BLOG: Audit Fees – precursor to problems?
By now, readers who are either baseball or Brad Pitt fans have probably seen the movie Moneyball. Based on a book by the same title, the movie chronicles the Oakland Athletics and their general manager, Billy Beane (played by Mr. Pitt), during the team’s quest for a winning 2002 season. At the heart of Mr. Beane’s approach to player evaluation is a complex statistical system known as “sabermetrics.”
The idea behind sabermetrics is that traditional measures of ability, such as batting average, provide inaccurate assessments of a player’s true value. In contrast, other, more esoteric criteria, such as on-base percentage + slugging average, do a much better job of gauging a player’s actual contribution to a team’s success.
So, you’re likely to be asking by now, what does all of this have to do with D&O insurance? An article titled “Audit Fees Can Serve as Early Red Flag,” by John Waggoner (USA Today, October 21, 2011), notes how Auburn University Professor Jonathan Stanley recognized that the year before it collapsed, Enron paid $25 million in audit fees — more than all but one company in the Dow Jones Industrial Index.
Specifically, Professor Stanley’s research uncovered a correlation between outsize audit fees and poor stock performance. His findings, which appeared in the August edition of the American Accounting Association’s Auditing: A Journal of Practice & Theory, demonstrate that when a company’s audit fees are (1) high, relative to other businesses in the same industry, and/or (2) increase sharply in a short period, trouble could be on the horizon.
In Mr. Stanley’s opinion, high or increasing audit fees often presage future difficulties for two reasons. Either they indicate that auditors have found something requiring additional accounting attention or the auditors are pricing in future legal fees. Neither situation bodes well for impending corporate performance.
In 2001, the Securities and Exchange Commission (SEC) began requiring companies to disclose audit fees within their annual reports, so such data is easily obtainable. The lesson to D&O underwriters: upward changes in or a conspicuously higher-than-average audit fee (on an industry-adjusted basis) could be one of those arcane — but effective — sabermetric statistics, which can more accurately evaluate D&O risks.
All the best,
Bob
Bob Bregman, CPCU, MLIS, RPLU
Senior Research Analyst
International Risk Management Institute, Inc.
Uninsured Motorist Exposure Rising Dramatically
In January, the Insurance Research Council (IRC) reported that one in six drivers nationally were likely uninsured. In some states, the rate of uninsured drivers approaches one in three. The report noted a remarkable correlation between being unemployed and being uninsured, and it does an excellent job of highlighting the uninsured and underinsured motorist and that the exposure extends to hit and run pedestrian accidents (i.e., bicycles). Updated figures now available from the Insurance Information Institute (III) confirm that the trend is increasing. This is a coverage where a few dollars could change someone’s life after an accident.
Robert Hartwig, president of III, provided an update on the situation during a presentation to the Insurance Council of Texas Insurance Symposium. With unemployment stubbornly high and fears that it could go higher, Hartwig’s presentation noted the average driver could now be commuting with one in five other drivers on the road uninsured. Drivers in areas hardest hit by the recession could be mixing with one in three uninsured drivers. The data from the Hartwig presentation below illustrates the unemployment versus uninsured motorist trend.
Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute.
Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage® and a licensed p-c agent.
Are Property Insurance Claims Getting Harder to Settle?
How much of a typical large property claim (property, builders risk, business interruption, and extra expense losses in excess of $5,000,000) actually gets paid by insurance, and how long does it take to settle a large claim with an insurance company? After 20 years of consulting on a variety of large property losses, I have my own ideas, but unlike smaller losses, for which statistics are regularly compiled, very little information is publicly available about large property claims. This is partly because they are relatively infrequent, but primarily because the settlement process tends to be highly confidential and limited to a small set of experts and consultants.
I was recently asked to participate in a survey that attempts to bring more information to light about the large claim process. The results of the survey confirmed what I have observed myself, that resolving large claims has become more difficult over the past 20 years, multiple claim disputes at various stages within any given claim process are common, insureds often incur expenses they believe are covered by their insurance but are not, and large claims are taking longer to settle.
The survey of independent insurance consultants and other insurance experts, conducted by Arthur J. Gallagher & Co., concluded that property insurance usually pays only about 75% to 85% of the final amount claimed (85% for physical damage, 75% for business interruption and 85% for extra expense), and even these figures are misleadingly high, because they are percentages of the final claim amount which has usually been reduced in earlier stages of the claim process. The total of all economic damages associated with a large property loss that end up being paid by insurance is only 65% to 75%.
The survey responses also suggested reasons why settling these claims has become more difficult. These most significant, from my experience, include:
There has been an increasing tendency for large projects/properties to be insured by multiple participating insurance companies, each with a seat at the settlement table, often making resolution more difficult; With more insurance companies on a single risk, insurers may rely on outside claim managers with varying and often unclear authority, who add an additional layer of participants into the claim process; Competitive pressures, soft insurance markets, and lower interest rates, have caused insurers to be even more recalcitrant about paying claims; Claim adjusters within insurance companies do not have as much settlement authority as in the past; Insurance companies have cut back on training of claims personnel and compensation has not kept pace with other insurer functional areas, leading to fewer employees with significant large-claim experience. The survey results also reported that it takes significantly longer to settle large claims than in the past. Almost a third of physical damage claims were not settled within six months of the property being repaired or replaced, and approximately 10% of physical damage claims took more than a year after repair or replacement to settle. Business interruption/delayed opening claims were even more difficult to resolve. According to the survey, 40% were not resolved six months after the end of the interruption or delay period and 14% were still unresolved one year after the end of the interruption/delay.
Regarding coverage disputes, the survey disclosed all sorts of reasons why some portion of the damages were not covered at all or were only partially covered by insurance. In my experience, these disputes can occur in any of three general stages in the claim process:
1) The first I call the threshold stage, in which the parties seek to come to an agreement about the facts pertaining to the damages sustained, often after consulting outside causation and engineering experts. Disagreements on causation for the loss can be extremely significant, depending on the policy’s causation exclusions. The insured must be careful when submitting the claim to anticipate these exclusions.
2) In the second stage, the insured often requires coverage expertise to determine what damage is covered and what is not. With physical damage, these determinations are about the extent of the damage, necessary repair, and functional upgrades, as well as the meaning of coverage terms in the policy. With extra expense, judgment is required to understand abnormal expenses as well as the meaning of policy language, especially when extra expense coverage is limited to amounts reducing the repair or delay period and the resulting business interruption loss.
3) The business interruption/delay component of large losses are usually resolved well after the physical damage loss and requires further expertise because actual damages cannot be substantiated. Assuming that there is agreement that there was a period of interruption or delay, the parties often disagree over what performance would have been had there been no loss event, the meaning of various “soft cost” definitions, and whether reasonable steps were taken to avoid or reduce the delay.
Of course, one very important aspect of the claim process should occur well before any loss occurs, when the insurance policy is purchased. Careful review of coverage proposals and negotiation of coverage terms with an eye toward possible claim disputes is critical and can serve to avoid uncovered losses.
Given that a large property loss is a relatively infrequent occurrence, for most managers such a claim is often a first time experience where lessons are learned the hard way. A better understanding of the claim process will help improve management practices. It is not enough to buy property insurance and hope for the best.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Joseph Whalen Farella Braun & Martel Russ Building 235 Montgomery Street San Francisco California 94104 UNITED STATES Tel: 4159544400 Fax: 4159544480 E-mail: Cloof@fbm.com URL: www.fbm.com Click Here for related articles (c) Mondaq Ltd, 2010 – Tel. +44 (0)20 8544 8300 – http://www.mondaq.com
(c) 2010 Mondaq, Source: The Financial Times Limited
Lindsay Lohan Offers Lessons in Auto Insurance
I
n all the commotion of Lindsay Lohan’s fall from grace, little attention has been paid to the impact her risky behavior will have on her insurance — auto, home, life, and health. But consumers can learn from her mistakes, according to the Insurance Information Network of California.
Using Lohan’s profile, ZIP code, vehicle model and current record of two DUIs and an at-fault car accident, IINC determined the average insurance premium difference she could pay for automobile insurance because of her risky behavior.
A single, 24-year-old female who lives in Beverly Hills ZIP code of 90210 (she lives in a condo in West Hollywood) and drives a 2009 Mercedes SL550 convertible would have access to 100 percent of the insurers offering auto coverage in California, IINC said. With a clean driving record, Lohan would pay approximately $2,075 every six months for a full coverage policy. But because of the at-fault accident and two DUIs on her driving record, the six-month premium jumps to $7,408.90. Worse yet, she would only have access to less than 10 percent of the companies in California offering auto coverage because most of the major insurers in the state would not want to insure her. Instead, she would probably have to purchase coverage for bad drivers through the Department of Insurance, IINC said.
Furthermore, her risky behavior also could affect the premium she would pay for life insurance, as some life insurers will pull a DMV record when determining a customer’s premium, the association indicated.
“Before we initially did the analysis, we thought her insurance would double,” said Pete Moraga, communications specialist for IINC. But, the increase in her premium because of her driving record is 350 percent more because she made some bad choices, compared to if she had a clean driving record.
“The big picture is that all of us can learn from her mistakes,” Moraga said. “People don’t always understand that what they pay for insurance is based on their own risk profile … and risky decisions we make in our daily lives will impact that cost.”
A DUI stays on a person’s driving record for 10 years, for instance.
Lohan might be able to afford paying nearly $15,000 for auto insurance, but for the general public, it’s important to know that the decisions we make and risks we take will affect your pocketbooks, Moraga said. “If we take risks and make bad decisions, our insurance will be much more expensive.
This article by Patricia-Anne Tom appeared in the July 21st issue of INSURANCE JOURNAL
The Supreme Court of the United States recently handed down a significant ruling clarifying the time within which plaintiffs may file disparate-impact claims under Title VII of the Civil Rights Act of 1964, as amended. In Lewis v. City of Chicago, the Court held that plaintiffs may challenge the application of an employment practice by a disparate-impact claim even if they did not timely challenge the earlier adoption of that practice. In that case, beginning in 1995, the Chicago Fire Department administered a written exam to applicants and made hiring decisions based upon their scores. More than 300 days after the July 1995 announcement of how the City planned to use the test results, an African-American applicant who was not hired filed a charge of discrimination with the Equal Employment Opportunity Commission, alleging that the City’s practice of selecting applicants caused a disparate impact on African-Americans in violation of Title VII. In a unanimous decision, the Supreme Court held that the unlawful employment practice was not just the adoption of the test, but also the application of the test, which occurred each time the City hired firefighters. As a result, to have a timely claim, the firefighters only needed to prove that the City used an unlawful practice that caused a disparate impact during the limitations period. The Supreme Court’s ruling is important because it narrows an employer’s potential statute of limitations defense to disparate-impact claims. As a result, employers should be aware that they may be subject to disparate-impact claims based on policies instituted years ago if such policies are still utilized in making employment decisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Employment, Benefits and Labor Practice Group Blank Rome LLP Watergate 600 New Hampshire Avenue, NW Washington, DC 20037 UNITED STATES Fax: 202772585 E-mail: gold-m@blankrome.com URL: http://www.blankrome.com Click Here for related articles (c) Mondaq Ltd, 2010 – Tel. +44 (0)20 8544 8300 – http://www.mondaq.com
Cannon Balls!!!
It was necessary to keep a good supply of cannon balls near the cannon on old war ships. But how to prevent them from rolling about the deck was the problem. The storage method devised was to stack them as a square based pyramid, with one ball on top, resting on four, resting on nine, which rested on sixteen.
Thus, a supply of 30 cannon balls could be stacked in a small area right
next to the cannon. There was only one problem — how to prevent the
bottom layer from sliding/rolling from under the others.
The solution was a metal plate with 16 round indentations, called, for
reasons unknown, a Monkey. But if this plate were made of iron, the iron
balls would quickly rust to it. The solution to the rusting problem was
to make them of brass – hence, Brass Monkeys.
Few landlubbers realize that brass contracts much more and much faster
than iron when chilled.
Consequently, when the temperature dropped too far, the brass
indentations would shrink so much that the iron cannon balls would come right off the monkey.
Thus, it was quite literally, cold enough to freeze the balls off a brass monkey.
Ted Talk #1
Crush It
Ted had been resisting social media with the same fervor that he resists mushrooms but he was won over by one book. That book was Crush It by Gary Vaynerchuk. Admitedly it could have been Gary’s reputation as an internet sommelier that convinced Ted to heed the advice of this self-described “Wayne’s World wine adicionado” but for whatever reason he is ready to Crush It .
Ted has been following Gary’s three simple rules his entire adult life:
- Love your family.
- Work superhard.
- Live your passion.
You might be asking yourself “how can anyone be passionate about insurance?” Well stick around. That’s what Risky Business is all about.
Come back tomorrow and we’ll tell you more. 
Risky Business 