NC Workers’ Compensation Loss Costs Reduction for the Voluntary Market

Since 2011, there has been a large shift in North Carolina workers’ compensation law. These changes include statute changes, rules changes, personnel changes at the Industrial Commission, and new focuses for the Commission such as faster decisions and finding uninsured employers.

Recently, the North Carolina Rate Bureau has released new numbers advising for a reduction in loss costs for the voluntary market. In particular, the NCRB has suggested that the loss costs for the voluntary market for workers’ compensation insurance be reduced on average by 10.2%. 

Loss costs, sometimes called pure premium, is a number that represents the expected costs to an insurer of loss (such as indemnity payments) and the adjustment expenses for those payments. The loss costs are specifically tailored to job codes, but represent the overall market. The recommended reduction in rates would become effective in April 2016.

This is a significant reduction.  In 2014, NCRB only recommended a reduction of the loss costs numbers of 3.4%.  In 2013, the loss costs recommendation was an increase in 0.3%.    In 2012, the loss costs recommendation was a 0.5% decrease. 

The natural next question among employers is whether they will see a reduction in workers’ compensation premiums based on the loss costs reduction.

The ultimate answer is: it depends on your insurance carrier. First, your insurance carrier would have to adopt the recommended loss costs. Even if your insurance carrier does, the loss costs number is one factor in determining rates. The other major factor is the insurance company’s Loss Costs Multiplier (“LCM”). This LCM factors the individual insurance company’s expenses such as commission and brokerage, general expenses (overhead), taxes, licenses, profit, contingencies and investments. You insurance premium will be derived from the types of jobs your employees do, the amount of payroll you have, the loss costs, and the LCM.  

While the reduction in loss costs is not a guarantee of premium reduction, it is a predictive number that estimates that workers’ compensation costs are on a downward trend.

Insurance Requirements in Commercial Contracts (Part 2)

In this second post in the series, I hope to shed some light on the difference between an insurance policy with a deductible compared to one with a self insured retention ("SIR") and how that impacts business contracts. 

I have often heard people ask what is the difference in an SIR versus a deductible.  Confusion on this topic can have real-world impact when it comes to obtaining coverage under commercial contracts.

In Part 1, we discussed that bargaining for additional insured status may not always be equal to a stand-alone insurance policy.  Let's presume that a business bargained for additional insured status on a CGL or other liability policy.  The business then assumed it has coverage to defend and indemnify it against third-party tort claims, as if it had purchased its own insurance. However, if the liability policy is subject to a SIR rather than a traditional deductible, then the business will not obtain any coverage until the SIR is satisfied.  Further, the law is unsettled (depending on jurisdiction) as to whether only the primary named insured is permitted to satisfy the SIR or whether an additional insured can make a voluntary payment to satisfy the SIR, thus obtaining the coverage it (believed) it bargained for in an indemnity agreement or commercial contract. 

Deductibles and SIRs are often conflated; the differences are poorly understood by those outside of the insurance industry as well as the practical implications. Two policies can have a $1 million limit, with the only difference between the two policies being that one has a $100,000 deductible and the other a $100,000 SIR. Under an SIR policy, the $1 million of insurance only becomes payable after the $100,000 SIR is exhausted by the insured. In contrast, the deductible policy will typically immediately respond. Also, depending on the terms, the typical SIR policy will entrust the direction of the defense, appointment of counsel, and payment of legal defense costs with the insured, while the insurer typically retains control of directing the defense, appointing counsel, and paying defense costs under a deductible policy.

These simple distinctions have stark real-world implications.

First, under an SIR policy, no insurance coverage is required to respond until after the policyholder pays the full amount of the SIR. If the policyholder has cash constraints, is undercapitalized, or enters bankruptcy, it may not be able to ever exhaust the SIR (and thus there will be no requirement of the insurer to ever provide coverage to the policyholder or to any additional insureds).

Second, under a deductible policy, a policyholder is entitled to a defense (i.e., the insurer paying for an attorney and expert witnesses) as an additional insured. Similarly, the insurer immediately has a duty to defend. However, under most SIR policies, the insurer is not obligated to provide a defense and the insured(s) have to pay their own defense costs (which includes attorney's fees, expert witness fees, and other defense costs). Any business which has defended many lawsuits will know that the dollar value of defense costs can be significant and can, in many cases, exceed the costs to settle the lawsuit. The duty to defend typically does not arise under an SIR policy until after the SIR has been exhausted.

Third, as an additional insured under an SIR policy, your business's ability to obtain insurance coverage is predicated on the primary insured being able to pay the SIR. Even though you bargained to be an additional insured under the SIR, your business will receive no coverage until the SIR is satisfied. But wait . . . what if you volunteer to pay the SIR on behalf of the primary insured and thus trigger coverage? This offer of voluntary payment may not be enough; there is at least one case which prohibits the additional insured from satisfying the SIR in order to obtain additional insured coverage for itself.

Fourth, SIRs can change the way the total tower of insurance is calculated.  For example, a $1 million policy with a $100,000 deductible actually provides only $900,000 of indemnity from the insurer; the policyholder pays $100,000 and the insurance company pays $900,000.  However, a policy with $1 million in limits, subject to a $100,000 SIR, will often be written so that it provides for an insurance tower of $1,100,000; after the policyholder pays the first $100,000, the insurance policy is triggered and provides an additional $1 million for a total of $1,100,000.  If there is an excess policy sitting above in a tower of insurance, this difference can change when the excess policy has to respond. 

Without notice that a policy contains an SIR rather than a deductible, and without understanding the implications of each, a business cannot accurately plan for a loss situation.  Further, the difference between a deductible policy and an SIR policy often has major implications for the defense of any claims, as the deductible policy typically places the insurer in control of the claims, hiring of counsel, and management of defense of any lawsuits. 

Nearly half of cyber claims come from Middle Market companies

The recently released NetDiligence 2015 Cyber Claims Study illuminates the data breach dangers for Middle Market* companies. 

Unlike many other cyber-risk studies, this one is focused on insured claims and insurance claims payments. 

Along with a great infographic, the study showed that:

• Nearly half (43%) of the reported cyber insurance claims came from Middle Market companies.
• "Insider involvement" was responsible for more losses than outside hacking
• While Middle Market and smaller companies accounted for 71% of claims, they were responsible for only about a third of records exposed.  While smaller companies may be more prone to data breaches, they typically house less records.
• The per-record cost of response for the last two years has been in the range of $955 to $965.

*Although there are different definitions of Middle Market, for the purposes of this post, I used the $50 million to $2 billion in annual revenues definition. 

Insurance Requirements in Commercial Contracts (Part 1)

This is the first post in a series regarding insurance terms that are commonly encountered (but sometimes, poorly understood) in commercial contracts.

Whether you are drafting business contracts, reviewing them, or are a party to them, you will encounter insurance clauses. Insurance requirements are common in commercial contracts and have been for decades.  This includes commercial leases, licenses, subcontractor arrangements, and merger or asset purchase agreements.

Some of these clauses were heavily negotiated, other times they seem like mere boilerplate which was lifted from a form book decades ago. Without an understanding of insurance law, you may bargain for terms in the agreement that do not actually provide the sought-after coverage to protect from a possible loss.

Whether you are drafting agreements or simply reviewing older contracts, it is important to understand insurance law or to work with an insurance broker or insurance lawyer. Without an understanding of common issues and pitfalls, a party may believe that insurance exists to provide financial security to a transaction, when actually no insurance exists or coverage would be speculative at best.

Outdated terms which no longer apply.
Older documents (or new documents based on old forms) may include outdated insurance provisions. For example the common CGL policy was renamed from “Comprehensive General Liability” to “Commercial General Liability” nearly thirty years ago, however some commercial agreements still have the old language. And if a client wants to be defended against personal injury lawsuits, it needs a policy which provides coverage for “bodily injury.” Under common insurance law and the modern CGL policy, “personal injury” means non-bodily injuries such as defamation, the tort of invasion of privacy, wrongful eviction, and advertising injury. Contractual language which requires a party to obtain an outdated product – a commercial impossibility – does nothing but unnecessarily strain the relationship between parties.

Requests for additional insured status.
A contract may require the counterparty to add your business as an additional insured. Anyone added as an additional insured must know the limitations to additional insured status. For example, the  ability to gain coverage is only derivative of the first named insured; an additional insured has zero coverage for any independent claim that does not involve the first named insured. Similarly, certain policies do not permit naming additional insureds, such as worker’s compensation policies. In other situations, because certain policies typically include insured vs. insured exclusions, naming a person or entity as an additional insured may actually serve to negate or reduce coverage rather than extend coverage in certain circumstances.

Scottsdale Ins. Co. v. B&G Fitness Center, Inc. - when is the injured plaintiff an indispensable party to a coverage action under Rule 19?

A common question in insurance coverage litigation is whether the injured plaintiffs in the underlying litigation are necessary parties to the coverage case. A recent, detailed opinion from Judge Fox in the Eastern District of North Carolina squarely deals with this issue and lays out a roadmap for dealing with the issue in future cases. Judge Fox concludes that the underlying plaintiffs are not necessary parties to the coverage action.  Whether the plaintiffs from the underlying litigation are necessary to the insurance coverage action - between the defendant from the underlying action and its insurance company - has broad implications for many procedural questions, as well as strategic implications.   


In Scottsdale Ins. Co. v. B&G Fitness Center, Inc., 2015 WL 4641530 (Aug. 4, 2015 E.D.N.C.), the defendant had been sued by five plaintiffs in two separate lawsuits regarding alleged surreptitious video recording in the tanning bed area of a gym (the “Underlying Actions”). Scottsdale, the insurer, then filed a declaratory judgment action in federal court, seeking a declaration that there was no coverage under its insurance policy for the torts alleged in the Underlying Actions.


The defendant, the policyholder gym who had been sued in the Underlying Actions, moved to dismiss the case under Federal Rule of Civil Procedure 12(b)(7) for the failure to join the five individual plaintiffs from the Underlying Actions as co-defendants, arguing that these were necessary parties to the insurance declaratory judgment action under Rule 19.


The Court first explained that whether a party is indispensable under Rule 19 requires a two-step inquiry. The party must be “necessary” under Rule 19(a) and if the “necessary” party cannot be joined, the party has to be determined to be “indispensable” under Rule 19(b). The moving party – here, the gym defendant – bears the burden of showing that the missing party is indispensable. The gym argued that the underlying plaintiffs were both necessary and indispensable because under Rule 19(a)(1)(B)(i) they claimed an interest in the action and that interest would be defeated or impeded by the failure to join them to the coverage action.


Judge Fox concluded that the underlying plaintiffs were, “at best, incidental beneficiaries to the insurance contract at issue” and because they were not parties to the insurance contract and did not already have a judgment against the gym, they lacked standing to have the insurance contract construed. See also, Whittaker v. Furniture Factory Outlet Shops, 145 N.C. App. 169, 172 (2001). “Without having obtained a judgment or settlement against [the gym], the third party claimants have no legal rights under the insurance contract. Because the third party claimants lack a recognized legal interest in this action, they cannot be necessary parties.” B&G Fitness Center, Inc., at *4. Judge Fox further concluded that, even if the plaintiffs from the Underlying Actions had an interest in the coverage litigation, it was aligned with the gym – they both were seeking insurance coverage under the Scottsdale policies – and thus the gym would adequately represent the interests in maximizing the insurance recovery available for the plaintiffs. In other words, only “when the insured was not actively defending the lawsuit” or is subject to a default judgment is it proper to hold that the absent third-party is indispensable. Id. at *5. But as a normal matter, “the insured’s position protects the interest of the absent party because both parties want the insurance to be viable.” Id., citing CFI Wis. Inc. v. Hartford Fire Ins. Co., 230 F.R.D. 552, 554 (W.D. Wis. 2005).


The question of whether underlying plaintiffs must be joined in the coverage action has to be considered in every coverage action. And, the outcome of this determination may be different in different jurisdictions. There are a number of federal cases from other jursidictions which hold that absent third-party tort plaintiffs are required to be joined under Rule 19. B&G Fitness is ongoing and it remains to be seen whether Judge Fox’s decision will be appealed or reviewed by the Fourth Circuit.


This question also has major implications for whether the coverage action can even succeed in federal court. Sometimes, a single federal district court may not be able to obtain personal jurisdiction over (1) the insurer, (2) the insured, and (3) the underlying tort plaintiffs. Even if a federal district court has adequate personal jurisdiction, insurance coverage litigation in federal court is typically premised on diversity jurisdiction under 28 U.S.C. § 1332. In some cases, that diversity jurisdiction only exists in the absence of the underlying plaintiffs; i.e., if the underlying plaintiffs have to be joined as indispensable parties under Rule 19, and joinder destroys diversity, then the coverage action can only be litigated in state court. Those facts typically arise when the policyholder sues the insurance company, joining the underlying tort plaintiffs as defendants in the coverage action. Of course in that case, the insurance company could move to have the parties re-aligned to reflect the true adverse interests in the suit, in which case diversity may exist. See, e.g., Earnest v. State Farm Fire and Cas. Co., 475 F.Supp.2d 1113, 1117 (N.D. Ala 2007). I have previously written about the topic of realignment in coverage cases in the Fourth Circuit, which you can find here: http://www.law360.com/articles/396074/builders-v-dragas-an-important-reminder-for-insurers

 

All Risks Covered: what's in a (blog) name?

All Risks Covered is Womble Carlyle’s new blog devoted to business insurance issues in North Carolina. This includes commercial property insurance, commercial general liability insurance, employment practices liability, insurer bad faith, directors & officers insurance, agents and brokers issues, errors & omissions insurance, cyber insurance, captive insurance, and insurance regulatory matters.


The blog’s name, All Risks Covered, will sound family to anyone who has ever bought an “all risk” insurance policy. “All risk” was, for a long period of time, considered the desirable property insurance policy for homeowners and many small and middle-market businesses. But understanding “all risk” coverage means understanding some of the basics of property insurance.


An insurance policy is a written contract between two parties; the insurance company and the policyholder. A property policy obligates the insurance company to pay for certain losses if they fall within the scope of the policy, subject to certain exclusions and conditions. Because all commercial policies have some exclusions, even policies named “all risk” do not actually cover all possible risks. These policies are still subject to certain exclusions.


The use of “all risk” differentiates certain property policies from policies that only cover specific named risks. As a result, policies are either “named peril” or “all risk” (which is now often called “comprehensive” or “open peril” to avoid confusion and to account for the exclusions).


A named peril policy only provides coverage for risks which are specifically named in the policy. The quintessential example would be a 19th century fire insurance policy; that was a property insurance policy that insured a property owner against loss by “fire” but nothing else. Today, popular commercial property insurance named perils policies typically provide coverage for physical losses as a result of:

• Fire
• Lightning
• Explosion
• Windstorm or Hail
• Smoke
• Riot or Civil Commotion
• Sinkhole Collapse
• Volcanic Action

As a result, if a loss is sustained by perils which are available as additional coverage, such as “weight of snow, ice, or sleet,” “water damage,” or “flood,” those would not be covered under the named peril policy. Any recovery must fall within one of the named perils. However, because the insurance policy only covers certain discrete categories of risk, it will be less expensive to purchase compared to an “all risk/open perils” policy.


An “all risk” or “open perils” policy works in the opposite way. It is designed to cover all types of physical loss, only excepting items that are specifically excluded in writing by the insurer. In other words, the named peril policy is a contract of inclusion (future losses are only covered if they are specifically included) while an all risk or open perils policy is a contract of exclusion (all future physical losses are covered unless they are specifically excluded).


Because the scope of coverage for an all risk policy is so much greater, these policies are more expensive than a named perils policy. The choice between the two policy types is often dictated as much by the policyholder’s financial condition as anything else. Lenders often have specific insurance requirements to protect the collateral which secures their loans. If a lender requires your business to have a comprehensive, open perils policy, that is simply a reflection of the lender’s desire to protect their investment against a broader array of risks and accidents which could occur.
 

As a legal matter, if there is a dispute as to insurance coverage under a property policy, the burden of proof at trial is different between an all risk policy compared to a named perils policy. Under a named perils policy, the burden of proof is on the policyholder to prove that the loss falls within one of the specifically named perils contained in the policy. In contrast, under an all risk policy, the burden of proof at trial rests on the insurance company to prove that one of the exclusions applies.
  

As I mentioned above, there has been a shift in the industry away from using the term “all risk” for these policies because they do not literally cover all risks which a policyholder may face. Indeed, the scope of coverage is really determined by the exclusions (and any exceptions to the exclusions). Most all risk/open peril policies continue to have numerous exclusions, including flooding (which can include or exclude sewage backup), ground shifting or earth movement (which can include or exclude earthquakes, mine subsidence, and mudslides), nuclear hazards, government action, war, and many others.