E&O Issues Relating to Flood Insurance

A value-added risk management service of

The Big “I” Professional Liability Program &

Swiss Re Commercial Insurance

                                                                       

Legal Disclaimer

The information provided and statements made in this panel discussion are for informational purposes and is not intended as legal or other professional advice. Please procure the appropriate legal or other professional advice and services to address your individual circumstances. There is no representation, guaranty or warranty made as to the sufficiency or accuracy of the information provided. The opinions and views expressed by outside counsel panel members do not necessarily reflect the opinions and views of Westport Insurance Corporation.

                                                                       

Panelists

• Mark Male (Host) – Sr. Vice President, Swiss Re Commercial Insurance

• Mary Jo Vrem – FEMA project manager, Floodsmart Marketing Campaign

• Robert Butler – Asst. Vice President, Head of Flood Insurance, Selective Insurance Company of America (Big “I” Flood Program’s endorsed Write Your Own carrier)

• Max J. Cohen – Partner, Lowe, Stein, Hoffman, Allweiss & Hauver, L.L.P. Areas of practice in commercial and casualty litigation, emphasis on professional liability and insurance defense.

• Robin LaFollette - Vice President of Claims and Liability Management, Swiss Re Commerical Insurance; responsible for managing claims team adjudicating agents E&O claims

                                                                       

Cause & Geographic Concerns

• In 2006, every state experienced significant flooding

• All 10 NFIP regions saw declared flood disasters

• Some causes seasonal, others unpredictable

• Hurricanes threaten coastal regions, heavy rains and quick snow melts in Northwest and Midwest, and flooding and mudslides from rainy season in the West.

                                                                       

States with Needs

• The bottom five states in overall household enetration: Washington DC (0.58%), Minnesota (0.71%), Utah (1.15%), Michigan (1.49%), Colorado (1.62%).  All of which are well below the national average of 8.41%.

• Those states that have the highest rates of uninsured properties in high risk areas include:  Washington DC (7.65%), Wyoming (10.39%), Alaska (10.63%), Minnesota (14.46%), and Kansas (14.47%).  Again, all well below the SFHA penetration average of 45.62%.

                                                                       

• Last year, more than one-third of flood insurance claims came from low- to moderate-risk areas.

• Those states that have the highest rates of uninsured properties in the low to moderate risk areas include: Minnesota (0.30%), Michigan (0.37%), Wisconsin (0.49%), Washington DC (0.54%) and Ohio (0.57%).  All are well below the 3.79% NSFHA average penetration.

States with Needs (cont’d)

                                                                       

Unique Flood Aspects

• Agents should communicate to their policyholders that federal flood insurance rules, coverage, exclusions and policy language are set by federal law and don’t vary from insurance company to insurance company.

• The coverage provided is designed to provide a mechanism to respond to flooding in a way that addresses recovery for both individuals and the public at large.

                                                                       

Unique Flood Issues

• Coverage is only available in participating communities

• A standard 30 day waiting period applies unless the insurance is required by a mortgage lender as a condition of the lender making, increasing, extending or renewing a loan.

• The receipt date of the signed application and premium payment at the Write Your Own Company or the National Flood Insurance Program are key factors in determining the start of the waiting period.

• Separate building and contents limits and deductibles apply

                                                                       

Unique Flood Issues (cont’d)

• Coverage is not available in Coastal Barrier Resource Act areas and Otherwise Protected Areas as identified on flood insurance rate maps.

• The discounted and newly enhanced Preferred Risk Policy is available for clients in B, C and X flood zones. Existing standard flood policyholders may also be eligible for the new Preferred Risk Policy due to a broadening of classes that was adopted in May of 2005.

                                                                       

Unique Policy Higlights• Direct physical loss by or from flood • Maximum coverage limits and excess coverage• No duplicate coverage (condo’s)• Only one building per policy-no blanket coverage• Actual Cash Value vs. Replacement Cost Value• No ALE, business interruption, loss of use, revenue or profits• No ordinance and law coverage except for Increased Cost of Compliance• Limited coverage in basements and below the lowest elevated floor of a

post FIRM elevated building. • No coverage for buildings where more than 49% of the building’s Actual

Cash Value is located below the ground.• Limitations on buildings in the course of construction.• No coverage for decks, walks, driveways, poured or paved surfaces, docks

or retaining walls.

                                                                       

Unique Policy Highlights (cont’d)Contents items:

• $2500 sub-limit for art, jewelry, furs and business equipment

• No coverage for personal property in the open/not in a fully enclosed building

• No coverage for bailee’s goods

• No coverage for property in a basement and below the lowest elevated floor of a post FIRM elevated building except as described in the policy.

• Antiques, covered for functional value only.

                                                                       

Common Objections• People think that their homeowner’s policy will cover flood.

– Only flood insurance financially protects your home and your personal property from floods.

– A flood insurance policy compensates homeowners, renters and business owners for all covered losses, and as opposed to a disaster loan, there is no payback requirement.

– The average flood insurance premium is around $500 a year. • My area has never flooded and besides I don’t live in a flood zone. 

– Everyone lives in a flood zone—it is just a question of whether you live in a low to moderate or high risk area.

– While flood insurance is required in high risk areas, 30% of all flood insurance claims come from low to moderate risk areas.

– Again, it is important for agents to talk about flood risk, letting customers know that anywhere it can rain, it can flood. 

                                                                       

Common Objections

Did you know that there is a 26% chance of flooding during a 30 year mortgage in high risk

areas, compared to 9% chance of fire?

                                                                       

Common Objections (cont’d)• Flood Insurance is too expensive.

– If the property is located in a low to moderate risk zone. Preferred Risk Policies provide protection at the best price.

– For just $112 a year, homeowners can purchase a minimum of $20,000 building and $8,000 contents coverage ($25 more if there is a basement).

– Renters can pay as little as $39 per year for $8,000 contents coverage. – Business owners can buy $50,000 building coverage and $50,000

contents coverage (per building) for just $500 per year. – Business owners who lease their space can purchase $50,000 contents

coverage for just $121 per year. • Additional barrier busters for agents are available on

www.agents.floodsmart.gov

                                                                       

Common E&O Claims

• Failure to Recommend Flood Coverage

– Flood coverage not required by the lender

– Policyholder not aware of the flood risk

– Change in circumstances increase flood risk

• Failure to Place Adequate Flood Coverage

– No coverage beyond what the lender required

– No excess flood coverage offered

– Flood limits lower than homeowners or property limits

                                                                       

• Failure to Explain the Coverage

– Business Interruption

– Off-Site Power Failure

– Waiting periods

• Administrative Errors

– Last minute placements

– Failure to follow special submission requirements

– Clerical errors

Common E&O Claims (cont’d)

                                                                       

Lessons Learned

1. When you upload a coverage request via the internet, make sure you confirm coverage has been procured.

2. Document the file or send the insured a letter when the insured asks questions about coverage; when you have discussions about coverage with your insured; and when your insured declines coverage.

3. When you take over an account from another agency or inherit an account in your own agency, review the account and determine whether the proper type of flood policy has been procured. Understand the different types of flood policies available.

                                                                       

Lessons Learned (cont’d)

4. If you procure homeowner’s or commercial (property and contents) coverage in excess of the maximum NFIP limits, recommend excess flood coverage and document your insured’s rejection of the coverage.

5. Documents win and lose cases. You don’t want to rely solely on your testimony when it conflicts with the testimony of your insured.

                                                                       

Direct/Indirect E&O Claim Costs

• The direct and indirect costs are no different than any other E&O claim

• Direct costs: Deductible and defense costs

• Indirect costs: – time for agency and staff to compile file documents

– assist in answering discovery requests

– deposition preparation and participation

– trial preparation

– time out of the office attending trial

• This can become very expensive very quickly

                                                                       

DOI Requirements

• According to FEMA’s website (www.fema.gov/nfip) , 41 states to date have adopted some type of flood continuing education requirement for insurance agents. While some states require flood education for all licensed property and casualty agents/producers, most have made the requirement only for those agents/producers who sell flood insurance.

• Those states are not making the flood CE a requirement for license renewal and are leaving the compliance and enforcement to the agencies and companies. Agencies need to make certain their agents/producers who are selling flood insurance have satisfied their particular states flood insurance training requirements.

                                                                       

NFIP Resources

• Agents.FloodSmart.gov is a secure, agent-focused website.  It offers numerous tools and resources just for agents, including seasonal flood information, links to education and training opportunities, post flood information and more.

• To access these and resources available on Agents.FloodSmart.gov, agents must register. 

                                                                       

Contact Information

• Questions from call, email available at: – www.independentagent.com/VU

• Big “I” Professional Liability Program underwritten by Swiss Re:– www.independentagent.com/EO

• Big “I” Flood Program:– www.independentagent.com/flood