Caveat emptor. (Risk Management).

According to the Legal Information Institute, caveat emptor is a Latin phrase for "let the buyer beware." This phrase projects the idea that buyers should take responsibility for the condition of items they purchase and should examine them before purchase. This has always been a good principle for every insurance buyer to follow, but is especially valuable advice during difficult insurance markets, like the one we are experiencing.

Camp underwriters are continuing the refinement of their risk appetites and operations. Some of these refinements are driven internally. External underwriting partners (reinsurers) have imposed other changes and adjustments on insurance companies, because they are no longer willing to support the underwriting of certain risks. The reasoning behind these decisions and changes may be actual -- or anticipated -- poor results or may be attributable to the perceptions of key decision makers. The sum of all the changes and fears in the insurance business these days equals continuing uncertainty and instability for the insurance buyer regardless of which insurance company accepts your insurance risk transfer (policy).

At times like these, nontraditional insurance solutions may be offered, which seem to be good on the surface. Under these circumstances, remember that not all insurance policies are alike. Just because a policy is labeled "General Liability," doesn't mean it offers equivalent coverage to the policy you have with the same name from another insurance company. "Let the buyer beware" -- in the current insurance environment -- requires a more thorough approach than simply taking the policy from the company with the lowest cost, for example.

Non-traditional insurance solutions include claims-made liability insurance policies, risk purchasing group programs, captive and rent-a-captive insurance arrangements, and excess and surplus lines insurance placements. All of these insurance solutions may be legitimate in their own right, but may simply not be the right solution for your insurance needs. Many of the issues surrounding these nontraditional insurance arrangements can be quite confusing, even for insurance professionals. Some of these insurance products may result in incomplete risk transfers, which could cost your camp money and threaten your assets. Be aware and informed.

Claims-made Liability Insurance

Let's take claims-made liability insurance, for example. Claims-made insurance policies are not new. They have historically been reserved for risks, such as product liability and professional liability (medical malpractice and errors and omissions), in which the claim patterns develop over long periods of time (long tail). However, in the last couple of years claims-made liability insurance provisions have appeared in some insurance policies being sold to camps.

One of the key questions for insurance buyers to ask about claims-made liability insurance is how long the supplemental extended reporting period is and how much will it cost? The cost issue may be overlooked in the comparison of claims-made insurance with other occurrence-based insurance options. There are no standard responses.

The question points to one of the fundamental differences between claims-made liability insurance and its occurrence cousin. Claims-made insurance policies respond to claims made in writing during the policy period, which occurs after the retroactive date. As long as your camp maintains continuous claims-made liability insurance and the retroactive date is not changed, a claim made in 2010 for injuries sustained in the summer of 2003 will be covered.

Furthermore, the difference between claims-made policies and the more traditional occurrence policy is underscored by the fact that under the claims-made insurance in this scenario the policy and the limits in force in 2010 will respond to the claim. In the same scenario with an occurrence-based liability policy, the policy and limits in force at the time the claim occurred (2003) responds no matter when the claim is made in the future.

A problem may develop when the limits in your claims-made policy in 2010 are lower than the limits carried in the claims-made policy in 2003. No insurance buyer would willingly reduce limits if the inherent risks in this situation were recognized, but suppose the limits you need and want are simply not available? Another problem may develop when the camp liability insurance carrier is changed. Claims-made insurance underwriters may be unwilling to keep the same retroactive date, which is usually the same as the date of the first claims-made liability policy. Moving the retroactive date forward could leave your camp exposed if claims are brought in the future from events occurring before the revised retroactive date.

Another problem may occur following the termination of claims-made liability insurance. Under these circumstances, the policyholder has the right to buy an extension of time to report claims. This extension is known as a supplemental extended reporting period. These extended reporting periods are usually offered for a limited time and for an additional cost. You should know the cost of these extended reporting periods in your claims-made policy, as well as how long the extended reporting period lasts before you buy claims-made insurance. There is little standardization when it comes to this issue. The problem from a risk management perspective is that if a claim is made after the extended reporting period expires, there might be no coverage (gap in the risk transfer plan). Under these circumstances the camp's assets may be at risk, and you may be forced to defend and/or pay a claim. Caveat emptor!

Risk Purchase Groups

Risk purchasing groups (RPG's) are also not new. RPG's are the result of the Federal Risk Retention Act of 1984, which permitted similar groups of insurance buyers to join together in associations to purchase liability insurance. While federal law spawned the group buying approach, RPG's are not insurance companies and can only sell insurance through established insurance companies. Various states regulate this process, but there is--once again--little standardization in the insurance products offered.

For example, RPGs may issue a policy or, in lieu of a policy, issue a certificate. If you only receive a certificate as evidence of your insurance coverage, you may be participating in a master policy. This always needs clarification. One question in this situation is whether you have your own limits of liability or share die limits with all the participants of the RPG.

Deductibles may apply to each claim and certain coverage may be limited. For example, we have seen liability insurance offered to camps through risk purchasing groups with limits of liability for sexual abuse and molestation as low as $25,000.

Other concerns involve the use of nonstandard clauses in RPG insurance policies, which require a fuller examination. This may be impossible for you to determine if you only receive a certificate as evidence of your insurance coverage. Some buyers choose to work directly with the program managers of these RPGs and under these circumstances, perhaps without realizing, may be ill prepared to ask the right questions. Caveat emptor!

Captive and Rent-a-captive Insurance

Captive and rent-a-captive insurance products are considered alternative risk funding approaches to insurance. They are very nontraditional. They often use a traditional insurance company to work with them as a "front." The term sounds indelicate, but the practice is quite legitimate.

Captive and rent-a-captive insurance arrangements often require some type of capital contribution from each policyholder to the working capital of the insurance entity. The capital contribution is usually a percentage of the insurance premium. Capital contributions may--or may not--be refundable and may be forfeited if the policyholder cancels or does not renew the insurance. Being asked to make such a capital contribution is a tip-off that some type of captive insurance organization is in use.

There should be a document, which governs the payment of the capital contribution and establishes the terms. However, we've seen one arrangement recently for recreation businesses where there was none. Concerns about legal issues like this are in addition to the insurance and business risk issues inherent in captive insurance company transactions. For example, how well capitalized is the company? Who is managing it? How long have they been in business? What happens if operations result in a loss? Can your business be assessed a percentage of the operating loss? What happens and who is liable if the captive company fails? Choosing to buy insurance through a captive insurance mechanism requires knowledge and a thorough investigation. It also requires a long-term commitment. Ask questions and if you aren't sure which questions to ask get someone involved who can be an advisor. Caveat emptor!

Excess and Surplus Lines

The excess and surplus lines marketplace plays an important role in the delivery of insurance products and services to businesses. It is the most firmly established of the alternative, nontraditional approaches to insurance we've identified.

Since it is a free and open marketplace specializing in unusual, difficult, and hard-to-place types of insurance, proposals from various underwriters can vary greatly. You can usually tell that your insurance has been placed in the excess and surplus lines market when you are asked to pay premium taxes in addition to your premium. Fees are also a usual part of this marketplace for inspections and other reasons.

This marketplace is also known as the nonadmitted marketplace, because the insurance companies who participate are most often not licensed by each state. This doesn't mean they are less financially viable, necessarily, but it does mean that if one becomes insolvent there is no backup support from any state insurance guaranty fund to help pay for your existing or future claims. Caveat emptor!

Be aware and prepared!

Ed Schirick is president of Schirick and Associates Insurance Brokers in Rock Hill, Nov York, where he specializes in providing risk management advice and in arranging insurance coverage for camps. Schirick is a chartered property casualty underwriter and a certified insurance counselor. He can be reached at 845-794-3113.