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Unlike traditional brokers, we use data to help drive our client's decisions... read more

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Information is critical to anyone charged with risk management. Below is a listing of relevant, real time industry insights we have complied. Follow us to stay up to date on what we are reading and thinking.

Insuring Bitcoin Transactions

Not a day has gone by this year that a Bitcoin story hasn’t made the news. It’s a new concept, it potentially brings a lot of risk to business and it is here to stay. Even if Bitcoin disappears, it seems likely some brand of cryptocurrency will survive.
 
The main draw of Bitcoin (which we will use to reference all cryptocurrency) to businesses is ultra low transaction costs. If a website wanted to charge readers a fraction of a cent to read a story it’s currently impossible with credit card transaction fees. If customers come from overseas, it gets even more complicated and expensive. As the world continues to flatten and economies transcend borders a government neutral currency like Bitcoin appears to be the only logical method of transacting payments.
 
As insurance brokers we help our clients identify risk and create plans to avoid, mitigate or transfer it. If a firm decides to accept Bitcoin payments we see two major issues – regulatory exposure from the government and risk of theft of the digital currency. The insurance market is traditionally very slow to address emerging risks, a recent Business Insurance article predicts insurance carriers will start putting serious thought into the issue in the “next year or two”. Following is our opinion on how current insurance policy wording could respond to Bitcoin related causes of loss.
 
Regulatory Exposure
 
How Bitcoin will be regulated is still undecided. The anonymity of the transactions makes it difficult to defend allegations of money laundering, which are of increasing interest to the Justice Department. Several government organizations have asked the IRS to rule on it’s Bitcoin position but so far it has failed to do so.
 
Many global organizations are hoping that the high-profile failure of Mt. Gox will spur US-based Bitcoin exchanges to enhance their security and scrutiny of transactions. Some are even calling for increased regulation of Bitcoin exchanges in America so that the market will have a safe place to trade. All this leads to an increasing likelihood that some governmental oversight and regulation process is coming. When it does, this will give attorneys the opportunity to ferret out companies that are not in compliance or break the rules.
 
For companies, the risk caused by increased regulation is mitigated two ways. The first is to stay on top of all changes and laws surrounding crytocurrency. Engaging with a lawyer who is knowledgeable about the topic may be advisable if a significant amount of a firm’s transactions occur in Bitcoins.
 
The second risk mitigation technique is to purchase Directors and Officers insurance. Directors and Officers coverage, if properly structured, should provide defense coverage to any organization caught with an unexpected regulatory investigation or surprise allegation. It is important to note that not all Director and Officer Policies are worded the same. Companies should review their policy to ensure that there is broad coverage for regulatory investigations.
 
Theft Exposure
 
The theft of Bitcoins presents a unique problem for companies. As intangible assets, they cannot be locked in a safe for the night and are not currently insured with the FDIC while at a bank. Since Bitcoins are simply a mark in an electronic ledger, insurance policies do not adequately address the exposure. But we believe that there may be coverage granted even with existing language in policies carried by businesses today.
 
There appear to be four possible Property coverage grants for stolen Bitcoins – as “money”, “electronic data”, “digital assets” or “valuable papers and records”. These definitions comes from wording in a Fidelity (Crime) policy, Property policy, and Network Security (Cyber) policy. Each policy could potentially respond to a loss of Bitcoins.
 
Fidelity/Crime Insurance
 
Crime insurance has been around for decades and the insurance coverage forms are fairly standardized. Policy forms of this type provide coverage for a variety of loss or theft scenarios including employee theft, counterfeit currency, and even computer fraud. However, each policy only covers those actions when “money” or “securities” is stolen. In order to know if Bitcoin theft might be covered under a Crime policy, the first question to ask is whether Bitcoin meets the definition of “money” or “securities”.
 
Money is generally defined as “currency, coins and bank notes in current use and having a face value; and travelers checks, register checks and money orders held for sale to the public.” Bitcoins are obviously not coins or notes. They are not checks or anything tangible either. Might Bitcoin be included as “money” because it is a currency?
 
Bitcoin could meet the definition of “currency” and therefore potentially be included under a Crime policy. This is due to the fact that the term “currency” is not defined in a standard policy. Outside the United States, the governments of Canada and Japan (among others) have formally decided that Bitcoin does not meet the legal definition of currency and is instead a commodity like gold or silver. The UK is expected to define cryptocurrency as a voucher, which would make subject to the VAT. If a ruling in the US says Bitcoin is not currency it would give insurance companies strong standing to deny Crime claims for Bitcoin theft.
 
Property Insurance
 
If Bitcoin is ruled a commodity standard Property insurance would not provide coverage as its not physical business personal property. Insurance companies began to exclude property coverage for digital assets after a series of coverage suits by Hyplains Beef in the mid 1990s. Hyplains filed a Property policy claim for the business interruption caused by a faulty computer system, after the coverage suit played out most Property policies began to exclude electronic data and then offer sub-limited coverage by endorsement. These “electronic data” coverage extensions generally include “information reduced to an electronic format for processing with and storage in electronic data processing equipment” but exclude “valuable papers and records”. Valuable papers and records is often defined as “inscribed, printed or written documents, manuscripts and records including abstracts, books, deeds, drawings, films, maps or mortgages”. One could make the argument that Bitcoins are both electronic data and valuable records.
 
Network Security Insurance
 
Cyber liability, a newer coverage with nonstandard policy wording, has come in to offer Property insurance for loss of “electronic data” or “digital assets” from a hacking event. However, almost all policies exclude money and securities. If Bitcoin is ruled a currency, a hacking loss is not covered under Cyber. If Bitcoin is determined to not be legal currency there is the possibility of coverage. Companies can buy large Crime policies to cover the theft of money but meaningful coverage for electronic data theft is only available under Cyber insurance.
 
Emerging Risk
 
The insurance industry tends to be reactionary and the first stolen Bitcoin coverage case will likely be litigated for years. When this happens insurance companies will likely either begin to exclude coverage for Bitcoin theft or clarify one of the policy definitions to explicitly include it. Our advice is that for the time being companies accepting Bitcoin should attempt to purchase Crime, Cyber Liability and possibly Property coverage from the same carrier to lower the chance of conflicting coverage grants.
 
Bitcoins and other crytocurrency present an exciting frontier in risk management. The advantages of accepted and advancing the Bitcoin space is clear, but the risks are just starting to emerge. For firms to protect themselves adequately from the exposures listed, each company should purchase Directors and Officers insurance, Crime insurance, Property coverage and a Network Security policy. Until the insurance industry reacts to this changing environment with new policy language clarifying how Bitcoins are to be perceived, these insurance policies will offer the best risk mitigation while accepting Bitcoins for business.

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FDIC Warns Institutions about D&O Insurance

Directors and officers liability insurance is a common type of insurance for corporations.  However, being commonplace does not mean that it is standard or easy to comprehend.  In fact, the Federal Deposit Insurance Corporation (FDIC) issued Federal Institution Letter 47-2013 to say just that.  The letter, released October 10, 2013, explained that:
 
In recent years, the FDIC has noted an increase in exclusionary terms or provisions contained in depository institutions’ D&O insurance policies…  When such exclusions apply, directors and officers may not have insurance coverage and may be personally liable for damages arising out of civil suits relating to their decisions and actions. In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language.
 
This warning – issued from an independent third party – should not be taken lightly.  It is important to review the coverage terms, exclusions and definitions of a firm’s D&O policy.  It is also critical to understand what changes may have occurred from last year’s policy to the current policy during the renewal period.
 
Directors and officers insurance is considered a “specialty” insurance.  Unlike auto insurance or workers compensation insurance, the exact policy language is not standard or regulated.  Each of the dozens of insurance companies offering D&O insurance has their own proprietary form and rates.  This means that not all insurance is created equal, and a simple price comparison will most likely leave a firm with large gaps in coverage.
 
Directors and officers insurance is meant to protect the personal assets of the officers in the event the company or its officers are named in a suit for poor management of the business.  Since the officers are also the buyers of this insurance, it is prudent to perform all necessary due diligence on such a risk transfer product.  Having a broker who is an expert in this type of insurance is imperative for any firm navigating an increasingly perilous regulatory landscape and looking to retain the highest caliber of directors and officers.
 
Contact Calculated Risk Advisors to discuss modernizing your companies’ executive liability insurance program.

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Cyber Liability Garnering Mainstream Attention

As more business is transacted online and as client data is now primarily stored electronically, companies are realizing that network security and cyber liability insurance is becoming increasingly necessary.  The Wall Street Journal and Inc.com have picked up on this trend and published articles to this effect.  The Wall Street Journal’s article explains that a small business who suffers a cyber attack and has no insurance will likely go bankrupt within 6 months.  Inc.com published 6 reasons why a company should buy cyber liability coverage.
 
The need is easy to see, but the coverage is often opaque and confusing.  If your company is considering the purchase of cyber liability insurance, there are a number of items the firm should consider.  Because each policy form is unique, here is a list of items our clients found helpful to consider:

 

• Cyber insurance can provide first party and/or third party coverage.  Which does your firm need? 
• Does the policy offer non-material business interruption? 
• Know what the exclusions and exact policy terms state.<  
• Consider how a company’s existing general liability and errors & omissions insurance coordinates with this new coverage.  
• If the firm has a policy that already covers some network security, what is needed that needs to be purchased separately?  
• What risk management assistance does the policy offer?  
• What sublimits are on the policy for credit monitoring and notification costs?  
• Does the insurance provide forensic cost reimbursement to uncover the cause of the breach and fix it?  

 

Contact a licensed broker to discuss whether cyber liability insurance is right your your business.

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Wisconsin Ruling on Keyword Advertising

A Wisconsin appellate court has upheld a trial court’s ruling that purchasing online advertising based on your competitors name is akin to opening a storefront next door – not illegal in the eyes of the state.

The law firm of Cannon & Dunphy was alleged to have purchased search engine keyword advertisements for terms including the name of Habush Habush & Rottier, a competing firm. Habush sued citing Wisconsin 995.50(2)(b) which bans using “the name, portrait or picture of any living person” in an advertisement without that person’s written consent. The trial court ruled for the defendant and an appellate upheld the verdict.

Contact Calculated Risk Advisors today to discuss better protecting your organization from evolving advertising injury lawsuits.

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California Coverage Ruling on Health Care Antitrust

The Superior Court of the State of California, Santa Barbara County has issued a coverage ruling in Cottage Health System et al. v. Travelers Casualty and Surety Co. of America et al.

The case revolved around Cottage and a group of contracted neurosurgeons who were accused of violating antitrust laws while conspiring to block a second third party physician group from practicing at the health system. As Cottage Health System’s insurance carrier Travelers initially provided defense coverage but later denied the claim.

The coverage argument centered on whether third party physicians met the definition of “insured person” under the Travelers’ Directors and Officers insurance policy. The wording, which is standard in most health care D&O policies, provided coverage to independent contractors who operated under the “exclusive direction” of the named insured. Travelers denied coverage based on the physicians not meeting that definition but lost the argument in court.

The ruling will likely be appealed and further litigation will continue to clarify coverage.

Contact Calculated Risk Advisors to discuss better protecting your organization from increasing regulatory risks and expenses.

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Employment Practice Update

As 2012 concludes, one factor remains important but easy to overlook – employment lawsuits. Employment law is regulated by the Equal Employment Opportunity Commission (EEOC) who manages complaints by the public and investigates or prosecutes businesses who violate federal law. The results the EEOC had in 2012 should be noted as they may indicate a trend for what to expect in 2013. In 2012, new complaints received by the EEOC totaled 111,139 (down slightly from 112,499 in 2011), while resolutions remained just below 100,000 as it has been the previous two years. However, the dollars recovered by the EEOC were the highest ever – $44.2 Million through litigation and $365.4 million through administrative enforcement. This shows that the EEOC may be pursuing larger cases on average.

While no wrongful employment practice is acceptable, it is important to understand what the EEOC may be looking at more critically. With limited resources, each company must decide how and where to invest its capital in order to best protect its firm. Knowing what the EEOC is concentrating on may help determine where to spend the extra dollar making sure it is in compliance. Based on the types of cases in 2012, Calculated Risk Advisors recommends companies to look carefully at the following areas:

• Hiring Practices – Hiring decisions based on an applicant’s record of previous arrests made a global beverages brand disqualify an unfair amount of black workers from the hiring process. The company paid over $4 million dollars to settle the matter.
• Disability Discrimination – One large trucking company had a policy of automatically terminating the employment of anyone requiring more than 12 weeks of leave. The EEOC found this to be discriminating to those with disabilities and the trucking company is paying $4.8 million to settle the matter.
• Retaliation claims – Growing in frequency, these occur when an employee complains of an unfair or wrongful practice within a company and is then harassed due to their complaint. The EEOC is increasingly pursuing these actions.

A firm should remember to include the following employment-related risk management practices in its operations:

• Use of Disparate Impact Studies – when deciding on a policy to implement, consider if the impact will be skewed towards a particular group
• Release of Liability – Upon termination, obtain a signed release of liability from employees
• Out-placement services – Assist in finding terminated employees new employement
• Avoid Blanket Policies – Broad policies are being scrutinized by the EEOC. “any prior convictions” should not be a hiring philosophy and “maximum allowed leave time” should be flexible.

For further discussion on ways to protect your company from employment practices liability, contact Calculated Risk Advisors today.

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New Mexico Health System Estimates $120M In Claims

Actuaries for the University of New Mexico Hospital have told the state that they could be on the hook for $120M in claims after a likely class action suit has surfaced.

The suit brings up an often overlooked insurance issue – what is a “claim”.

Although the story says the UNM Hospital is self insured, most similar facilities have a large self insured retention with excess insurance above it. Policy language would determine whether the 101 claimants in the class action count as one claim or separate claims. The policy provisions deciding how a retention is applied is often called “batch” coverage.

If the system carried a $1M retention with excess insurance above, the most they would pay on single claim is $1M. However, if the policy counts each claimant as separate the system would be out $1M per claimant – potentially over $100M.

Many systems also carry an aggregate retention, limiting the maximum amount that can be paid out in one year. With the alleged malpractice happening over several years improper policy wording could allow different policies to respond to each of the claimants.

Contact Calculated Risk Advisors today to better understand how your policy will react in the event of a catastrophic event.

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Reporting Data Breaches

A story broke this week that Coca Cola’s systems were breached in 2009, the hackers stole information on a pending $2.4 billion acquisition of China Huiyuan Juice Group. The deal fell apartment three days later. Investors were not aware of the event until it leaked this week.

Last year the Securities and Exchange Commission issued guidance that any information about breaches that “a reasonable investor would consider important to an investment decision” should be disclosed. However, very few companies are disclosing and when they do it’s with little specifics.

Contact Calculated Risk Advisors to discuss changing regulations and the costs associated with complying.

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Regulatory Uncertainty Continues for Captives

On-shore and off-shore captives have both been uneasy over the prospect of changing regulations.

On-Shore

The Non-admitted and Reinsurance Reform Act (NRRA), a subsection of Dodd-Frank, has been keeping captive owners awake at night. The law states that no state other than the home state of an insured may require any premium tax payment for non-admitted insurance and that the placement shall be subject to the statutory and regulatory requirements of the insured’s home state as well. This is concerning for those who own a US captive, yet operate in a non-captive venue.

Off-Shore

Solvency II is meant to strengthen capital requirements for EU domiciled insurers and reinsurers, but a wider adoption is worrying captive owners.   Many offshore domiciles are implementing the guidelines to stay competitive in the world market, including two of the top captive domiciles (Bermuda and Cayman).  Bermuda has committed to the requirements while Cayman has flirted with the idea, worried about losing their edge in the captive insurance industry.  Both Bermuda and Cayman have promised to exclude captives from the requirements of Solvency II, but it is uncertain whether they can.

Contact Calculated Risk Advisors today to discuss how this regulations may impact your current and future alternative risk transfer options.

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Hospital to Pay $9.3M Fine

Freeman Health System in Joplin has been hit with a $9.3 million fine for violations of the Stark Law and the False Claims Act. The hospital had given incentive pay to 70 physicians in violation of federal law. This follows a $60M 2008 settlement by Missouri based Cox Medical Centers for similar allegations.

Contact Calculated Risk Advisors to discuss protecting your organization against the costs of defending against increasing government regulations and investigations.

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