A Berkshire Hathaway Company Casualty Insurance Coverage Triggers: Claims-Made vs. Occurrence Scott Kuechler – Gen Re

A Berkshire Hathaway Company

Casualty Insurance Coverage Triggers:Claims-Made vs. Occurrence

Scott Kuechler – Gen Re

2Presentation for Iowa CPCU, 10/20/2005, Proprietary and Confidential. © 2005 General Reinsurance Corp.

Agenda

• What is a “coverage trigger”

• Review of occurrence trigger

– Advantages

– Disadvantages

– When best used

• Review of claims-made trigger

– Advantages

– Disadvantages

– When best used

• Summary/Conclusion


Definition of Coverage Trigger

• A provision that defines the nature and sequence of events that must take place in order for the policy to cover a claim for injury or damage to a third party.

• Important because some exposures or conditions continue for some length of time, spanning a number of years and a number of liability insurance policies.


Occurrence Coverage Trigger

b. This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory";

(2) The "bodily injury" or "property damage" occurs during the policy period; and

(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II – Who Is An Insured and no "employee" authorized by you to give or receive notice of an "occurrence" or claim, knew that the "bodily injury" or "property damage" had occurred, in whole or in part. If such a listed insured or authorized "employee" knew, prior to the policy period, that the "bodily injury" or "property damage" occurred, then any continuation, change or resumption of such "bodily injury" or "property damage" during or after the policy period will be deemed to have been known prior to the policy period.


Occurrence Coverage Trigger Continued

c. "Bodily injury" or "property damage" which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II – Who Is An Insured or any "employee" authorized by you to give or receive notice of an "occurrence" or claim, includes any continuation, change or resumption of that "bodily injury" or "property damage" after the end of the policy period.

d. "Bodily injury" or "property damage" will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II – Who Is An Insured or any "employee" authorized by you to give or receive notice of an "occurrence" or claim:

(1) Reports all, or any part, of the "bodily injury" or "property damage" to us or any other insurer;

(2) Receives a written or verbal demand or claim for damages because of the "bodily injury" or "property damage"; or

(3) Becomes aware by any other means that "bodily injury" or "property damage" has occurred or has begun to occur.


Definition Of “Occurrence”

• "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.


When did the bodily injury occur???

• A woman used hand lotion for seven consecutive years, beginning on 01/01/1990 and ending on 01/01/1997. For the next three years, 01/01/1998 to 01/01/2001, she stopped using the hand lotion altogether. Toward the end of the year in 2000, she develops a painful rash and dark spots on her hands. On 01/01/2001 her doctor diagnoses her with a horrible skin condition, telling her that her skin has likely been badly damaged. Her condition is not curable.

• When did the woman’s injury occur???

• For how long in the future can a claim be filed???


When did the bodily injury occur???

• Exposure theory – 01/01/1990 to 01/01/1997

• Manifestation theory – 01/01/2001

• Continuous theory – 01/01/1990 to 01/01/2001

• Which theory will apply?????????

• Which insurance carriers will be legally obligated to pay defense and indemnity claim(s)?????????


Disadvantages with Occurrence (Insurer)

• Difficulty in determining exactly when the injury/damage took place.

– Determining the insurer(s) responsible for handling the claim.

• Time lag between injury/damage and report of claim

– IBNR

• Inflation eroding the purchasing power of the policy limits over time due to the time lag.

• Long run insurer pricing problems

– Insurer solvency


How does one solve those problems?

• Claims-made coverage trigger.

• Policy coverage does not necessarily depend on when the injury/damage occurs. Instead, coverage is triggered when a claim is made during the policy period.

• Retroactive date (Injury/damage must occur on or after).

• Extended reporting period.


Advantages of Claims-made (Insurer)

• Predictability of losses

– One policy and limit will apply to claim

• Avoid disputes among insurers

– Claim is resolved faster for benefit of all parties

• Price advantage

– Stability of premiums over time

• Retention of business

– stable market supplier


Does Claims-made solve all problems?

• More “difficult” to underwrite?

– Prior acts/retro dates

– Extended reporting periods

• More “difficult” to handle claims?

– Same issues as above

• Coverage gaps to insured (continuity of coverage)

– Moving retro dates

• Does NOT get insurer out of paying large losses.


When is occurrence trigger best used?

• When it is easy to identify exactly when in time and space the injury/damage took place.

• When there is no real potential for stacking of policy limits.

• When there is no long gap between the time injury/damage takes place and the time the claim(s) is reported.

• When only “process” risk is present and no significant “parameter” risk is present.


Two general types of risk

• Process

– Inherent variability of the insurance process.

– Reflected in the difference between actual and expected losses.

– Example?

• Parameter

– Inherent variability of the estimation process.

– Reflected in the difference between REAL expected losses and ESTIMATED expected losses.

– Example?


When is claims-made best used?

• Parameter Risk

– New technology

• Time lag between injury/damage and claim report

– latency

• Date of loss identification issues

• Stacking of limits potential

– Injury/damage occurs gradually over time

• Unstable pricing environment

– Legal climate changes


Claims-made classes of business

• Alcoholic beverage manufacturing and processing

• Cellular phone manufacturing

• Chemical manufacturing

• Chemical wholesaling or distribution

• Cosmetics manufacturing

• Drug manufacturing, repackaging, relabeling

• Exterminators

• Feed manufacturing

• Feedlots/Meat Processing


Claims-made classes of business

• Fertilizer manufacturing

• Herbicide/Pesticide application

• Insulation manufacturing, installation, removal

• Manufactured housing

• Medical equipment or device manufacturing

• Microwave equipment manufacturing

• Paint, coatings, adhesives manufacturing

• Pipe or tube manufacturing

• Tank manufacturing, installation, repair (above or below ground)


Summary/Conclusion

• There is a time and a place for the use of an occurrence policy trigger

• There is a time and a place for the use of a claims-made policy trigger

– Parameter risk

– Stacking of limits

– Injury/damage identification issues

– Time lag between injury/damage and report of claim

– Unstable pricing environment

• As underwriters, we need to be able to analyze a risk and determine which trigger is best suited for the exposures we are taking on.

Documents

A Berkshire Hathaway Company Casualty Insurance Coverage Triggers: Claims-Made vs. Occurrence Scott Kuechler – Gen Re