Larry Wilcher:
Good afternoon, and welcome to A Practical Conversation About COVID-19 Insurance Claim and Coverage Strategies for Retail and Restaurant Businesses. My name is Larry Wilcher. I am moderator for this program. I'm a business attorney with the law firm Calfee, Halter, and Griswold, and a former general counsel to Bass Pro Shops and Dollar General Corporation. This one hour webinar is co-hosted by Marsh. Please feel free to submit questions at any time.
Larry Wilcher:
Today's presenters are James Sullivan, partner, Calfee's insurance recovery practice group; Mac D. Nadel, US retail, wholesale, and food and beverage industry leader at Marsh; Carl W. Patchke, attorney and senior claims advocate, Marsh; and Mary Anne Mullin, management liability and cyber claims advocate at Marsh. If we could, let's go to slide three. Listed are the topics that we will discuss today in this conversation. The first, property and business interruption, will be discussed by James Sullivan and Mac Nadel. The general liability claims will be discussed by Carl Patchke and James Sullivan. Worker's compensation and employment practices liability by Mary Anne Mullin, James Sullivan, and Carl Patchke, and then James Sullivan and Mary Anne Mullin will discuss management liability, D&O, and cyber liability and then rounding out our webinar, Mac Nadel and I will discuss captive insurance considerations.
Larry Wilcher:
It's my pleasure now to introduce Mac Nadel and James Sullivan for a discussion of property business interruption coverage.
James Sullivan:
Thanks, Larry, and good afternoon everyone and welcome to the webinar, we appreciate you joining us. So we wanted to talk to you about a broad variety of insurance coverage issues as it pertains to COVID-19 in the retail sector. We know that the issue that most people have been reading about and hearing about endlessly is a property insurance business interruption coverage. So we're not going to spend a lot of time on it. Happy to talk with anyone who's attending this afterwards, obviously, any of us would. But just to give you the latest update on where things stand, you've probably seen that there have been many, many, many lawsuits filed throughout the United States and actually around the world pertaining to claims seeking business interruption insurance coverage for losses that entities have sustained as a result of the pandemic.
James Sullivan:
To date, it does not appear that any insurance companies in the US are paying claims voluntarily. And that's with some exceptions, right, there's some policies, certain types of policies, such as certain event cancellation policies, where there would be pretty clear coverage. But as a general matter, insurance companies do not believe that they owe any duties to cover business interruption losses. There's various reasons for that. There, as I said, have been many federal and state coverage lawsuits that have been filed. None of those have been resolved in the United States to date. It's probably going to be a while before we see actual resolution of those matters, although there have been a number of dispositive motions filed, including by insurance companies, to try to get courts to declare the parties' respective rights and obligations, so you want to keep an eye out for that, and if you're not part of litigation already, if it appears that insurers start having cases cutting against them, it might be the time to jump in at that point, or at least to revisit any claims you've submitted.
James Sullivan:
There's also been federal and state legislative initiatives to try to require insurance companies to pay some of these claims. None of those have actually made it to the point where they've been put in as law yet, and while that might sound like a nice, clean, easy fix for those policyholders that are suffering from losses and want to get paid and don't want to wait around forever, understand that if a legislature says, "Insurance company, you have to pay a claim," and the insurer believes it doesn't have to, there's a good chance that that legislation's going to get tied up in constitutional challenges for possibly years to come.
James Sullivan:
So the story is still being written. It looks as though a possible way to resolve this is to get the insurance industry and legislators together and try to come up with some sort of a mechanism or otherwise it's going to have to play out in the courts. But it's too soon to know exactly how this is going to play out yet. Now, Mac, if you want to talk a bit about the claims process, though, that's be [crosstalk 00:05:26].
Mac Nadel:
Sure. Yeah, absolutely. Thanks James, and again, thank you to our friends at Calfee for inviting Marsh colleagues and myself to join today's webinar, we appreciate that. Yes, James. With that understanding that the overwhelming majority of policies either ... Are certainly intended to exclude, and do exclude lost income as a result of there not being direct physical damage, or that being the trigger, that there must be direct physical damage for business interruption coverage to go into play. Even with that, we are recommending to our clients who've had some sort of an interruption, because of the uncertainty that you mentioned, James, file a loss. Put your carrier on notice that a claim will be coming. It can be very vague in terms of the cost for it, but there's really no harm in putting your carrier on notice of the potential of a loss. So you're protecting your rights.
Mac Nadel:
And as far as what it has done to the property insurance marketplace, COVID-19 really hasn't had a material impact on the property insurance market. It was already a challenging marketplace, it continues to be a challenging marketplace for clean risks, those that don't really have a lot of losses, we're seeing 20 to 40% rate increases, so it's really all over the board right now.
Mac Nadel:
What we are seeing, and what the concern is that for retailers in particular who have had some experience or some losses from the recent civil disturbance, that that is actually going to have an impact on their renewals going forward, as the carriers have been looking for rate on the clean losses and now if you've incurred losses as a result of civil disturbance, that could be a problem going forward. But really, no material impact of COVID-19 on the property insurance marketplace itself.
James Sullivan:
So we're going to transition now to general liability types of claims. So it's interesting, much of the focus has been on the business interruption losses like we just talked about. A coming wave that is starting to hit in certain respects is third party liability type claims, and for retailers, and restaurants, in all likelihood the most common types of claims that we're anticipating that would be a general liability type of claim would be things where third parties come to the premises and then later turn out to have COVID-19, and either they or their loved ones get sick or, God forbid, die, you're probably going to see, and we already have seen some of these claims starting to get filed around the country, where those third parties will say, "Hey, company, you got me sick."
James Sullivan:
And you can imagine it's going to be clothed in all sorts of different clothing. You're going to see claims saying, "Well, you didn't have the proper PPE, you didn't have your people wearing masks, you didn't have the proper spacing, you didn't clean, you had protocols but you didn't honor those protocols, you created a public nuisance." So there's going to be a lot of these different types of claims out there.
James Sullivan:
Now, a positive thing about it is most general liability CGL policies don't have a broad virus exclusion, and certainly not a COVID-19 exclusion, so you may turn out to have a little more insurance coverage for these types of claims than you would for one of the business interruption claims. It still remains to be seen how intense these types of claims will become, because as you can imagine, it's going to be extremely difficult to prove the point of origin if people got COVID. But we've heard the stories about haircutting companies where they diagnosed one of their folks there with COVID-19 and then they had in turn cut hundreds of people's hair without a mask, things like that. So we'll look out for that in the coming months. And Marsh, have you seen anything coming in this space yet, your claims group?
Carl Patchke:
Sure, thank you James, and good afternoon. We anticipate claims based on the creativity of the plaintiff's bar. So we're expecting anything and everything. We are operating on the assumption that all claims are covered, and we believe that's the approach that should be taken. As you mention, there's no specific exclusion like there is for asbestos in the policy for COVID-19, but what we do know is there's no coverage without proper notification to the insurer, and by that, proper meaning timely and with sufficient details, although at this point in time it still is going to be vague, like you mentioned earlier.
Carl Patchke:
The insuring agreement, the GL policy, says something like we pay those sums you become legally liable for because of bodily injury or property damage. Bodily injury may include mental anguish depending upon the jurisdiction and/or the policy language, something to look for. Property damage is either physical injury to tangible property, or loss of use of tangible property that's not physically injured. So another situation to look for.
Carl Patchke:
What we do know is that there has to be an occurrence, and that definition generally either refers to an accident or repeated exposure to the same harmful condition. So I think we've got a lot of gray in that area. Also whether or not the occurrence is single or multiple, and multiple may trigger multiple deductibles or retentions, so we anticipate there'll be issues in that regard.
Carl Patchke:
I think from a practical standpoint for new claims, we would advise patience. Send your notice and have it on record, documentation that you may want to gather if you're doing investigations or things of that sort. We suggest you consult with defense counsel, so that possibly you can secure the privileges that may be associated with having counsel advise you in that process. We think you're going to persevere, we expect that there'll be either reservation of rights or denials of the coverage that we would want to overcome, and there certainly is going to be a lot of certainty.
Carl Patchke:
But finally, for old claims, we think there are settlement opportunities. We think that because the courts have been slowed, and that plaintiff attorneys and plaintiffs may need some money, that we think there may be some claim settlement opportunities there as well. And Mac, maybe you want to talk about the impact on the market.
Mac Nadel:
Yeah, and just to reiterate, Carl, and reinforce, what we've been hearing from our retail and restaurant clients is they have been doing that with regard to seeking settlements and aggressively going after it. So it's a great opportunity right now to try and close out some of the outstanding claims that have been there.
Mac Nadel:
We also are seeing from a claim trends perspective and the impact on the market, at least immediately, the claim trends have been down, whether you're an essential retailer or a non-essential. Obviously non-essential you were closed, so you weren't going to be having the customer shopping anyway, but even those areas that we're seeing the uptick, supermarkets, food retailers, those that were open, they were seeing a reduction in their losses, and in some ways reduction in foot traffic. So that's been happening.
Mac Nadel:
Plus, from the insurance marketplace standpoint, there's been a decrease, particularly for the non-essentials and the exposure to themselves, with them being closed, so that's leading to ... as well as an impact of reduced revenues, so combine lower losses along with the reduction in revenues, the carriers are going to react to that, and they should be reacting to it in a way that allows them, where you should see the rates going down, but I think the carriers are a little bit concerned in general about what's going to be going on overall with their [inaudible 00:13:59] business. Many carriers are writing multiple lines of coverage, they're looking across their book of business and they're going to be concerned, so I think they're still going to look to maintain some sort of single digit increases.
Mac Nadel:
The problem area, and this existed before COVID-19, was in the umbrella in excess liability. So [inaudible 00:14:17] inflation, nuclear verdicts, and you're seeing a lot of increases, very dramatic increases in the excess and upper layers above your primary general liability coverages, and [inaudible 00:14:27] liability.
James Sullivan:
Thanks Mac and Carl. And I guess just following up on a couple of points there that I'd like to underscore. The one is if you have these pending claims, and this isn't meaning the pending claims that are arising out of COVID-19, these are pending claims that existed pre-pandemic. For those of you out there who have some connection to the pending claims and litigation, understand that most law firms who would be defending these, they tend to separate out the defense counsel and then the insurance coverage counsel, if there's even insurance coverage counsel involved at all. So it may be that your underlying defense counsel isn't yet fully focused on the fact that you might be able to manage the insurance coverage issues a little differently now to try to push claims to resolution than you would've previously, and so it's worth having a conversation with your defense counsel to say, "Hey, I know this has been maybe stopped or stayed in the court itself, but do you think there's a chance of pushing this towards resolution now, and let's talk to our insurer about that."
James Sullivan:
The one other thing Carl talked about, as we all know, general liability tends to be bodily injury or property damage, and we talked about the bodily injury. So far it appears bodily injury is going to be the most likely high value type claims coming from COVID-19. We're not seeing that much about people saying that their property was damaged by a retailer or buy a restaurant business, and even if it were, it's hard to imagine how those would turn into large, significant claims. As we all know, facts happen, strange patterns arise, so keep your eyes open for any third party claim at all alleging liability, and make sure you're looking at it and flipping it over to your broker for consideration.
James Sullivan:
So as you can imagine there's plenty more we could say on the general liability, but right now that's the way we're seeing things playing out, it's as much about what's not COVID as it is COVID in the general liability space right now. So we're going to move on now to worker's compensation and employment practices liability. This is where we are both seeing and expecting to see a lot of action for retailers in the restaurant business. You're already seeing claims out there, I know McDonald's has had some high profile claims by its employees, and this'll be interesting to see how it all plays out, because on its face, if it's just a, "I'm an employee and I got sick," then there's a real good chance that that's going to be dealt with through worker's compensation, right? But you're going to have other claims out there, and you're going to have more traditional employment practices claims out there. Employers may be wrongfully denying sick leave. Some employees will say, "Well, you put me in a position to get ill, and you didn't take adequate steps to protect me, you didn't have the proper protocols in place, you didn't enforce the proper protocols, there was a culture of get back to work."
James Sullivan:
Sometimes they'll say, "You failed to shut down when you should've." Some may say, "You opened too early." You can imagine all the different ways that these are going to take. And then you've also seen out there mass layoffs, and any time there are layoffs, that exposes businesses, including retail and restaurant businesses, to your traditional discrimination claims. And so we expect to probably see more of those coming out of this as well, saying, "Hey, it's interesting that of the 10 people who were laid off, eight belong to a protected class, and the rest of your employees all survived the layoff," right? So you're going to see more and more of those types of claims coming across the wire. And then Carl and Mary Anne, I know you're going to talk about the worker's comp and the EPL coverage issues separately, I'm not sure which you want to go sure.
Carl Patchke:
Sure, it's Carl. So I guess we'll do it in the order you have on the slide, it's simple.
James Sullivan:
Sure.
Carl Patchke:
And to talk about worker's compensation, just to review the concept of worker's compensation. The employee gives up the right to sue, and in exchange gets the right to worker's comp, and the employer gets the affirmative defense of exclusive remedy. So those can be powerful for the employer in making a determination as to where a claim should fall. We are, again, taking the position that assume the claim is covered and give a report to your comp carrier or third party administrator so that you're not accused of trying to suppress claims. We think that could be a dangerous thing.
Carl Patchke:
Once you have given notice, then you want to prepare a defense if you believe it is not a claim that should be compensable, and you would then want to prepare your defense so you could controvert the case. Again, as I mentioned earlier, we think it's best to work with comp defense counsel who may, through their research and because the nature of this claim is so unusual, may be aware of certain defenses that are available that you may not ordinarily come across in your day to day claim handling.
Carl Patchke:
Where we see probably the most immediate concern or the most practical right now is returning people to the place of employment. There's an awful lot of information out there about this, the NCCI, other insurance periodicals are regularly running articles on this subject. Certainly we think it's appropriate to consider any CDC guidelines and compliance with those, documentation of that compliance, again, as part of defending against claims if you don't believe that they are appropriate. Practices and procedures for cleaning and disinfecting, and again, having that materials available, what materials you're using, records of those materials, and how often and when you do that. General safety protocols and procedures, depending on how you're running your restaurant, if you're doing outside serving. I've been to a place by me a couple of times, the waitstaff is running around the parking lot. I look at that as a claims person and I shudder, because I think trip and fall, slip and fall, potholes. So many things that could happen that would be unrelated to the job, but things of that sort, so looking at safety for the practices and new practices that you set up.
Carl Patchke:
And then finally, the possibility of the needing to comply with the Americans with Disabilities Act, which takes us outside of worker's comp, moves us perhaps a little bit more towards employment practices liability and Mary Anne's presentation.
Mary Anne Mullin:
Very good, thanks so much. So from an EPL world that was already sort of reeling with claims arising from #MeToo in terms of increased volume of claims and large settlements for verdicts, echoing what some other folks said earlier, it's actually, we're seeing eagerness on the part of some plaintiffs to settle cases that are already in the door, rather than go to trial, perhaps a jury of a lot of unemployed people on it. But we have seen a large number of claims from employees saying that they're uncomfortable going to work. Now, these are only from essential workers, and that's somewhat of a limited group of people, but what we're expecting in the future when more folks are going back to their employment locations is claims that are arising out of violations of the Family Medical Leave Act or the Americans with Disability Act, and there's newer laws like the Families First Coronavirus Response Act.
Mary Anne Mullin:
We're expecting discrimination claims associated with RIFs arising in connection with large layoffs, disparate impact claims also arising out of RIFs or furloughs, particularly if it impacts older employees, but any protected class is potentially a risk. There's potential disparate treatment, for severance or benefits for some but not others. There's claims that could arise out of Age Discrimination Act. There's potential hostile work environment claims, that could be on the basis of a COVID diagnosis perhaps, or race/national origin.
Mary Anne Mullin:
We also have some concern about whistleblower and retaliation claims related to engaging in protected activity like taking leave and then getting, having some kind of repercussion for that, or complaints regarding the failure to keep a workplace safe. Those are what we're anticipating coming in the future. We haven't seen them yet, but again, as more people go back to work. We have not seen a lot of insurance companies trying to put on COVID exclusions on EPL policies yet. What we are spending a lot of time talking about in EPL is whether to give notice. So the EPL policy is claims made, and the claim is defined, and it generally includes, it's [inaudible 00:23:42], for instance, or certainly a lawsuit. But if you had information that you think could give rise to a claim, but is not a claim yet, do you notice that? And it's a particularly difficult if you are switching carriers.
Mary Anne Mullin:
So we've had lots of discussions about whether there is enough information that is specific enough that it would meet the requirements of the policy for notice of circumstance, which usually have some specific enumerated factors that have to be met. We've actually had about a dozen denials so far from our accounts of clients who have given notice of circumstance and insurers have said they haven't met the specificity requirement, so that's one of the issues that we're dealing with in EPL at the moment.
James Sullivan:
Great, thanks Mary Anne. And to the extent that there's good news to be had in this space, it's that probably a lot of the claims that are coming in in the EPL world and the worker's comp world are going to be run in much the same way and litigated in similar fashions to non-COVID claims that came before them, whereas especially in that CGL, third party liability space, and even the business interruption space, because of the way the insurance policies function, those are going to really, a lot of those things will turn on really new and creative and novel theories, where a lot of the theories themselves and then the defenses haven't been all that tested.
James Sullivan:
So that's going to be a challenge, figuring out how to work those claims. Whereas these claims, while unfortunately may see more of these types of claims, they're probably going to end up looking a little more familiar in the way that they ultimately get managed. Of course, there will be COVID-19 specific issues. And one thing that's curious and interesting is typically, if you had your employees getting ill or injured, you'd feel comfortable that you're just going to have to focus on a worker's comp claim, or worst case, a single EPL claim. It will be really, really interesting to see how this intersection between EPL/worker's comp on the one hand and then CGL/third party liability on the other, because we're already seeing claims out there where family members and friends of employees say, "Hey, this employee," right, "who was forced to work or who wasn't given proper protections, got sick, contracted COVID-19, brought it home, and gave it to me, or to their friends." And you're going to see those kinds of claims coming in where you may not see it in your traditional worker's comp claim.
James Sullivan:
So that's something where you're going to see a potential expansion of claim risk, but nevertheless, when you get a claim coming in, you should be able to pretty quickly slot it in and characterize it as one of the different types, whether it's a third-party that runs up through CGL, or whether it's a worker's comp or EPL. And certainly your outside counsel and your broker should be able to help you with getting those put in place appropriately.
James Sullivan:
I just want to underscore, and essentially echo what Mary Anne said about notice issues. Really important at this moment in history, since you're probably going to get some claim of some kind, know your insurance policies and their notice provisions, and make sure you understand now notice has to be given and when it has to be given, because it really can vary from one policy to the next, and some have dates certain, and so you know, as an insurance policyholder side lawyer, I've litigated late notice issues many times. And it's one of those issues that throughout the United States, if there's a date certain in your policy, most courts in the 50 states will enforce that, and enforce it rigidly. So you can't risk missing those deadlines.
James Sullivan:
So now we'll move on to management liability., and this'll fall typically under your D&O policies, sometimes it may run up through your errors and omissions, E&O policy, so have those top of mind also. The types of claims that we're expecting to see out of the COVID-19 insurance arena is you're going to probably see retailers starting to face securities class actions, and some restaurant groups. You're going to see probably some claims against directors and officers and managers saying that the risk management processes and procedures were not in place, that they didn't put in place proper protections to keep people from getting sick, to keep customers from getting sick.
James Sullivan:
And then interestingly, you may also see a second, similar set of claims that are somewhat different, and that will be investigations into whether the risk management framework that was put into place before the pandemic is appropriate, and that's going to primarily include things like your insurance coverages, did you have the right coverage in place, and did you buy enough insurance? Did you buy the right kinds of insurance? Things like that, so directors, officers, and managers who have some control over and responsibilities for putting risk management frameworks and protocols in place big picture, they may get challenged in ways that they never really saw coming.
James Sullivan:
And lastly, you're going to see insolvency-related claims, and some D&O policies can offer some coverage for certain aspects of that. So we've already seen a good number of insolvencies, bankruptcies, restructurings out there, and so you expect you're probably see some more D&O type activity in that space as well. Have you all seen some activity in this space yet, Marsh? I mean, I haven't seen and heard a lot of this coming out yet, but I suspect it's coming down the road here.
Mary Anne Mullin:
We have not seen a ton of D&O activity, just COVID-related, but the D&O world is really reeling at the moment. The first quarter of 2020, premiums for D&O increased 44%, and that was prior to most people factoring anything involving COVID. Then that doesn't take into account the number of insurance whose retentions increased dramatically. A lot of that is public company-driven, but private companies alone, 8.9% increase. There's a lot of concern about bankruptcy filings for private companies, and that's what the underwriters are focused on. A lot of this premium increase is because of the large number of securities class actions, which is always a public company risk factor, but there was 428 of those in 2019, and we're expected to have a similar number in 2020. Settlement amounts are huge, derivative settlements are really big now, and they never used to be really a huge factor. And of course defense costs continue to increase.
Mary Anne Mullin:
So the underwriting community was already dealing with all those factors, and now they're worried about COVID. They don't know what it means, but we expect continued increases in premium because of it. Just in terms of the claims we've seen, not many, but of what we've seen are suits alleging inadequate disclosures and failure to manage the company during a pandemic. Mostly these are notice of circumstances. Again, same kind of issue, it's a claims made policy. You want to make sure you look at your policy to see what the requirements are for noticing circumstances and that you comply with that. And we are seeing lots of draft language for exclusions, and anything ranges from we're excluding everything that arises from COVID, to we're excluding everything that arises from this lawsuit that talks about COVID. Those are event exclusions versus particular litigation exclusions.
Mary Anne Mullin:
Their breadth of them is different for each carrier, and you want to ask your broker what all this really means in the real world in terms of what that language means and how it's going to impact you going forward.
Mac Nadel:
And to that point, I think the rates that you show, 44%, and that was really before COVID-19 impacted the retail industry, which was already, a lot of companies that were already financially challenged, that were in a little bit of trouble. This put some additional stress on them. I think as a result, the underwriters are looking that much more carefully and are really going to be underwriting, and asking a lot of questions. So the perspective of your upcoming renewals, be prepared for that. Get out in front of it early. Think about the story that you're going to tell and the things that your company has been doing not just in terms of a response to COVID-19, but more importantly, business resiliency overall, for any type of an event like this, it becomes very important. The 44% figure again for Q1 2020, for the retailers, that figure was already higher, that was about in the mid-50s, and probably not going to change all that much in the back half of the year. So just, again, be ready, work closely with your broker, tell a good story, meet with your underwriters, get your senior leadership involved also, tell the story of the company and how you're different and the plan that you have to be successful going forward.
James Sullivan:
Great, thanks. And then from an insurance policyholder lawyer perspective, a point that I want to make that's really important with D&O policies is, most of you will know it as directors and officers liability insurance, or you may think of it as management liability insurance. And so for private D&O policies, understand that this does more than just protect directors and officers and the individuals. It also protects the entity, and in fact we like to call it business litigation insurance, because if you look at the insuring agreements, most private directors and officers liability policies are extraordinarily broad, right? So you heard earlier, Carl talked about in the general liability space, where it really focuses on bodily injury, or property damage, and then EPL tends to turn on employment practices.
James Sullivan:
Well, the directors and officers policies tend to be structured differently. They tend to cast an extraordinarily broad net and say, "Hey, if a third party wants to take money from you because they're saying you engaged in some wrongful act, whatever that wrongful act is," then there's coverage, right? And so that's where you start. And then, after that, it's where the exclusions kick in that start to carve back and really give the shape and the definition to what's covered and not covered under D&O policy. And even more so in a private D&O policy in particular, you get the actual coverage grant sliced up into different portions, some of which is specifically allocated to those individual human beings, the directors, the officers, and indemnification issues pertaining to them, and then you have a whole separate section which we call side C coverage, which covers the entity itself for alleged wrongdoing.
James Sullivan:
So I guess the moral of the story is don't just assume that these policies we've talked about today do cover certain things and don't cover other things. Distill it this way: if there is any third party out there in the world that comes to you and says, pertaining to COVID-19, or really anything, but we're talking about COVID-19 today, and says, "You owe me money for something that you did," don't just make assumptions about what the coverage is and isn't. Talk to your brokers, look at your various policies, talk to an outside coverage counsel or to your regular lawyer, and make sure, because especially if money is tight, you're going to want to look for ways to get insurance companies to help you take some of the pressure off, whether it's the defense costs, or settling a claim, or if you have to take a claim to a judgment, and if a judgment gets entered against your entity. So you don't want to have that moment of eureka where you're like, "Oh, wait a minute, this is a claim that could've been run through the D&O," but it's too late because you missed your notice deadline, and then it's game, set, match. So it's really important to be thoughtful about anything and really understand how your insurance policies function.
James Sullivan:
One other thing that's worth mentioning here, I think this is the right place to do it. We didn't dedicate a slide to it, because those of you in the retail and restaurant business, you may not be involved in that many M&A deals, selling assets or selling entities, stock deals. But Mary Anne was talking about whether we're going to see or not see COVID-19 exclusions added onto D&O policies in the representations and warranties insurance space, and that basically is an insurance product, some of you know it, some of you may not, that if you're doing an asset deal or a stock deal, you can lay off some of the risk of breaches of representations and warranties made in a deal agreement onto third party insurance companies. We are seeing right now in that space, virtually every deal we're working on, on rep and warranty insurance, we're seeing COVID-19 exclusions, and it's interesting to see how the insurers are trying to figure out what to do with this, because some of them have very narrowly-tailored surgical strikes where they're doing deep due diligence saying, "Hey, we're seeing that these three aspects of your business, or in your supply chain are really susceptible to COVID-19."
James Sullivan:
Then, other insurers are just putting very broad exclusions on there, and I would just say, whatever context you're in if you're negotiating insurance or working with a broker negotiating it, if you see COVID-19 exclusions being put on there, really give them a good, hard look, because some of them, and again, I use the rep and warranty insurance space as an illustration, some are so broad that they really swallow up much if not all the coverage, because a lot of life and a lot of things going on in the world right now, almost everything in some way, shape, or form can be tethered back to the world of COVID-19, right? And so I would urge you, if you're negotiating renewal process for insurance, if COVID-19 exclusions come up, don't just sleepily accept it and say, "Oh, it must be right." Give it critical thought, that's really an important point.
James Sullivan:
We're going to move on now to cyber coverage. It's interesting, we all have started moving and working from home and there's been the stay at home orders and then the stay at home suggestions, and businesses scrambled to make sure that their employees could work from home. Now, I understand that for those of you listening in the retail and restaurant space, some of your work is tethered to your actual brick and mortar retail businesses or restaurant businesses, but many of you of course have online presences, and of course you all also have office workers, right, and managers and directors and people trying to manage the business behind the scenes. So for every one of you, you probably have seen a shift to work outward, and the question is, is this going to expose entities to losses, either direct first party losses by exposing their systems to cyber criminals, or third party losses? Because if you host your customers' or your suppliers' financial information, their credit cards and the like, and those get breached, do you have coverage for that? So it's something to be thoughtful about.
James Sullivan:
Marsh, are you seeing much in the cyber space that's tied in to COVID-19? I've not heard a lot myself about claims that are tethered directly to that. I've heard a lot about a tax increasing, I just haven't heard about claims coming through yet for insurance.
Mary Anne Mullin:
We have lots, there's been many, many discussions about this and lots of anticipation of claims, but not a lot of actual claims. We're expecting a lot of claims arising from all the increased videoconferencing hacks, we thought email compromises and phishing claims would increase. There has been an increase in some business interruption. The real issue, not necessarily COVID-related, but it's continued to increase during COVID is ransomware attack claims. These have increased in severity and frequency twentyfold from just between 2018 and 2019. The average amount now paid for ransomware is $110,000, it used to be a couple hundred dollars when it stared out, and the largest payment made so far for a ransomware attack from one of our insurers was $7.5 million. So that has been a concern of ours which actually predated COVID, has not decreased or increased really during COVID, and we haven't seen the anticipated claims that we thought. But again, a lot could happen in the future. But so far, less than we thought, and this also, a lot of it is discovery or occurrence policy, so less of the claims made sort of reporting issues arise there.
James Sullivan:
Good. And Mac, have you seen, do you have anything to add about the cyber insurance market, other than what Mary Anne said?
Mac Nadel:
Yeah, and so I think the market itself pre-COVID was starting to see a little bit of an uptick in rates, and it was really mostly in the single-digit area, and that's mostly the excess layers. Lots of capacity still available. I think that there's, the concern and anticipation of some loss of it might be due to the increased threat exposure that you talked about, James, from COVID-19 and the way we're working. I haven't seen it work its way into pricing yet. It will be interesting to see what happens with the network disruption, the malware/ransomware type of claims, since we are seeing such an increase, and payout amounts are increasing there. But again, mostly sort of single digit type of thing, but lots of capacity still available to build your limits.
James Sullivan:
Okay, thanks. And then I guess just a plug for cyber coverage generally, for those of you who are listening in here today, if you have been thinking about cyber, or even if you haven't, if you don't have it yet, it's a product worth looking at. If you handle third parties' sensitive information, be it credit cards, Social Security numbers and the like, if you have your own information on your computer systems that if disrupted could do serious operational harm, I'm not just talking nuisance or irritation, right? We all have that with IT most days of our life, but I'm talking about serious disruption, or if you have really important secret information on your system for your own entity, be it financial information or even trade secrets or public relations materials that may be in process and you don't want it getting out there depending on what your drafts say and things like that, if you have any reason that damage to or attacks to your system, your electronic systems could cause serious problems to you, or have liability exposure to third parties, you really ought to think about this coverage.
James Sullivan:
In its infancy, it was, in some instances, snake oil. That's no longer the case. There were some policies originally that really didn't offer much and they were being sold without much value, but courts have become a lot more certain about saying that typically, commercial general liability coverage is not going to cut it for cyber type events. I mean, there's still some gray space in that area, but I would not rely on and assume that your CGL coverage is going to take care of you if you have a cyber situation where you owe a third party liability.
James Sullivan:
So there's still different types of policies out there. There's kind of a convergence, it's matured a lot where a lot of the offerings of the actual coverage itself is similar from one policy to the next, one insurer to the next, but you're still seeing variations in the forms. And certainly from where I sit when it's claim time, as an insurance lawyer, the devil truly is in the details, so you do want to work carefully and closely with your broker or even your outside coverage counsel or your lawyers to take a good look at the policy forms and make sure that you're getting as robust coverage as you can for your money. And I understand there's a balance between the cost and the like, but this is an area where you really should be looking at it and taking it seriously. Again, you can't buy it now to protect from COVID stuff, probably, in all likelihood, because it's a known loss out there, but nevertheless we're thinking about it renewal time.
James Sullivan:
We'll move on now to captive insurance considerations, and we wanted to include this slide obviously because people out there right now are up in arms saying, "Well, wait a minute, I spent all this money buying insurance, and now my insurer is saying there's no business interruption coverage and my premiums are skyrocketing," so we're expecting a renewed interest on captive insurance. And Larry and Mac, you're going to explain what this is to folks who may not know and tell them the issues surrounding it.
Larry Wilcher:
Yeah, thanks James. Just by way of background, I was in-house at two large retailers for many years. A number of non-legal functions reported me, and two of those functions included risk management. And both of my companies had captive insurance companies, so we covered many different lines of coverage in those captives, we had extended warranty plan, worker's compensation, property insurance, medical, stop-loss, on and on with a variety of coverage. And I had the good fortune to work with Mac and Marsh in my last engagement there with Bass Pro Shops in the captive insurance space, and we did a lot of good work and developed captives. But that's the background that I have. Mac, I know you have an extensive background in captives, as well as other people in Marsh. You want to tell us a little bit about that?
Mac Nadel:
Sure. I guess the concept of a captive, it's worked successfully for you, Larry, at your two retail roles, two retail companies that you worked at. So a lot of people think that it's a concept just for the large companies, but there are vehicles that you can use, there's the advantage of captives, if you're a mid-size company, getting involved with the group captive. There are protected cell captives that you can participate in where your losses and your financial results are really walled off from the others in the group, but you still enjoy the advantages of working in a captive program, and then Larry, I think what you were describing in your experience is with single-parent captive. In the volatile insurance marketplace, it's a way to smooth some of that volatility by taking control of your insurance program.
Mac Nadel:
In the group captive space, you're working with others who are like-minded companies that are thinking about loss control and really have a focus on safety and doing all the right things, so you might as well enjoy the benefits of that with that group as opposed to just being exposed to the general experience of folks out there. And then, as you said, Larry, there's a great opportunity to insure some coverages and think about your retention levels in ways that make more sense for you, and not have that being dictated to you by the insurance companies, you're taking control of those things.
Mac Nadel:
And really, it all starts out with a feasibility study, and looking at what the possibilities could be for you looking at your losses, your exposure, things that you want to include in there doing complete financial analysis, which includes even looking at whether that should be an onshore, within the United States, or an offshore type of captive.
Larry Wilcher:
I'll start with the first item we have entered on the slide, balance sheet protection. In my opinion, that is the prime directive of the whole risk management function, and all the insurance programs that we've thoroughly discussed today. Risk control in companies is critical to protect the balance sheet, and a significant part of that has to do with insurance coverage, what is covered, what isn't covered? What losses will be paid, won't be paid? And all the various factors and considerations that we've gotten to, but ultimately it all distills down to, is relevant and critical to protecting the balance sheet, because without balance sheet protection, the company will not survive long-term. So everything that we have on the slide and everything that I think Mac and I are going to say relates to balance sheet protection. That's ultimately what we're about with a captive insurance program.
Larry Wilcher:
There is the flexibility that Mac talked about. For example, there can be coverages that are difficult to obtain, there can be coverages that are unavailable. The flexibility of a captive allows a company to provide coverage for, for example, if you're a retailer, of certain products. Boats, tire irons, cannabis, tobacco. Some of these coverages are very difficult to obtain. With a properly-structured and actuarily sound captive insurance program, these risks can be covered in ways that either supplement what's available in the traditional markets, or be freestanding and backed up with reinsurance, so there're a variety of things that can be covered in different approaches. Coverages that may be unavailable, for example, we don't know, in the future, pandemic coverages could be unavailable. Civil unrest could be unavailable. Business interruption property coverage could be unavailable, or be so limited with such high retentions at such high costs that it's not practical. And that's where a captive, properly structured and actuarily sound, can be beneficial to a retail restaurant business.
Larry Wilcher:
I don't know if you have anything on flexibility or these, unavailability and difficult coverages, Mac, but I suspect you've seen, and Marsh has seen a lot of examples of this through the years.
Mac Nadel:
Sure. [inaudible 00:52:32] basis of captives beginning in the first place was with a difficult traditional insurance marketplace. So it was a way to get coverage for things that either the marketplace was saying they were not able to provide coverage for anymore, or it was, like you said, priced so exorbitantly high that it was unattractive, but companies still wanted to have that balance sheet protection and wanted to be able to protect themselves. So I think the key words that you use, or key phrases, properly structured, actuarily sound, it needs to make financial sense for the company to do it, so yeah.
Larry Wilcher:
I know there are aspects, Mac, to captives related to estate planning and business planning. I don't have experience with that, so I know you do, so I'd like to ask you to give us some thoughts on that.
Mac Nadel:
Yeah. I'll sort of say enough to avoid getting in trouble with the accounting firms and sort of the tax and estate lawyers, but if you're a privately held company participating in a captive, there may be some creative ways to ... The dividends that get paid out based upon good experience of the captive, of how those dividends get paid out. That's more on the private company side of things, and something, again, that I would advise folks to speak to your tax and accounting partners.
Larry Wilcher:
Well, certainly getting back to the flexibility that captives can offer is the ability to customize retention levels. And I've also seen examples of this where the retention on a particular product, for example, maybe market's come in at renewal, and they all want a $10 million retention on this type of product, the company doesn't feel comfortable with a $10 million retention, they're comfortable with a $3 million or a $5 million retention, there's a gap there. How can that gap be filled? A properly constructed captive insurance company that's actuarily sound can assume that risk, and allow the company to use traditional insurance for most of its product line, and for these few products that are in a different category, take that risk in the captive and fill up something that the market's not willing to fill.
Larry Wilcher:
Or there could be a corridor where the market says, "We have to have three losses of $10 million before we reach an attachment point." Again, the company may feel like that's not a risk it's willing to take. They can use the captive to help fill this so that they're not exposed to that level of risk, or they could do it at a more reasonable cost than the market would do if it's available. So these are real life scenarios, and Mac, I know you have others if you'd like to share anything with us, you see this frequently, I'm sure.
Mac Nadel:
Yeah, and again, you covered it well, Larry, and the experience that you had firsthand speaks to how they can be successful, I think a key word there being customize, right? It really is something where you can look at how you want to cover your risks and exposure versus having it dictated to you by the insurance marketplace, and that's, again, at the retention levels and the coverages that you're providing.
Larry Wilcher:
Yeah, I think that's a good point, Mac. The markets are going to issue policies and manuscript forms with terms and conditions that are generic, basically, to all their insurance. And getting something different from the carriers is going to be difficult, but having a custom scripted captive program, and coverage in a captive is pretty easy to do with good insurance counsel to draft the documents. And we have experience doing that, so it's a good customization route that people don't often think about, but it can be very robust in helping companies meet their risk control needs, and at the same time, do it at a more reasonable rate than they might otherwise be able to.
Larry Wilcher:
I think the last thing with regard to captives is we can smooth the volatility of the insurance marketplace. We've all seen soft markets, we've all seen hard markets. We've seen insurance companies suddenly retreat from a type of coverage, or if they stayed in that line of business, increase the retentions so that they're not competitive. A whole host of different types of issues. The insurance in the captive is not subject to these variations and fluctuations to the same degree that they would without the captive. I'm not saying they're immune to it, but it does smooth out this volatility to allow for business planning within the company, to allow for financial planning, and at the same time provide for protection of that balance sheet.
Larry Wilcher:
So these are, I think for many companies, especially in retail, that I know about, and I'm sure in restaurant and other companies and types of industries as well, very compelling reasons to think about captive in certain circumstances. So Mac, anything to add on that volatility? What are you seeing now? Are there any lines of coverage that are extremely soft, or any lines of coverage that are extremely hard right now?
Mac Nadel:
I think most companies dip their toes in the water looking at medical stop-loss as one of the coverages, and then their deductibles under the [inaudible 00:58:34] program, so usually it's the worker's compensation, and then they have the general liability and put it in there, so those things [inaudible 00:58:40] retention. And then they're looking at other things, like you mentioned the warranty program, some of the type of product risks, could be some of the terrorism type of coverages, things that aren't generally available in the marketplace. There are elements of cyber, there's elements of private recall that you can put into there, so lots of different opportunities.
Larry Wilcher:
We have about two minutes and we've had two excellent questions submitted. And Mac, I'll submit this first question to you.
Mac Nadel:
All right.
Larry Wilcher:
The question is, is there any insurance available for a "second wave" of COVID-19 or future pandemics?
Mac Nadel:
Good question. No. The short answer, there's nothing available for any future outbreaks of COVID-19, not that there was any specific ... There was a product, and there is still a product for pandemics out there, something called PathogenRX, which is a combination of sort of quantified potential loss from pandemics, then providing indemnification protection for financial loss. There wasn't a lot of uptake for PathogenRX before. It's getting a lot of interest right now, but even that is not going to be covering any future outbreaks of COVID-19.
Mac Nadel:
I think where the real opportunity is is in something that has been called PRIA, Pandemic Risk and Insurance Act. There has been legislation introduced into the House, and we've been proud as an organization to help sort of shepherd and try and organize the insurance industry and the risk management industry around it. Modeled after TRIA, the Terrorism Risk and Insurance Act, went in place after 9/11. Understanding that it really needs to be a private insurance company and public, federal partnership. So the insurance companies are not going to write something that could be this massively huge and has been such an economic disruption, and future events that could have these severe economic repercussions, the insurance companies themselves aren't going to write it without some sort of federal backstop, and that's exactly what this PRIA is proposing. It is starting to make its way through and we'll see where it goes from there.
Larry Wilcher:
James, I have a question I'll direct to you that came in. Can state departments of insurance force insurance companies to pay claims?
James Sullivan:
That's a good question. I guess the short answer is no, can't force it, and certainly state departments of insurance have a lot of control over how insurance business is conducted in their states, but interestingly, many, many of the state departments of insurance that have spoken on the topic are actually saying that they believe that most property policies with business interruption coverage in them don't cover losses from COVID-19. And there's a whole host of things that could be said about the reasons for that, both from they just read the policies and applying them, and the second, there's political considerations and there's considerations about the fact that some of these departments backstop certain aspects of insurers when they start getting into financial challenges, but I guess to distill an answer here, I would say, I wouldn't look to the departments of insurance as the lifeline that's going to get, certainly the business interruption claims paid. It may be influential, and as things evolve and progress you may see some value coming out of the departments, but not forcing insurers to agree to things that the insurers don't believe they agreed to in their original policy contracts.
Larry Wilcher:
For our participants today, feel free to contact James Sullivan or me if you have additional questions or would like to discuss any of the topics presented today. For those of you in the retail space, Calfee will have future webinars covering issues of importance to you. The next webinar will be in late summer, on the topic of cybersecurity. If you would like an invitation, please send me an email, and I'll be glad to see that you're on our invitation list. And on behalf of Calfee and Marsh, thank you for joining us for this webinar. Good day.
James Sullivan:
Thanks everybody.
Larry Wilcher:
Thank you.
Mac Nadel:
Thank you.