You've Been Served

• Ronald J Panko
• February 2011
• 

Small-business owners, pension plan administrators and mortgage processors are among a wide array of professionals who face new liabilities as a result of business, technology and regulatory changes. Insurers are developing new coverages to help them cope.

Many of these risks are emerging with the increased reliance on Web-based services. "Cyber liability is really the big trend," said Rick Grimes, executive vice president at Professional Risk Services, a wholesale insurance broker based in Warren, N.J. "We see cyber liability as being where employment practices liability was about 10 or 15 years ago, when it was just starting out." About 20 carriers write cyber liability insurance, Grimes estimated.

Businesses and organizations that automate and turn to electronic communications pick up swaths of new exposures that aren't likely to be covered by traditional professional liability insurance. These include failure to protect a corporate network from hacking, viruses or other cyber attacks.

Professionals can become liable for failing to safeguard the private data of customers or for failing to provide access to customers that need it. They may need coverage to help pay for breach notification, network interruption, privacy liability or crisis management. Or, they may want to be reimbursed for expenses incurred when they are unfairly portrayed in a published story and they need to protect their reputations.

Another new risk is statutory liability, or the failure to comply with several laws involving pensions and health care. The federal government has stepped up enforcement of rules promulgated by the Health Insurance Portability and Accountability Act of 1996, the Pension Protection Act of 2006 and the Patient Protection and Affordable Care Act of 2010, according to Daniel Aronowitz, president of Ullico Casualty Co.

In particular, the American Recovery and Reinvestment Act of 2009 included provisions for stronger enforcement of those laws, he said.

For those taking legal action against professionals, the financial crisis of 2008 and 2009 "is a gift that keeps giving," said Key Coleman, managing director at Chicago-based consulting and business advisory firm LECG. "I've worked with mortgage insurers and I happen to know they have taken a huge hit. It's not any secret that the top seven mortgage insurers have lost billions of dollars in the past two or three years."

As a result, mortgage insurers are questioning the mortgages that were fed through to them, said Coleman. Many of those mortgages were Alt-A, meaning that mortgage brokers did not collect financial information, and the lenders just wrote checks to mortgagors. Lenders may file suits against mortgage brokers for a breach of fiduciary duty, he said.

The next wave to hit the professional liability market will likely involve the "robo-signers" in small law firms that handle and process foreclosures, said Coleman. "Some of them have actually testified that they sit in their office signing documents for hours on end without reading them," he said. "That's a professional problem. To the extent that there are other professionals--not only lawyers, but anybody in the foreclosure process that is, say, an outside service provider--that do not follow proper foreclosure procedures, then that is going to cause some professional liability on their part as well."

Smaller businesses and professionals that never considered directors and officers insurance or errors and omissions insurance are now ripe for coverage, and the U.S. professional lines business of global specialty insurer Torus is moving into that area.

"It's an untapped market as far as convincing them, but the word is spreading exponentially," said Michael Phillips, senior vice president of U.S. commercial E&O. "It's driven by two things: Clients are demanding that their professionals carry E&O coverage just to get a contract, and when a client is dissatisfied, even when the professional has done nothing wrong, there are expense costs."

Jeff Grange, senior vice president and head of U.S. professional lines, added that professionals realize that every service they can think of is delivered in one form or fashion via technology. "And that creates a whole range of exposures," he said.

Professional Lines for Small Business

Torus, a global specialty insurer, has begun trying to reach customers who have not previously bought professional liability insurance in the United States. The company is focusing on management liability (D&O), commercial E&O, and financial institutions.

A fundamental strategy is to align the new business with where the economy is growing fastest--currently information technology, privacy and network security, life sciences and health information technology, said Jeff Grange, senior vice president and head of U.S. professional lines. Torus plans to reach out to such firms as investment advisers, mutual funds and security broker-dealers.

"There are over a trillion medical records produced in the U.S.," said Grange. "Every one on paper is now being digitally recorded. Health care will clearly be an area of rapid expansion, both in public and private investment, for years to come."

Grange said Torus will work to provide contract certainty. "The last thing you want to do is sift through 30 pages to know whether you have coverage or not," he said. "There's power to making a contract thin and accurate in terms of the language."

Fiduciary Liability in Health Plans, Pensions

Since the Enron scandals in 2002, fiduciary liability has no longer been a sleepy little product line, said Daniel Aronowitz, president of Ullico Casualty Co.

The company's core product is fiduciary liability insurance for multi-employer and public benefit funds. Aronowitz cited three trends:

1. The sluggish economy is leading to more claims. Many of these claims allege that the plan administrator promised something and then improperly cut back the often-vested benefit. Beneficiaries are winning some of these cases, including one that went to the U.S. Supreme Court, Central Laborers' Pension Fund v. Heinz.

Aronowitz said there can be issues in what fiduciary liability insurance covers, given that issues can involve plan design as well as plan administration. "So we've added a negligence provision in the definition of wrongful act, which expands the coverage," he said. "This at least affords some coverage…even if it is typically not a fiduciary duty issue."

2. New statutory liabilities come from newly implemented regulations. These liabilities arise from enforcing the Pension Protection Act of 2006 and involve the assessment of penalties against pension plan administrators and trustees.

One is a new tax for failure to meet minimum funding standards. Another is a daily penalty for failing to certify the funding status of the plan or for not responding to a question from a plan participant/beneficiary.

Typically, an E&O policy does not cover penalties, and the penalties cannot be paid out of plan assets unless a private company is the sponsor. Trustees, who are typically volunteers, would have to pay out-of-pocket, so Ullico has begun covering penalties, and other carriers have followed, Aronowitz said.

3. Those protecting against health information breaches face new responsibilities. These new duties were imposed by the Health Information Technology for Economic and Clinical Health Act (HITECH), part of the stimulus package of 2009. Beneficiaries/plan participants must now be informed of breaches, and the problem must be fixed. "For the first time, we're seeing real teeth" in the Health Insurance Portability and Accountability Act, Aronowitz said. "So we're now giving full policy-limit HIPAA coverage because the penalties can go up to $1.5 million, and the remediation costs can be even higher."

Ullico has also added coverage for fiduciary liability exposures if trustees fail to comply with the Patient Protection and Affordable Care Act's insurance market reforms. These involve penalties similar to those in HITECH and are enforced by the Internal Revenue Service and the departments of labor and of health and human services.

Aronowitz added that the IRS and DOL have set up employee-plan compliance resolution systems, where trustees can voluntarily fix mistakes. Since they can't pay out of plan assets, trustees must pay out-of-pocket, but Ullico is now covering those fines and penalties. Voluntary compliance claims have grown to 40% of claims the company receives, he said.

Financial Services Liability

When the tide goes down, everybody sees where the bodies are buried, said Key Coleman, managing director at consulting and advisory firm LECG. That has been particularly true since subprime mortgages touched off the financial crisis and led to the demise of Lehman Brothers, the stock market collapse and the deep recession.

"Every professional, if their clients have lost money in the last four or five years because of the financial crisis, has been scrutinized for their practices, from investment professionals, insurance brokers, accountants, lawyers, architects, engineers, just a whole list," he said. And that certainly applies to mortgage brokers.

Coleman said insurers will "certainly want to close the barn door" to the financial services exposures they expect to pay in the next two years. He expects that new policies will have certain exclusions or requirements, but pricing will remain soft because he doubts that a new wave of claims hitting the market will reverberate as hard as did some of the 2007 and 2008 issues. If mortgage robo-signers' policies are limited to a certain number of occurrences or limits, they will not trigger nearly as much insurance recovery in a loss that is proved, he said.

Cyber Liability

Travelers introduced 1st Choice+ in November 2008 in order to offer a variety of new coverages, including Network and Information Security Offense and crisis event coverage. NAISO covers risks associated with failure to prevent unauthorized access, failure to provide access to authorized users and system problems caused by viruses, said Dan Reed, second vice president, professional liability for Travelers Bond and Financial Products.

"We cover not just electronic data, but any data," he said. "It's all eligible for coverage provided it harms a third party." And it covers not just professional data but any business-related data, such as an e-mailed holiday greeting that carries a virus, he said.

A new exposure is crisis event coverage, which Reed said only a few carriers offer. For example, a firm may commit an honest error, and the aggrieved party may go to a newspaper, which runs a damaging story without interviewing the firm. Travelers would reimburse the firm up to $10,000 per event ($30,000 per policy) for reasonable costs it incurs in defending its reputation, such as by hiring a public relations firm.

Chartis refers to its cyber insurance as network security and privacy coverage, which includes coverage for event management expenses. These include breach notification costs, credit monitoring for victims of the breach, forensic expenses, public relations costs, identity theft education and assistance and call center services, said Tracie Grella, president of professional liability at Chartis.

Clients may add media coverage, which insures against media and intellectual property exposures, and interruption coverage to include loss as a result of any unintentional and unplanned outage of a computer system. In the works is broadened event-management coverage to restore profits lost due to a crisis event.

Chartis gives insureds the option of broad event management coverage subject to a policy sub-limit and/or an affected individual's limit for notification, credit monitoring expenses and other event management expenses outside the limit of liability, she said.

Learn More:

Travelers Group

A.M. Best # 018674

Distribution: Independent agents and brokers

Chartis U.S. Insurance Group

A.M. Best # 005953

Distribution: Global, national, regional and local brokers

Ullico Casualty Co.

A.M. Best # 002623

Distribution: Key brokers and managing general agents

For ratings and other financial strength information visit www.ambest.com.

By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com