Auto General Liability Umbrella Inland Marine Ocean Marine Personal Auto Homeowners Flood Insurance Group Personal Lines Pension Plans Payroll Deduct Plans Health Insurance Disability Insurance Boiler & Machinery Professional Liability Executives Rob Mastrantonio, Pres. Rob@omni-risk.com Frank Strcich, VP Frank@omni-risk.com Glenn Glubiak, VP Surety Glenn@omni-risk.com Commercial Lines Tara Pattona Tara@omni-risk.com Christine Schuller Chris@omni-risk.com Adam Stone Adam@omni-risk.com Gina Di Paoloa Gina@omni-risk.com Tom Weigand Tom@omni-risk.com Teressa Richardson Teressa@omni-risk.com Personal Lines Patricia Micari Pat@omni-risk.com Joe Schepis Joe@omni-risk.com Mechelle Diaz Mechelled@omni-risk.com Surety Jennifer Spadaro Jen@omni-risk.com Life & Health Joe Schepis Joe@omni-risk.com Claims Debbie Oggeri Debbie@omni-risk.com Accounting Maria Salvo Maria@omni-risk.com Administration Natalie Perry Natalie@omni-risk.com Candace Strasser Candace@omni-risk.com	Commercial Lines AVOID UNNECESSARY COSTS WITH ENVIRONMENTAL SURVEYS A pipe leaked in a ceiling of a high-rise building. The plumber ripped off the insulation, sealed the pipe, and put blowers in to dry the leak. An office worker tested the insulation debris that was all over the floor. It turns out it was asbestos, and it was now blown all over the building.This resulted in the need to evacuate and seal off the whole floor of the office building. Adjacent floors were tested, and an emergency cleanup was conducted. After decontaminating all furniture and moving it off site, the carpet was removed, only to discover asbestos floor tiles sticking to the carpet. Naturally. the floor tiles were glued down with asbestos mastic. After all removal and cleanup was done, the reconstruction could be started. This is a true story. This disaster could have been avoided by having an initial survey and testing done to locate hazardous materials and having a plan for this type of incident on hand. Having a preexisting relationship with an environmental expert is helpful. Prequalify your consultant/contractor before you need their services, and make sure they will be in business next year. This job would have cost $500 if an experienced environmental firm had been involved from the beginning. Instead, it was a $100,000 fiasco. Personal Lines CARCO PHOTO INSPECTIONS For your convenience Omni Risk now offers CARCO inspection services. NYS requires this inspection for the protection, of you and of your insurance company. The inspection is designed to document the existence of the vehicle, it's physical condition and existing options and accessories. The ultimate goal of vehicle pre-insurance inspection is to help reduce the cost of automobile physical damage insurance coverage (collision and comprehensive) by accurately documenting your vehicle, and greatly reducing the possibility of fraudulent claims. Please contact Joe Schepis @ 631-434-1000 x106 or email joe@omni-risk.com to schedule inspection Defensive Driving Course We are now offering a Defensive Driving Course sponsored by the Empire Safety Council. Each course is 6 hours long will be presented in a two classroom session. You will get essential information about traffic safety issues, defensive driving techniques & Vehicle & Traffic Laws. This course will enable you to receive a reduction of up to 4 points on your driving record &/or receive a minimum 10% reduction on your liability & collision premiums each year for 3 years. The cost will be $50 to attend. Contact Joe Schepis joe@omni-risk.com for class schedules Hurricane Season is Here! This year is predicted to be an active hurricane season. Don't get caught unprepared! The steps below will help you minimize hurricane damage and get back on your feet if you encounter hurricane damage. Listed below are some frequently asked questions about what insurance usually covers, along with some tips on filing claims. Remember: every situation is different and many policies, while similar, are seldom exactly the same. Just as the "one-size-fits-all" insurance policy is a myth, so is the idea that all questions about what is covered can be answered definitively, without knowing all the provisions of the insurance policy; the final determination can only be made by the insurance company. Frequently asked questions 1. I have reported my claim, now what should I do? You should take all steps necessary to prevent further damage—securing property, temporarily boarding windows and roof, drying out carpets and personal property, etc. If the insured does not do this and further damage results, it may not be covered. You should not undertake any permanent repairs, nor dispose of any damaged property before an adjuster has been able to see the damage. When there is water damage to the contents of a home, you should remove water-soaked contents such as carpeting and furniture, however you should not dispose of such items before an insurance adjuster sees them. You can place such items outside under a tarpaulin. In the case of perishable items (i.e., food) that must be disposed of, first take photographs of that property to substantiate the claim. If you do not, some damages may not be covered. You should retain all receipts for emergency repairs and for items which might qualify under additional living expenses (such as water, ice, rental charges at another location if the home is uninhabitable, etc.). 2. Is there anything I can do to speed up the claims process? Although the adjuster will contact you as soon as possible, priority will be given to the most severe losses. Also be aware that larger claims will be settled in stages, not all at once. While waiting for the adjuster, there are a number of things you can do: You may wish to secure a repair estimate (preferably at least two) for the adjuster to review. This will help the adjuster with the settlement process. Take pictures of the damaged property. If you have pictures of the property before the loss, these should be provided to the adjuster. Make a list of all damaged property, including a description, age, original cost and place of purchase and estimated replacement cost. Any receipts or canceled checks for these items also should be included. 3. What if my home is so damaged I can't stay in it? Under most homeowners and dwelling forms, coverage is provided for additional living expenses. If the home is uninhabitable due to a covered peril and you must temporarily relocate, most policies will reimburse for the reasonable expenses incurred over and above your normal living costs. For example, it would probably cover all reasonable housing expenses since you will be paying a mortgage payment, but would only cover food expenses over and above what the policyholder normally would pay for food. It is imperative that you retain all receipts for these expenses in order for them to be considered as a part of the loss. The expenses must be in line with normal living costs and must be a necessary and direct result of the loss. Most policies limit recovery under Additional Living Expenses to a percentage of the amount of coverage on the home itself. 4. What coverage is there for trees that are down? There is no coverage under standard dwelling and homeowners policies for damage to trees by "weather perils" (such as wind). However, if the tree falls and causes damage to some other type of covered property (such as a house or fence), the damage to the house or fence would be covered. Separate windstorm coverage can be purchased as an added endorsement. 5. Power was out for five days and the food in my freezer and refrigerator spoiled. Is it covered? Generally, most residential policies do not cover food spoilage resulting from power outages due to the "Power Failure" exclusion. A small number of companies provide some very limited coverage (i.e., $250 to $500) as a coverage enhancement. Aside from this, coverage is generally not available. 6. When power finally came back on, a power surge damaged some of my electrical equipment. Is it covered? Most homeowners policies provide coverage as "sudden and accidental damage from artificially generated electrical current"; however, coverage does not apply to loss of transistors, computer chips or similar items. Therefore, damage from a power surge would not be covered for property such as televisions, VCRs, computers or similar items. 7. The adjuster was here last week and I still haven't gotten my check. How long is this going to take? After the adjuster has visited the insured, he must complete detailed paperwork on the loss, which is subsequently submitted to the carrier for review. After everything has been checked, the carrier will issue the claims draft to the insured. If the adjuster is carrying a heavy claim load, there is often quite a delay in completing the paperwork by the adjuster, since they generally must do this at night, as well as the delay at the company as it deals with thousands of claims to review at one time. Often, an insurance agent can check with the adjuster to find out exactly when the paperwork was submitted to the carrier. If the papers have been sent in, the company also may be able to provide a status report. 8. I've just received my claim check, and it's not enough. If the check is for a lower amount than the insured expected, it is usually due to policy terms that require settlement on an actual cash basis with replacement cost being paid at the time repairs or replacements are actually completed. Check with your agent or company. 9. What is the difference between actual cash value and replacement cost coverage? If the policy indicates that settlement will be on a replacement cost basis, then payment will be made for the actual cost to repair or replace at today's prices, limited only by the total amount of coverage that was purchased. If the adjustment basis is actual cash value, settlement will be made by determining the replacement cost at today's prices and subtracting from that amount a reasonable amount for depreciation, age or obsolescence. Some policies provide coverage for the home on a "guaranteed replacement cost" basis. In this situation, the carrier will pay whatever it costs to repair or rebuild the home, regardless of policy limits. 10. I was told I was "underinsured." How can this be? Too often, homeowners neglect to review their homeowners insurance. Changes to your home such as the addition of a room or an increase in your home's value may affect your coverage. Call Omni Risk Management for the best advice. Surety Bonds What is an ERISA bond and how do we obtain? Article 412 of the Employee Retirement Income Security Act requires every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan (a "plan official") secure an ERISA Fidelity Bond. The bond protects employee benefit plans against loss caused by acts of fraud or dishonesty, either directly or through connivance of others. The amount of such bond at the beginning of each plan year must be at least 10% of the amount of funds handled. In no event can the bond be less than $1,000 nor more than $500,000. Any bond shall be in a form or of a type approved by the Secretary of Labor, including individual bonds or schedule or blanket forms of bonds that cover a group or class. It is unlawful for any plan official to receive, handle, disburse, or otherwise exercise custody or control of any of the funds or other property of any employee benefit plan, without being bonded. It is also unlawful for any plan official to permit any other plan official to perform such functions. Life & Health Advantages & Disadvantages of Term & Whole Life What are the advantages and disadvantages of term and permanent insurance? The following points can help you determine which type of insurance best suites your needs. Term Insurance Advantages Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest It's good for covering needs that will disappear in time, such as mortgages or car loans. Disadvantages Premiums increase as you grow older. Coverage may terminate at the end of the term or become too expensive to continue. The policy generally doesn't offer cash value or paid-up insurance. Permanent Insurance Advantages As long as the premiums are paid, protection is guaranteed for life. Premium costs can be fixed or flexible to meet personal financial needs. The policy accumulates a cash value against which you can borrow. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance. The policy's cash value can be surrendered -- in total or in part -- for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's lifetime or a specified period.) A Provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability Disadvantages Required premium levels may make it hard to buy enough protection. It may be more costly than term insurance if you don't keep it long enough Construction News WHAT IS A CAPTIVE INSURANCE PROGRAM? A captive insurance company is, in its simplest and purest form, an insurance company that only insures all or part of the risks of its parent. This definition is, however, rather narrow and fails to reflect the way in which captives have developed over the years. A captive may more usefully be described as an insurer that writes risks whose origins are restricted or risks to which it has unique access. History and development In the last 20 to 30 years there has been phenomenal growth in the number of captive insurance companies so that today there are well over 4,000 captives worldwide writing more than $20bn in premium. These companies have capital and surplus estimated at over $50bn. The captive insurance industry can be said to have its origins in the formation of mutuals and co-insurance companies in the 1920s and 1930s. However, the start of the real growth of the captive industry can be traced to the early 1950s and the move by parent companies, to establish their captives offshore. The greatest stimulus to the development of captives has been the expense or lack of availability of certain types of insurance cover in the commercial market. Other considerations apply, however, and these have become so important in the minds of risk managers and finance directors that, even when commercial premium rates have been extraordinarily low, the interest in captives has been greater than ever. Evidence of this interest is provided not only by the number of captives being formed but also by the increasing number of domiciles available for their incorporation. Long-standing domiciles, such as Bermuda, the Cayman Islands, Guernsey, the Isle of Man and Luxembourg have been joined by the likes of Vermont, the British Virgin Islands, Gibraltar and Dublin. In a move that demonstrates forcibly the emergence of captives into the mainstream of the insurance and risk management arena, the Council of Lloyd’s passed a byelaw in November 1998 permitting the establishment of captive operations at Lloyd’s. Types of captive In its simplest form a captive can be defined as a wholly owned insurance subsidiary of an organization not in the insurance business whose primary function is to insure some or all of the risks of its parent. Since captives were first formed the industry has looked at new ways of developing the captive model to provide appropriate vehicles for a wide range of different owners and users. There are now many types of captive, including: Single-parent captives, underwriting only the risks of related group companies. Diversified captives underwriting unrelated risks in addition to group business. Association captives which underwrite the risks of members of an industry or trade association. Liability risks such as medical malpractice are frequently insured in this way. Agency captives formed by insurance brokers or agents to allow them to participate in the high-quality risks, which they control. Rent-a-captives are insurance companies that provide access to captive facilities without the user needing to capitalize his own captive. The user pays a fee for the use of the captive facilities and will be required to provide some form of collateral so that the rent-a-captive is not at risk from any underwriting losses suffered by the user. Special purpose vehicles (‘SPV’s) are used in risk securitization. They are reinsurance companies that issue reinsurance contracts to their parent and cede the risk to the capital markets by way of a bond issue. Captives may be established as direct-writing companies issuing policies to, and receiving premiums from, their insureds but the insurance industry is generally highly regulated and, in many jurisdictions, certain risks may only be written by an admitted insurer. Usually, and particularly in the case of smaller captives, it is simpler for the captive to operate as a reinsurer accepting the risks of its parent, which have been insured by a licensed direct-writing company (a ‘fronting company’) and then ceded to the captive. The fronting company will charge a fee for its services and may require a letter of credit to guarantee the captive’s ability to pay claims. Reasons for forming a captive insurance company It is popularly thought that a captive is primarily a tax minimization device. In fact, captives are usually formed for other economic reasons with the main drivers being risk management and risk financing. Some of these reasons are summarized below. Lower insurance costs. Commercial market insurance premiums must be adequate to meet the cost of claims but, in common with other commercial enterprises, insurers are in business to make money and will therefore include in the premium an element to provide for their acquisition costs, overheads and profit. This portion of the premium can represent as much as 35% or 40% of the whole. In establishing a captive, the parent seeks to retain the profit within the group rather than see it go to an outside party. A captive may also help reduce insurance costs by charging a premium that more accurately reflects the parent’s loss experience. Cash flow. Apart from pure underwriting profit, insurers rely heavily on investment income. Premiums are typically paid in advance while claims are paid out over a longer period. Until claims become payable the premium is available for investment. By utilising a captive, premiums and investment income are retained within the group and, where the captive is domiciled offshore, that investment income may be untaxed. Additionally the captive may be able to offer a more flexible premium payment plan thereby offering a direct cash flow advantage to the parent. Risk retention. A company’s willingness to retain more of its own risk, particularly by increasing deductible levels, may be frustrated by the inadequate discount offered by insurers to take account of the increased deductible and by the fact that the company is unable to establish reserves to pay future claims. Establishment of a captive can help address both these problems. Unavailability of coverage. Where the commercial market is unable or unwilling to provide coverage for certain risks or where the price quoted is seen to be unreasonable, a captive may provide the cover required. Risk management. A captive can act as a focus for the risk management and risk financing activities of its parent organization. An effective risk management programme will result in recognisable profits for the captive. Risk management can be viewed by a captive owner not as a cost centre but as a potentially profitable part of the company’s activities. A captive can also be used by a multinational to set global deductible levels by enabling a local manager to insure with the captive at a level suitable to the size of his own business unit while the captive only buys reinsurance in excess of the level appropriate to the group as a whole. Access to the reinsurance market. Reinsurers are the international wholesalers of the insurance world. Operating on a lower cost structure than direct insurers they are able to provide coverage at advantageous rates. By using a captive to access the reinsurance market the buyer can more easily determine his own retention levels and structure his program with greater flexibility. Writing unrelated risks for profit. Apart from writing its parent’s risks, a captive may operate as a separate profit centre by writing the risks of third parties. In particular, an organization may wish to sell insurance to existing customers of its core business. For example, retailers may sell extended warranty cover to customers with the risk being carried by the retailer’s captive. The claims pattern of this type of business is usually very predictable with a large number of small exposures and can provide the retailer with a valuable additional source of revenue. Tax minimization and deferral. The tax considerations in forming a captive will depend on the domicile of both the parent and the captive. Integration of a captive as part of an overall tax planning strategy is a complex subject so that professional legal and tax advice is essential. To add someone to this email list, send newsletter@omni-risk.com and put in subject Line “Add to Newsletter” To be removed from this email, send newsletter@omni-risk.com and put in subject Line “Remove from Newsletter”