Gulf Oil Spill Disaster: The Trigger of American Economic Collapse?

May 16, 2010

This article is written to analyze the potential economic fallout of the Gulf of Mexico oil rig explosion that occurred on April 20, 2010. I maintain that this incident could be the trigger of the American economic collapse. My expertise is in the insurance risk management and claims field. So, let’s look at what is going to happen as this disaster unfolds over time.

The oil drilling platform that burned and sank was drilling a well about 50 miles off the Louisiana coast. The derrick, the Deepwater Horizon, is owned by Transocean Ltd., and was leased to British Petroleum (BP). It was connected to the ocean floor by a “riser”…a 5,000 foot pipe that is now kinked like a garden hose. But the leaks are at the sea floor, not in the pipe. If BP, the lessee, cannot close the valve at the mile-deep wellhead, they may have to drill another well to relieve pressure. Some experts estimate that it could take two months to cap the well at the mile-deep ocean floor. And every day, somewhere between 1,000 and 5,000 BARRELS (200,000 to 1 million gallons) of crude oil float to the surface of the Gulf of Mexico.

The leading edge of the oil slick is about to make landfall at the Louisiana, Alabama and Mississippi coasts. But there exists the possibility that the oil spill may be caught by the Gulf Stream…the powerful, warm, and swift Atlantic Ocean current that originates in the Gulf of Mexico, exits through the Strait of Florida, and follows the eastern coastlines of the United States and Newfoundland before crossing the Atlantic Ocean.

And, we are just about to enter the Hurricane season, which extends from June 1st to November 30th. Any hurricane that enters the Gulf of Mexico will disperse the surface oil to parts unknown. There is no predicting which coastlines could be coated with crude oil. Any Gulf hurricane will impede and stall cleanup efforts as well as vastly expanding the geographic footprint of the spill. Cleanup cost could multiply exponentially.

So, we may be witnessing the humble beginnings of a disaster that could potentially affect the American coastline from Texas to Newfoundland.

Insurance Claims Issues

First Party Claims

There will be a flood of first-party claims, which are claims for direct loss or damage to covered property. But most Commercial Property insurance policies exclude pollution-related losses unless the loss was caused by a “specified cause of loss,” usually named in the policy…and usually confined to occurring on the insured premises.

Tens of thousands of claims will be filed under the Business Income and Extra Expense sections of commercial insurance policies. Untold number of businesses will be adversely affected by the oil spill, such as resort owners, commercial fishermen and shrimpers, coastal rental property owners, seafood wholesalers, most tourist-related business at the seashore, and charter fishermen.

But once again, BI and EE coverage requires direct physical loss to covered property. So, many businesses will be shocked to discover that even though they have Business Interruption insurance, it does not mean that they have a legitimate BI claim.

Even those policyholders that do have acceptable and covered BI claims may be limited in their monetary recovery by the policy language. The period of restoration usually does not include any increased period of time due to the enforcement of any ordinance or law that may require a policyholder to mitigate the effects of, or clean up the pollutants.

So most policyholders will be out of luck by filing claims with their own insurance companies. More on this later.

This denial of coverage will spell the bankruptcy and end of tens of thousands of coastal businesses. The ripple effect from those businesses to their customers and suppliers, as well as the families employed by all parties, will be catastrophic.

Third-Party Claims

Another huge consideration is the certainty of third-party claims. First-party insurers that pay claims related to the oil spill will subrogate (seek recovery) against those parties responsible and liable for the damages. Then consider all of the business that will file third-party claims directly against the parties responsible and liable for the damages. The list will continue to mount over the coming decade or longer. Timing will be crucial in this matter, since many of the responsible parties may have already exhausted their liability coverage and their corporate assets. Lawyers may find that many responsible parties will close their doors, effectively barring recovery.

Post-Katrina Insurance Industry Reality

In the wake of Hurricane Katrina, scores of insurance companies paid claims that they had originally denied. Sympathetic courts ordered them to pay claims that were arguably not covered. The same kinds of pressures will be brought to bear on ALL insurance companies in the aftermath of this oil spill disaster. In these kinds of widespread catastrophes, insurers will be required to pay claims that they may not owe simply because they CAN PAY. That takes some of the political pressure off of states and Washington.

Monstrous insurance loss payments can bankrupt insurance companies. But even worse are these politically-motivated claims for which the insurance company had not collected a premium. Do not be surprised to see many insurance companies fold in the wake of this ecological disaster if they are required to settle claims politically. And all insurance companies are backed up by reinsurance companies. The reinsurers will be hit with losses also, adding more ripples throughout the worldwide economy.

Lawsuits

In war, there is an old saying; “Kill them all…let God sort ‘em out.” That is kind of the philosophy of trial lawyers. In giant commercial enterprises such as BP, there will be dozens of entities that are involved…the parent company, subsidiary companies, contractors and suppliers. Trial lawyers customarily target the entities with the deepest pockets…plus everyone else. The lawsuits have already begun, and will name every business entity even remotely connected to the operation of the Deepwater Horizon oil platform. Every entity named in the lawsuits will be forced to defend itself.

And here’s where it gets even more complicated.

Many contracts between businesses and contractors contain a Hold Harmless clause that forces the contractor or vendor to absolve the business from liability, or at least to provide legal defense for the business. Common sense will tell you that subcontractors or vendors will have lower liability limits than the controlling entity, like BP. So lower liability limits will max out quickly.

The lawsuits will continue to be filed, and it will take years of legal wrangling to begin seeing damage awards meted out by all the various courts that will be involved.

Gigantic lawsuits and gigantic jury awards have the very real possibility of bankrupting the companies responsible for this oil spill.

Political Realities

Your Washington politicians have already passed legislation that protects their oil company buddies while exposing Americans to immense cleanup costs and business losses. A law passed in response to the 1989 Exxon Valdez spill in Alaska makes BP responsible for cleanup costs. But the law sets a $75 million limit on other kinds of non-cleanup damages. So, Federal law limits how much BP has to pay for damages such as lost wages and economic suffering in the Gulf Coast oil spill, despite President Barack Obama’s assurances that taxpayers will not be on the hook.

But the hue and cry from the Gulf Coast will be so great that Washington will feel entirely compelled to swoop in and start writing checks. The Hurricane Katrina/Rita debacle of 2005 is a scab on Washington’s skin that they don’t want torn off. And no Congressman is going to take a position against helping the poor Gulf fishermen and the rest of the populace that makes their living from Gulf and gulf-shore businesses. And despite Obama’s assurances, there is no way that he would refuse to sign a disaster relief law.

All of that means that the Federal Government will print more paper money and go deeper in debt. But printing paper money will hasten hyperinflation. And in order for Washington to go deeper in debt, foreign nations must by American debt securities. Eventually, foreign nations will cease cutting their own throats and say no to Washington.

Tens of thousands of Gulf Coast businesses will cease operations in the months to come. Banks that hold loans and mortgages on those businesses…as well as the loans and mortgages of the employees now thrown out of work…will suffer financial losses. Hundreds of thousands of coastal residences will be unemployed. Cars will be repossessed. Home foreclosures will escalate. Credit card companies will hold uncollectible accounts. Even the local Dairy Queen could suffer economic losses when the surrounding coastal community’s economy collapses.

And we haven’t even left the Gulf of Mexico yet. If the Gulf Stream moves the oil up the Eastern Seaboard, multiply all these predictions by an X factor.

Conclusion

As you see, the economic impact of the oil spill will reach around the world. Companies in the UK will be affected. Likely some insurers at Lloyd’s of London are involved. Reinsurance companies will take hits, which might affect companies in Germany, Switzerland, France and Bermuda. Domestic insurers will likely pay claims due to political pressure. Banks will suffer losses. Businesses will close. Unemployment will spike. Most importantly, it will place crushing pressure on Washington to fix the problem with money…and Washington withstands pressure like a Dixie cup under an elephant’s foot.

Therefore, I submit to you that the April 20th Gulf of Mexico oil disaster could very likely be the trigger of the collapse of the American economy.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


Public Adjusters: A Battle Looms in Florida

March 5, 2010

By Russell D. Longcore

In the State of Florida over the last twenty years, Public Adjusters (PA) have been very successful in helping policyholders recover all the money they are entitled to collect.

Way too successful for the insurance companies’ liking.

So, a major battle is looming in the State of Florida over the business practices of Public Adjusters.

Three insurance associations are supporting legislation to restrict how Public Adjusters operate. The Florida Insurance Council, Property Casualty Insurers Association of America and the Florida Property Casualty Association issued statements which criticize Public Adjusters…who represent homeowners in the professional preparation of insurance claims…accusing them of “inflating” claims, driving up costs for all policyholders.

But think about it for a moment, friends. The insurance companies enter into agreements with the PA and the policyholder to settle a claim. That means that “a buyer and a seller” agree on a price. Nothing forces the insurance companies to agree to a price they believe is too high. The insurance companies simply hate the fact that a policyholder goes into the marketplace and hires a claims professional to represent himself in the preparation of his claim. That is akin to the IRS getting mad at people for having their taxes prepared by an accountant.

State Senator Mike Bennett, R-Bradenton, and Rep. Janet Long, D-Seminole filed new legislative bills in February. The bills (S2264 and H1181) seek to:

• Prevent Public Adjusters from soliciting customers either by phone or in person unless both parties had a prior knowledge of one another or were family members.

• Prevent PAs from sending mail to prospective clients in the first 30 days after a storm. Further, the bill seeks to force Pas to label their letters “ADVERTISEMENT” in 14-point font red letters.

• Prohibit PAs from informing a prospective client of their firm’s success record in obtaining claim settlements for policyholders.

• Cap fees for PA services at 10% for hurricane claims, and a 20% cap for all other property claims.¹

It is a criminal restraint of trade to suggest that a Public Adjuster cannot attempt to make contact with a prospective client for 30 days after a storm. After a major hurricane, communications systems are usually broken for a time. In most instances, the only way a PA can contact a prospective client in the dasy after a storm is through either a personal visit or mail delivery.

Insureds with damages have immediate needs for emergency board-up, mitigation of damages, Living Expenses and other policy benefits. The insureds will need this kind of help immediately, not 30 days after the storm.

There is no legislation that prevents a building contractor from soliciting business right after a storm. Same goes for a roofer, tree removal company, or a debris hauler. So, no restriction should be imposed on PAs either.

You don’t see a restriction on accountants in tax season. You don’t see restrictions on Personal Injury attorneys after accidents. Why pick on PAs?

Think about this also. Hurricanes happen in hot weather. Damages from water quickly become mold damages. Mold left untreated for 30 days could render a building entirely useless and could require demolition. Further, the insurance companies have written ironclad Mold Exclusions that you can be sure they would invoke.

The state legislators wish to deny policyholders the timely assistance in preparation of their insurance claims, under the guise of protecting the policyholders of the State of Florida. But this effort to too transparent not to be seen for what it is…a desperate insurance industry trying to maximize its own profits at the expense of the policyholders of the State of Florida.

A recent state study found that in the past six years, the Division of Insurance Fraud received 937 complaints about public adjuster-related fraud from insurers and policyholders. It investigated only 269 of the complaints and made 31 arrests from 2004 to 2009. Curiously, the study did not say how many complaints it had received from policyholders about their own insurance companies’ claims practices. Nor did the study show how many hundreds of thousands of claims had been filed from 2004 to 2009. But we do know that SIX major hurricanes struck Florida in that time period.

They were:

Charlie – Category 4
Frances – Category 3
Jeanne – Category 3
Dennis – Category 4
Katrina – Category 3
Wilma – Category 4

Let’s run some numbers to show how deceptive this report is and give some perspective.

Let’s say that the total number of property claims filed for all the listed hurricanes togetherover six years was 1,000,000 claims. You already know that this number is ridiculously small, since tens of millions of property owners suffered repeated losses in the hurricanes. But at 1 million claims, 937 complaints is less than 0.0937% of all the claims filed. That is less than one percent of a purposefully low estimate of claims. And in only 31 cases was there enough evidence for even an arrest, much less a conviction.

And 31 arrests…not convictions…over six years is not enough illegal activity to cause legislators to pass additional laws restricting the business operations of ALL Public Adjusters.

Looks to me like the Public Adjusters, taken as a group, are paragons of virtue. They should be praised, not pilloried…lauded, not legislated…decorated, not demagogued.

I wonder if Senator Mike Bennett and Rep. Janet Long would open up their financial records and disclose how much money they have received in contributions from insurance industry-related donors. My guess is that these Florida solons are bought and paid for by the insurance lobby.

Write to your own Senate or House representative and vigorously protest the enactment of these bills into law. Florida policyholders would once again be taken advantage of by the insurance companies if this bill is passed.

¹To read the bill for yourself, go to: Public Adjuster Bill

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


State Farm Reverses Course, Stays In Florida

February 2, 2010

The Office of Insurance Regulation of the State of Florida released a statement about State Farm Insurance Company’s intent to leave the State of Florida. Commissioner Kevin McCarthy issued a consent order that ends the pending litigation between State Farm and the Insurance Commissioner’s office concerning State Farm’s plan to leave Florida’ property insurance market. State Farm will now continue writing business in Florida’s residential insurance market, and Citizens Property Insurance dodges a bullet that could have been fatal.

The Florida legislature established Citizens Property Insurance, the high risk pool, in 2002, in response to insurance companies that either went bankrupt, cancelled or pulled out of Florida because of repeated hurricanes. So, Citizens Property Insurance places the Florida taxpayers at risk for residential losses. Since 2002, storm after storm have struck Florida, nearly bankrupting Citizens. And Citizens is only one big storm away from ruin. So, when State Farm, the largest residential property insurer in Florida announced that they were leaving the state, the Insurance Commissioner’s office panicked.

This allowed State Farm to figuratively bend the Commissioner over the couch and have its way with him. Prior to State Farm’s announcement that they were leaving Florida, the company requested a rate increase of over 65% which was denied by the Commissioner. But rather than wave goodbye to Florida’s largest insurer, the Commissioner has granted the smaller…yet generous…rate increase of 14.8%. And, it is allowing State Farm to get rid of 125,000 policies that are arguably the highest risk policies they have on the books.

So, not only does State Farm get a rate increase on all policies, but it gets to keep its most profitable business and shove the riskier business off onto the taxpayers of the State of Florida. And for Citizens, 125,000 risky policies is better than 860,000.

You’ve got to admire that kind of moxy. State Farm, being the largest insurer in Florida, took full advantage of their market position and finally showed the State of Florida who is the boss. The regulators and the Florida legislature had little choice and no options but to give in to State Farm’s demands. The press release issued by the Commissioner’s office was a pitiful attempt to save face and spin the story to look like the Commish’s office was protecting Florida’s property owners.

Don’t you wonder if the terms of the consent order was what State Farm wanted all along?


Top Ten States For Staged Auto Accidents

January 11, 2010

My previous article about staged auto accidents is found at: Staged Auto Accidents Best to read these articles together.

According to the National Insurance Crime Bureau, a total of 70,844 Questionable Claims (QC) were submitted within in 2007 and rose to 74,676 QCs in 2008 (a 5.4% increase).

On the national level, the first quarter of 2009, 1129 staged accident claims were referred for further investigation, according to NICB. This is a 34% increase over the same time period in 2008, which had 845.

Top 10 states for “Questionable Claims” by loss in 2008 were:

1.California (15,609)
2.Florida (6,508)
3.Texas (6,455)
4.New York (6,378)
5.Michigan (2,691)
6.Georgia (2,244)
7.Illinois (2,231)
8.North Carolina (2,194)
9.Pennsylvania (1,881)
10.Arizona (1,854)

Staged auto accidents are no accident, and they are not victimless crimes. They are designed to receive payment for personal injuries and all the costs involved in a seemingly innocent fender-bender. They endanger lives and drive up insurance costs for everyone.

•Fraud costs insurance companies millions of dollars a year in direct and in-direct expenses.
•Every dollar saved on fraudulent auto claims is a dollar spent on protecting safe and law-abiding drivers.

This report was provided to the media from Allstate Insurance.


Protect Yourself From Identity Theft

January 4, 2010

My expertise is in the Risk Management and claims portions of the insurance business. So, I look at nearly every issue as a risk management challenge. And when I consider the risks of identity theft, I must urge you to take some basic precautions.

Identity theft, forgery and fraud are at the highest levels ever. Your finances are at risk like never before. Here are some simple tips that can offer basic protection. All are easy and some cost nothing, yet offer great protection.

1. Order new checks for your checking account and have only your initials (instead of first name) and last name put on them. If someone takes your checkbook, they will not know your first name. The thief will also not know if you sign your checks with just your initials or your first name, but your bank will know how you sign your checks. Shred the old checks you’re not going to use, or the checks you still have from old bank accounts that you’ve closed…or burn them.

2. If you have a PO Box, use that on your checks instead of your home address. If you do not have a PO Box, you might use your work address. Never have your SS# printed on your checks. Do not have any phone number printed on your checks. You can write it on the check if necessary. If a clerk asks you for your phone number, don’t speak it…write it on the check yourself.

3. Do not sign the back of your credit and debit cards. Instead, write “PHOTO ID REQUIRED.”

4. When you are writing checks to make payment on your credit card accounts, DO NOT put the complete account number on the “For” line. Instead, just put the last four numbers. The credit card company knows the rest of the account number, and anyone who might be handling your check as it passes through all the check-processing channels will not have access to it.

5. When you pay your bills, don’t place them in your mailbox with the little red flag up. That’s advertising to the world that you’re sending out mail. It takes less than two seconds for a thief to roll up, open your mailbox and remove your mail. Then, he has your checks and your account numbers. When mailing your payments, mail them at the post office.

6. If you receive an email that looks completely legit from anyone that asks you to confirm or change any of your personal financial information or a password, don’t do it online. Call the Customer Service number on their monthly invoices, and verify if they actually requested the new information. Then, if they did, give them what they need. But most of these emails are scam attempts to get your identity info.

7. Place the contents of your wallet on a copy machine. Copy both sides of each license, credit card, etc. You will know what you had in your wallet and all
of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place. Also carry a photocopy of your passport when traveling either here or abroad. We have all heard horror stories about fraud that is committed on people by stealing a name, address, Social Security number, or credit cards. Don’t be that person.

8. Most hotels and motels use card keys for entry to rooms. When you check out of a hotel that uses card keys, do not turn the “keys” in. Take them with you and destroy them. Those little cards hold all of the information you gave the hotel, including address and credit card numbers and expiration dates. Someone with a card reader, or employee of the hotel, can access all that information with no problem whatsoever. If the hotel desk clerk asks for the card keys at time of checkout, only give them back if the clerk will destroy them in front of you.

9. When you’re paying a restaurant check with your credit card, NEVER sign the credit card slip and just leave it on the table. Make sure you hand the credit card slip directly to the waiter or the manager.

10. Buy a document shredder and shred EVERYTHING that you don’t keep in your financial files at home. Also remember that all of those credit card offers you get in the mail have an application with some of your information already printed on the app. Shred them, too.

11. Buy Identity Theft Protection. Learn more at: Identity Theft Info

Here is some critical information to limit the damage in case your wallet is stolen:

1. Cancel your credit cards immediately. The key is having the toll free numbers
and your card numbers handy so you know whom to call. Keep those credit card company phone numbers where you can find them. Might not be a bad idea to put your credit card company’s Customer Service phone number in your cell phone Address Book. Many credit card companies have a deductible, like $50, on thefts. So, you’d be responsible for the first $50 and they accept the risk for fraudulent purchases above that. But if you cancel quickly enough, the company can cancel the card before purchases start to appear.

2. File a police report immediately in the jurisdiction where your credit cards, etc., were stolen. This proves to credit providers you were diligent, and this is a
first step toward any investigation and verification of any claim.

3. Call the three national credit reporting organizations immediately to place a fraud alert on your name and Social Security number. The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit. There are records of all the credit checks initiated by the thieves’ purchases. It seems to stop thieves dead in their tracks.

Here are the numbers you always need to contact about your wallet and contents being stolen:

Equifax: 1-800-525-6285
Experian (formerly TRW): 1-888-397-3742
TransUnion: 1-800-680-7289
Social Security Administration (fraud line): 1-800-269-0271

4. Call your homeowner’s insurance company. You may have some coverage available for credit card theft if you purchased an endorsement.

Doing these simple actions will give you good basic protection against identity theft.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


Insurance Fraud: The Dumb Criminal Chronicles IV

December 13, 2009

One of the greatest challenges insurance companies face is the ferreting out of insurance fraud. Wherever there is a chance that someone can get paid for submitting a fraudulent claim, there are also stupid people who are willing to give it a try.

Here are some recent examples:

1. The Charging Bull

NEW HAVEN, CT: Connecticut state investigators say have charged Garrett Dalton with felony fraud after he was spotted running a 40-yard dash in a race sponsored by a local radio station. Dalton was collecting worker’s compensation from alleged injuries sustained as a prison guard…otherwise known as a “bull.” Dalton entered a not-guilty plea.

2. Mr. Motion pleads guilty to faking injury

PENNSYLVANIA: The state Attorney General said that Michael Taris tried to make a claim for injuries from a slip and fall in a Seven Eleven store. But then investigators found out that Taris is a professional wrestler with the name “Mr. Motion,” and is trained to fake falls and injuries. Taris pleaded guilty and got three years probation.

3. Didn’t you think someone would notice her missing?

CHICAGO, IL: Donald Brewer was charged with first degree murder in the death of Kenyatae Brewer, 22, his wife and the mother of three kids to collect on her life insurance policy. Mrs. Brewer was found slain in the trunk of her Chevy Monte Carlo, shot multiple times.

She was not available for comment. Mr. Brewer may be unavailable for comment for 40-60 years.

Insurance fraud is serious business, since claims paid on fraudulent claims cost ALL of us higher premiums. It’s no different than shoplifting at a retailer. Stores simply add the cost of their “shrinkage” to the cost of the goods you and I pay for.

Report any suspected insurance fraud to the police. And know that most of the time, criminals get caught.


Insurance Fraud: The Dumb Criminal Chronicles III

December 12, 2009

One of the greatest challenges insurance companies face is the ferreting out of insurance fraud. Wherever there is a chance that someone can get paid for submitting a fraudulent claim, there are also stupid people who are willing to give it a try.

Here are some recent examples:

1. Cops should know better.

COLUMBIA, KY: Donnie and Tina Richmond have been arrested and charged with arson and perjury in the case of insurance fraud on a house they owned. Donnie is a Kentucky State Trooper…or should I say…was a Trooper. They have been indicted and will be tried for the fire that occurred in October 2009.

2. Sharing the wealth doesn’t pay.

Investigators at the Georgia Department of Insurance have arrested the man they allege was the “ringleader” in a fraudulent auto accident scheme that collected over $95,000 from various insurers.

Joseph Morris of Savannah was charged with three counts of insurance fraud. Each count could get Morris ten years in prison.

Morris filed 16 claims involving vehicles he either owned or previously owned, or claims involving people who were associates.

3. If you can skydive, maybe you’re OK.

HUDSON FALLS, NY: Jacob Bancroft, a press operator, claimed a back injury which allowed him to collect insurance benefits for about 18 months until he was discovered skydiving. He also did hot air ballooning, hiking, firefighting and heavy construction. His downfall was when he posted his activities on Facebook.

The video is at: ABC Insurance Fraud Video Clip

Insurance fraud is serious business, since claims paid on fraudulent claims cost ALL of us higher premiums. It’s no different than shoplifting at a retailer. Stores simply add the cost of their “shrinkage” to the cost of the goods you and I pay for.

Report any suspected insurance fraud to the police. And know that most of the time, criminals get caught.