Book Cooking Terrorism Raise CAAs DO Premium

July 8, 2002
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GRAND RAPIDS — Current market conditions have not only driven up deductibles and premiums this year for the risk and liability coverage needed by private firms, these forces also have done the same for public entities.

Board members of the Convention and Arena Authority found that out recently, when they saw their deductible rise by 200 percent and their premium go up by nearly 50 percent in a year, while the coverage limit remained the same.

The CAA is responsible for the operations of the Grand Center and Van Andel Arena and the liability that comes with directing a pair of very busy and very high profile public buildings.

For the board’s standard $10 million policy, one that has been in place since the group’s inception in 2000, the deductible jumped from $5,000 last year to $15,000 this year.

The annual premium went from $14,850 to $22,000, an increase of 48 percent this year and a hike of 63 percent from 2000 when the premium was $13,500. (See related story.)

And the latest deductible and premium came from the firm with the lowest bid, as the CAA renewed its coverage with Chubb Executive Risk. Chubb also offered the board a policy at last year’s premium of $14,850, but that plan had a liability limit of $5 million.

The CAA shopped around, too.

Kemper Insurance Co. quoted an annual premium of $35,000 for $10 million worth of coverage. Travelers Insurance Co. was lower than Kemper at $31,000, but still quite a bit higher than Chubb.

Meanwhile, the Great American Insurance Co. just plain declined to bid on the policy, which is known as directors’ and officers’ liability insurance (D&O).

What is most interesting is that the public sector wasn’t really responsible for the increase, according to the insurance companies.

“Basically, they said that current market conditions are dictating it. It’s not a reflection on the convention center and the arena,” said Steve Duarte, deputy director of fiscal services for Kent County who was part of the team that solicited bids from insurers. “There are a couple of reasons for that.”

The horrific attacks committed by a band of terrorists on the World Trade Center and Pentagon last September is one reason.

Claim payouts for property damage resulting from the assaults drew down the cash reserves of many commercial insurers.

“Since all policies are backed with reserves, it either limited the amount of exposure they were willing to take on and made them unwilling to take on additional exposure. Or they got out of certain markets, like D&O,” said Duarte. “By having fewer competitors, obviously, this has a tendency to drive up the price.”

Duarte said another reason for the higher premium is that the amount of class-action lawsuits has risen to a record number across the country since 1997.

Only a few such suits have been settled so far, and some may not reach that stage for a while. And the trend to sue collectively may not taper off any time soon if this past year is any indication.

The alleged cooking of books at large public companies has raised the insurers’ fear factor concerning the lawsuits that are likely to come, putting their cash reserves in further jeopardy.

These supposed actions by a growing list of private sector executives have contributed to a higher premium that taxpayers will pay so the CAA can have a D&O policy.

“We’ve got Tyco, Enron, WorldCom and all those type of things that are putting this big uncertainty over everybody’s head in terms of what these claims might ultimately settle for,” said Duarte.

“It is one of those things where they look at their risk exposure and the reserves that they have to put up and, yeah, I definitely think it has an impact on us, too.”

Duarte said they knew a premium increase was coming because they had advance warning from the insurers.

“In 2001, they were predicting increases in the 25 percent range,” he said.

“In 2002, they were saying these would be in the 40 to 50 percent range. And if I have calculated right, ours was right around 48 percent.”

Letting the deductible rise, of course, kept the premium from going higher than it did.

Strangely, one factor that isn’t likely to raise the D&O coverage limit, and, in turn, jack up the premium or the deductible, is the January 2004 opening of DeVos Place, the $220 million convention center being built on Monroe Avenue.

“I don’t see where they would need an increase in the limit. I don’t think that the risk they’re facing is going to increase in this area,” said Duarte. “At least, not in my point of view.” 

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