Financial Loss · Insurance · Property Insurance

How We Helped a Client After Their Product Was Condemned

I am going to share with you a story about a new client that left their prior insurance broker because of a bad loss they suffered that could and should have been covered.  I am going to explain why they choose us but I want to be clear, getting a new client because they suffered an uncovered loss is not a good way to win clients and not something we prefer.  We would much rather work with a client prior to a loss and uncover coverage gaps so that if they are unfortunate and have a loss and least it is covered by insurance.

The loss involved a fire at their premise that destroyed roughly 25% of their product.  The remaining 75% of the product was condemned even though it appeared not to be damaged.  The insurance company covered the 25% that was damaged but not the 75% that was condemned.  The condemned property should have been covered and could have for a very little amount of additional premium.

After the loss the client decided it was time to move on from their large fortune 500 broker that had a team dedicated to life science clients.  The client did an informal RFQ and asked the competing brokers to analyze their current coverage, current pricing, and coverages they might be missing.

What we found was pretty staggering.  From a pricing standpoint, they were in good shape, and they had most of the same coverages that we would have recommended.  The problem was that the coverage terms within those policies left the client significantly more exposed than they realized.  In addition to the condemned property coverage gap, we found a handful of other six and seven figure coverage gaps that the prior broker had missed and which our competition had failed to point out.  It is never pleasant when a loss uncovers a coverage gap and that is what we strive to avoid with our clients and prospects.  At the end of the day, our deep dive coverage analysis is what won us the business.  We had equal capabilities to the other brokers when it came to pricing and placement expertise, but we shined when it came to correctly identifying what their current coverage lacked and how to fix it.

If you are a life science company and would be interested in learning more about our coverage audit please email me at matt.corcoran@alliant.com.  We spend our time and resources doing this analysis, not yours.

Catastrophe · Monday Market Update · Property Insurance

Monday Market Update – What Will Hurricane Florence Mean to the Property Insurance Market?

Last week there were multiple named tropical systems in the Atlantic Ocean in addition to four others in the Pacific Ocean.  Florence of course generated most of the attention here in the United States and will continue to be in the news as the true destruction is sorted out.

We will most likely see losses in the billions for Florence with the amount of insured losses also in the billions.  Insured losses are the dollars paid by insurance companies for covered claims, whereas the headline loss number will be the total loss which is not all insured.  Insured losses will often not include indirect losses such as lost wages and delays, but some of these losses can be covered by insurance.  What will this mean for the insurance market?

If the past is any indication we will most likely see carriers try to increase rates and the insured that are renewing coverage within the next 45-90 days will see the largest impacts of this increase.  This is what we saw last year when multiple hurricanes hit the United States.  These rate increases ended up not holding up over time.  Insurance companies were saying to investors and analysts that the hurricane losses were “earnings events” and would not have a material impact over the long term.  On the other hand, they were telling insureds and brokers they needed to increase the premium or rate because of these same losses.  Insurance companies essentially used the storms to increase rates but told the analysts that cover their stocks that the losses were just a blip on the radar.  I remember underwriters asking for rate increases up to 40% in the immediate aftermath of these storms.

Rates returned to normal because there is so much surplus money in the insurance market and competition is fierce.  After the 2008 recession a lot of money flowed into the reinsurance sector where investors could secure a better return on money compared to US Bonds and this continues to be the case.  Couple the money that flowed into reinsurance with the stellar returns in the equity markets during this time and you now find insurance industry surplus near all-time highs despite pretty hefty losses the past few years (think hurricanes, earthquakes, CA wildfires, etc.). That is why if your policy renewed in April you probably saw no increase or at worst a minimal increase.

Over time these losses add up and could weaken the market and lower total surplus.  My personal belief is that as interest rates continue to increase you will also see some of the money move back into US Bonds.  Investors that traditionally did not invest in insurance but only started after 2008 will begin to exit the insurance market and invest in US Bonds where they can get a similar return with less risk.  If we see move money move out of insurance and into bonds, with losses continuing to mount, the property insurance market will at some point be impacted but that could still be a long way away.  If your property insurance renews in the next 45-90 days I suggest you ask your broker why insurance company CFOs and CEOs are saying these storms are just “earnings events” but then increasing your rates.

As always, fee free to reach out with any questions or comments.  You can reach me at matt@mattcorc.com or matt.corcoran@alliant.com.

Catastrophe · Insurance · Property Insurance

Hurricane Florence – Property Insurance Tips

Hopefully Hurricane Florence weakens and has a minimal impact on the East Coast of the United States, but if we are not so lucky I wanted to share some coverages that you might have available in your property policy that will help mitigate the financial loss.

  • Debris Removal – often this has a sub-limit but it can help with cleanup costs
  • Catastrophe Allowance – not standard in all policies, but can give you some additional coverage if your limit is not sufficient to replace your property
  • Denial of Access – Can pay Business Income in the event you cannot access your premise because of damage to a nearby property
  • Expediting Expense – an additional coverage that responds when you make temporary repairs to get back into business
  • Equipment Breakdown – can be especially important if your HVAC system gets damaged and you have temperature sensitive product
  • Claims Expense – Can pay for a third party to help you work through the claim, especially important in business income claims
  • Ordinance or Law – Can help pay for demolition, increased cost of construction, loss to undamaged portion of the building
  • Preservation of Property – the safeguards you put in place to protect against loss can be covered
  • Business Income and Contingent Business Income – provides coverage for income lost while your premise is down from a covered cause of loss or a key supplier/customer
  • Civil Authority – provides coverage for loss of income because the government deemed a road or bridge unsafe or closed it due to a covered peril
  • Extra Expense – added cost to relocate

These are just a few examples of where coverage can be found.  You do want to be aware that not all policies will have these coverages, but most of them should be found in even the most basic of policies.

A couple of things to be aware of that can work against insureds.

  • Coverage can be impacted by deductible, particularly wind deductibles that might differ from your regular deductible. In wind prone areas you might incur a percentage deductible instead of a flat dollar amount.  For example, your deductible might be 5% of total insured values subject to a minimum of $50,000
  • Wind deductibles could also impact Business Income and Contingent Business Income
  • Flood is often excluded
  • If you have National Flood Insurance Program (NFIP) coverage they adjust the loss on an “actual cash value” basis, meaning it is replacement cost minus depreciation.
  • NFIP coverage is limited in total limits available
  • If you are in a flood zone but have no NFIP coverage but have flood coverage through your insurance carrier it could be subject to a deductible equivalent to what NFIP would have covered.

I hope this is help that is ultimately not needed.  For those in the states that could be impacted, I wish you the best and hope there is little or no impact to you, your business and your families.

Biotech · Financial Loss · Property Insurance

AVEO Pharmaceuticals Lost 40% of Their Market Cap – How Insurance Can Protect Against Delays

Delayed

AVEO Pharmaceuticals (stock chart) was in the news this week because they were forced to revise the timing of their topline data from the third quarter to the fourth quarter.  As a result of this news their stock dropped from over $2.80 to under $2.00.  The reason for the delay was the number of progression free survival (PFS) events occurred slower than forecasted combined with ten patients leaving the study without documented progression.   The point is, delays can decimate the value of your company and they can be caused by a multitude of events.

PFS events are out of one’s control but are part of running a clinical trial, they are a business risk. Physical loss or damage to an R&D location is also out of one’s control, but the financial impacts can be an insurable risk.  The problem is that most companies either don’t have the coverage in their insurance policy or have it but not enough.

Your policy should be setup to pay the actual loss of business income you sustain due a covered peril to property that is directly related to your “research and development operations.” The policy should pay for the period equal to the length of time it takes restore the damaged property.  For example, your key R&D site had a fire and it took 3 months to restore resulting in a 3 month delay of you launching your product, the insurance would pay this difference if setup correctly.

Let’s say you are not ready to launch a product, you are at the other end of the spectrum and are conducting animal studies.  The same fire scenario described above occurred and your R&D documents or prototypes were damaged or destroyed.  If your insurance policy is setup correctly, the continuing operating expenses you incur while you restore your operations should be covered by your insurance policy.

AVEO is an example of what happens to a company when there are delays.  In AVEO’s case the delay was due to something out of their control (their CRO could be negligent for a part of the delay, but that is another issue).  If you can tell your shareholders and key stakeholders that yes there was a delay, but that the financial loss due to the delay is insured, wouldn’t that be a much better conversation to have?  The question is – are you insured for these risks and if so are you insured adequately?  Or are you just finding out that these risks can be insured by reading this article?  If it is the latter, I would be happy to discuss with you how I can help.

Insurance · Life Sciences · Property Insurance · Risk Management

Why Milestone Payments Go Uninsured

Almost every day I read about a company receiving a milestone or grant payment, but sometimes milestones aren’t met and it is not for lack of science. I often wonder how a company would be affected if the milestone or grant were not received because of a fire or some other natural event rather than the science simply not working? Even worse, how would a company and its shareholders feel if they knew this financial loss could be covered by insurance?

For many life science companies these payments allow them to continue operations or avoid having to raise additional money that will dilute shareholders. The financial loss of a missed milestone due to an event that is insurable but not covered by your insurance policy is inexcusable. For R&D companies where there is no cash flow, a missed milestone could put you out of business or significantly impact operations. Sadly, many clients never have the conversation with their broker regarding this important coverage. As you look through the chart below, how deep of a dive have you and your broker done?

Milestone Flow Chart

Typically when I speak to new clients they have rarely gone deeper than the second question, “has your broker discussed what limit is appropriate?” Milestones and their applicable payment are usually well-known in advance so this is actually a rather straightforward coverage to determine the correct limit of insurance if the right questions are being asked. However, if you don’t know the coverage is available and your broker is not asking the correct questions it can turn into a costly coverage gap that is either uninsured or under-insured (limit is not adequate for the loss exposure).

If this is as deep as you have gone, what other coverage are you missing in your policy? If you think this is the only aspect of business income insurance commonly overlooked I am sorry to say you are mistaken. In future posts I will discuss other business income issues that are not often not covered properly or not covered at all.

If you have questions on whether your policy is correct, feel free to shoot me a message and I would happy to discuss.

Financial Loss · Insurance · Property Insurance

Protecting Your Supply Chain

I read an interesting article* the other day about a supply chain issue Ford is having because one of their key suppliers suffered a fire loss.  Ford said the disruption could cause a reduction of up to 15,000 trucks being manufactured per week and would have an “adverse impact” on its financial results.

Ford is a colossal company and to see how a single supplier could have this much impact on its financials is mind numbing.  Many of my clients in the Life Science space are beholden to one or two suppliers and finding alternative suppliers and vendors can be both difficult and time consuming given the highly regulated industry of Life Sciences.  For many Life Science companies (both pre-revenue and revenue generating) this could potentially put them out of business.  This is the Black Swan event, both hard to quantify and catastrophic.

There is a solution, but it is often overlooked or at best underestimated.  The solution can be solved through the use of the Property Insurance policy and making sure there are adequate limits under Contingent Business Income.

The approach I use with my clients when designing their program is to first take a deep dive into their supply chain and identify worst case scenarios.  I like to ask few questions to get the process started.  Who are my client’s key suppliers?  Who are their suppliers?  If a supplier goes down can my client quickly move to another supplier or facility?  How much product does my client have in reserve?

Once we identify weakness or vulnerabilities in the supply chain we then start looking at the economics of each vulnerability.  This is part math and part art.  We start at what would be the worst possible scenario, what could put my client out of business.  An example would be a company with a single product using a single supplier for a key ingredient and the supplier goes down with no backup facility or vendor in place.  How long would it take to get another supplier?  If this scenario played out, what would be the economic cost to the client?  Once we identify this scenario it becomes my job to develop different program options that best fit the risk tolerance and economics of my client.

I had one client who was very conservative.  They had a recently approved product and were expecting significant sales from that product.  They had no other product on the market and they used a single manufacturer with no backup facility in place.  We determined the quickest a backup facility could be identified and validated was 8-10 months.  The client had about 4 months of product in reserve.  We created options that ranged from 4 months of protection to 24 months.  We also looked varying deductibles based on their reserve amounts.  In the end the client moved forward on a program that would protect their business income for a period of up to 12 months if the third party facility went down with a deductible of 30 days.

The more difficult situation to quantify is the R&D organization with X amount of dollars and a burn rate of Y who has a trial interrupted because of supply chain issues.  There are no sales but there would be a real economic loss if the trial is interrupted.  This is not necessarily business income, but can still be protected in the same exact way making sure the proper wording is on the policy form to protect R&D expenses.

Out of all the issues I see every day, this is often the most overlooked or the limits are inadequate because a deep dive on the exposure was never contemplated.  If Ford has a supplier that can cause an “adverse impact” on their financial results, how good do you feel about the protection you have if one of your suppliers suffers a loss?

*http://www.autonews.com/article/20180509/RETAIL/180509786/ford-f-series-production-cut-supplier-fire