DOCTRINA

The integrated occurrence coverage 

 Por Rodrigo M. Amengual  (*) 

After the collapse of the excess casualty market in the United States in 1984 and 1985, several insurance companies were established in Bermuda and to a certain extent they were fueled by capital from large manufacturing corporations.  One of the major reasons the Bermudan market was formed was to service those companies, a group of corporate customers who needed high limits and capacity to face their liabilities.  Typically Bermuda insurers are not licensed to do business in the U.S.; they are part of an excess market (meaning that they will only participate above the “working” layers), and they do not write all types of risks, but rather specialty ones (e.g.: excess liability; E&O; political risk and terrorism; energy; property catastrophe).  As a result, the policy forms used by these insurers are not based on the common ISO or London language, which means that they present a variety of distinct characteristics.  However, we will comment on one truly unique feature found in these Bermudan forms, which is that they offer “Integrated Occurrence” (“I.O.”) coverage. 

A good approach for discussing I.O. is to first lay out a set of circumstances that will help understand where the need for this type of coverage came from and what type of insureds and lines of businesses it is best designed to protect. 

First, as previously mentioned, we are discussing the casualty market, as opposed to the property market.  Most property loss exposures have a reasonably clear maximum possible loss (“MPL”).  For example, if we think strictly of property damage, excluding business interruption or other types of coverages, the MPL for a building that would cost $4,000,000 to rebuild is $4,000,000; no loss to that building could exceed the amount of money necessary to rebuild it.  Unfortunately, there is no method to estimate the MPL for most liability exposures.  The reason is (not even discussing the punitive damages component) largely that awards to injured people are very difficult to predict; are sometimes not the result of any logical process; and many times can reach staggering totals.  The consequence of this–especially in today’s marketplace and with respect to big corporations is that the underlying policy limits and/or Self-Insured Retentions (“SIRs”) to which the excess policies attach are becoming increasingly larger.[1] 

Now, from an “excess” perspective, one of the reasons policyholders purchase this type of coverage is the effect of aggregate losses.  In addition to an “each occurrence” limit, one or more aggregate limits for the policy period often apply to a liability insurance policy.  The aggregate limit is the most a carrier will pay under a policy during the policy period; sort of the “ultimate” limit.  If a company sustains several losses during a policy period, it could exhaust its aggregate limit, therefore leaving any subsequent claims uninsured or underinsured. 

When policyholders purchase liability coverage, they want to buy certainty; they want to buy “peace of mind”.  When it comes to casualty excess lines, due to the “long-tail” effect inherent in the kind of liability claims that most manufacturing companies could face, this “certainty” contains two dimensions: financial strength and policy provisions.  An insurer in the casualty excess market is supposed to be financially strong: this means that carrier should still be out there 10-15 years from now, and should be able to pay claims that arise today and that are covered under its policies.  If we take for granted that any major insurer is financially sound, then the problem rests with the policy language. 

If a company releases thousands of its products per year into the stream of commerce, the policy language is of particular value, especially to large manufacturers which might produce a defective product that causes a “small” amount of damage to a very large number of people.[2]  Latent losses as well as the so-called silent or unknown exposures represent obvious risks to companies, especially to the product manufacturers.  These companies (as most of the others do as well) expect future protection for activities taking place today. 

With all the aforesaid in mind, we can now approach our main topic, recognizing that even though I.O. could apply to more than one line of coverage (i.e.: employment liability, advertising liability, personal injury, etc) we will focus on the insured’s products. 

“Integrated Occurrence” coverage is a special type of insurance protection that allows the policyholder to aggregate multiple claims that arise out of the same actual or alleged event, condition, cause, defect, hazard or failure to warn.[3] 

The Bermudan forms give the policyholder the right to declare a “batch”[4].  There is a key concept to have in mind: not every claim needs to be reported as an I.O.  It is the policyholders’ discretion when to give notice of an I.O.; and even if a series of claims would potentially meet the criteria to be regarded as I.O. under a policy, they will not be treated as such unless and until the insured reports them as I.O. 

Now, carrying on with the aforementioned definition, when the policyholder gives the carrier a “batch” or I.O. notice, all past, present and future claims that arise out of the same event, condition, cause, defect, hazard, or failure to warn are added together and treated as one (1) occurrence, regardless of the period of time or area over which the losses take place, and subject to one policy limit.  There are very important consequences to this.  First, the ability to “batch” allows the insured to exhaust the underlying limits faster and reach the excess coverage, which otherwise would be illusory.[5]

In addition, if as we discussed the policyholder has the ability to “batch” any claims regardless of the period of time they take place, the policy wording is “frozen”, providing the insured with coverage for losses into the future, even after an exclusion is applied or renewal is declined, as long as those losses stem from the same cause, subject of course to the maximum limit of indemnity.  This is probably the main advantage of this type of coverage.  What this really does is it matches one (1) problem with one (1) policy limit. The I.O. coverage protects the insurance company from the stacking of limits, because the Bermuda forms state that all losses from a common cause (“batch” losses) must be reported into one year and are therefore subject to that year’s policy limit.  The advantage for the policyholder is that the policy language is frozen for the lifetime of the “batch” going backward and, most importantly, going forward for those losses within the “batch” that are yet to happen.  This is the future component of the I.O. coverage. 

However, it is critical to be aware that this is not unrestrictive coverage and that the different Bermuda forms contain exclusions to it.  Some policies provide that in order for the insurer not to assert the “expected or intended” injury exclusion, the influx of claims being experienced by the insured must be “vastly greater” than a previous “historical” trend.  Other forms indicate that future losses will be covered as long as the insured has relinquished possession of the product, meaning as long as that defective “batch” is already released into the stream of commerce.  The rationale behind this is that: an excess layer should respond to catastrophe or “other than average” trends because the “working” layers are there to cover the “average” exposures; and the insurance companies will not encourage their insureds to keep selling products that are already defective. 

As a way of example to illustrate the above, let’s think of a chemical manufacturer that starts selling a fertilizer product from 1998.  For some reason unknown to the manufacturer (i.e.: the product is defective; the product contaminates the environment; the product labels do not contain the proper instructions and/or warnings, etc), that specific product starts to create problems (claims).  The manufacturer has already released a whole defective “batch” of the product into the stream of commerce and does not know when the problem will stop, but it knows it will be a big problem, so it decides to integrate, and reports this claim as a “batch”.  The I.O. or “batch” in this case will be the particular problem with the product that is the common cause of all the claims being reported as a result of the customers applying the product (i.e.: the product’s insufficiency or failure to warn creates health effects –bodily injuries- to every person that applies the product for its intended use.).  Let’s assume that the claim is reported as an I.O. under the 2003-2004 policy period; that the policy has $50 million in limits for that year with a $10 million SIR, and that there are no applicable exclusions.  First, by integrating these “fertilizer” claims, the policyholder will exhaust the underlying limits faster and will get to the excess layer, with the $50 million limit.  More likely than not, an underwriter will exclude coverage for this “fertilizer” product in the 2005 policy year and policies going forward.  Notwithstanding, should the policyholder continue to experience claims for this particular product in 2005, 2006, 2007 and so on, there will still be coverage under the 2003-2004 policy, subject to the $50 million limit.  This is because as we said, the policy language is “frozen”, and the limit is tied-up to the year when the notice of the I.O. was given to the carrier.  It is this kind of situation that the I.O. coverage is best designed to overcome. 

Again, each form contains specific provisions dealing with this, and as in any insurance policy, the exclusions help re-shape or re-define the definitions.  The different Bermuda forms contain different requirements, and the I.O. coverage is not a superior one compared to others (claims made for example), but rather a response to specific needs.