RISK PROBLEMS/SOLUTIONS
Kidnap and ransom, products recall and environmental exposures
By LeRoy H. Utschig, CPCU, ARM
It is better to discuss coverage that the insured may decline than to say nothing and then have the client suffer an uninsured loss.
This column is a continuation of September's column about "unlikely" losses. In this one we'll discuss three other coverages that are seldom talked about with clients, much less sold to policyholders. However, these exposures do exist. This will give you an opportunity to discuss these coverages with your clients. We continue to emphasize that it is better to discuss coverage that the insured may decline than say nothing and then have the client suffer an uninsured loss.
Kidnap and ransom
More than 20 years ago I worked with an insurance agency on a claim. It took place in a town of about 40,000 people. The following details are altered somewhat.
One Friday afternoon, just prior to quitting time, a business owner received a phone call. A voice said, "I have your wife and children. For $500,000 you can have them back."
Many thoughts raced through the man's head. "Is my family okay? Who has them? I cannot call the police. If I give them the money will they return my family? Where is my family being held? Who would do this?"
After thinking many, highly-emotionally charged thoughts, he began to consider more practical things, such as "Where am I going to get $500,000 in less than 48 hours?"
The business owner did not have that much ready cash. In fact, his business would not be able to borrow that much money, and he could not borrow that amount of cash in his own name. Even if he could borrow that much money, it could not be done in 48 hours. Adding to the normal problems associated with raising large amounts of money was the fact that it was a weekend. Even though banks function on Saturdays, typically their large commercial loan departments don't. And, many banks are not open on Sundays.
Besides the issue of raising the money, the business owner had no experience in dealing with kidnappers.
This business owner was very lucky. He had purchased kidnap and ransom insurance. The insurance company was used to dealing with this type of a situation. It provided the necessary expertise to deal with the kidnappers. Besides that, they furnished the $500,000. The claim department of the kidnap and ransom insurance company functioned 24 hours per day, seven days per week. They were ready to act on a moment's notice. They have to be ready to operate at any time. It is highly unlikely that kidnappers are going to operate during normal business hours.
We will share no other details, other than to say that with the aid of the insurance company, the family was returned unharmed.
Products recall
The following loss occurred during the 1970s in a large metropolitan area. A friend of mine was the risk manager for a large manufacturing firm where the loss occurred. This firm produces many products, one of which is so common that I suspect every reader has used it at one time or another. However, that is not the product that caused the loss.
The company also manufactured and sold smoke detector units. Because they were a household commodity, these smoke detectors were sold by many types of stores: hardware stores to discount stores, on a countrywide basis.
The company had been selling the smoke detectors successfully for many years and was unaware of any problems with them. Then, the government informed the company that all of their smoke detectors were defective. They would have to recall and replace all of them.
To comply with the government order, they had to advertise to tell people to return their smoke detector(s) to the store where they bought it. They would be given a new smoke detector to replace the old one. To give reasonable coverage to the entire country, they advertised the recall in major newspapers in every area of the country.
In addition, they sent letters to every buyer who had sent in a guarantee card.
The manufacturing firm incurred a lot of expense. The cost of the new machines to replace the defective ones was the smallest one. This author's memory is that the smoke detectors cost about $.50 each to manufacture.
Running the advertisements
was the highest cost. Full-page ads are expensive. Each ad was run several times.
This firm got an above-average return on its recall request. About 20% of the smoke detectors were turned in for replacement. Typical recalls result in about 2% of defective items being returned.
Products recall insurance covered the recall expenses incurred by the manufacturing firm.
We certainly cannot predict what any insurance company would charge for products recall insurance. You might have to go to the specialty market to find this coverage. When I was last handling products recall insurance, it was relatively easy to write. A large, old, mainline insurance company provided the coverage for a premium of 20% of the product's liability premium for the insured.
Pollution
The following is about an account for which I did consulting work many years ago. The description of the operations is essentially true. The loss is fictitious, but plausible.
We'll call the company Painting, Inc. Its business was painting motorcycle fenders and gas tanks. It occupied its own 100,000 square-foot building, doing customized trim work. It painted the tanks and fenders in unusual colors and did pin striping also. When completed, the fenders and gas tanks would become part of motorcycles in the $25,000 price range.
This firm spray-painted continuously during the time that it was operating, using a state-of-the-art spraying booth. Air was drawn into the booth from the top. The air exited through the bottom. On its way out, the air passed through a water bath. This water bath was about three feet deep and the size of a swimming pool. Because the paint particles were captured by the water bath, only clean air came out of the booth. Thus, the air from the spray booth did not contaminate the outside air.
Eventually, the paint particles would sink to the bottom of the water bath, which periodically would be cleaned to get rid of the accumulated paint particles.
A licensed hazardous waste disposal firm would pick up the water with the paint in it and dispose of it at an approved waste disposal site.
The commercial lot next to Painting, Inc., was undeveloped. A firm decided to purchase the lot with the intention of constructing a new manufacturing facility. Prior to buying it, the firm had the ground tested to be sure that there were no old environmental problems to contend with. The environmental tests revealed a pollution problem at the site. Further checking showed that the polluting material was coming from Painting's plant.
A government agency became involved. Painting had to pay for the removal of the contaminated soil from the lot next door. They also had to pay for the removal of contaminated soil on their own lot.
Painting determined that the source of the pollution was a leak in one of their water bath holding tanks. Some cement at the bottom of the vessel had cracked, letting out the contaminated water.
One of the most expensive parts of the situation was that part of the building had to be torn out so that they could get at the leaky water bath and remove contaminated soil from the tank to the exterior of the building.
There were several components to Painting's loss. Coverage for removing the contaminated soil from the neighboring property would most likely be covered by environmental impairment liability. Removal of contaminated soil from Painting's lot might be covered by pollution remediation coverage.
Environmental insurance seems to have its own language. Two environmental insurers might use entirely different names for identical coverages. With one insurer, a given coverage feature will be included in its main insurance form. Another environmental insurer will provide identical coverage by using an endorsement.
When working with environmental insurers, do not assume that you know the coverage based upon the name on a given form. To be sure of your coverages, you will need to look at their specimen policies to be sure proper insurance will be provided.
Summary
We are not suggesting that you offer the coverages just discussed--kidnap and ransom, products recall and environmental coverages--to every insured you have. Most, if not all, of your clients will decline to even consider these coverages. However, it is important to:
* Have some familiarity with the coverages
* Discuss the coverages with your clients
* Assuming they decline the coverage(s), keep a record of their declination in their file.
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.