The Insurance Dilemma

Ted Kayes, Chairman, NSS Insurance Committee

Insurance for organizations owning cave properties is a significant, on-going problem. The National Speleological Society expenditure for insurance doubled this fiscal year and it is unlikely to be significantly reduced in the future, though we are trying. An organization’s liability insurance is intended primarily as defense against being sued by non-members. If the Society is sued, the insurance will provide funds for defense and pay the court award, if necessary. Also, and perhaps equally important for larger organizations, liability insurance protects those who lend or rent real property or equipment to the Society, if they are sued as a result of the Society’s use of that property. Without the latter there would be no Convention.

Cave owners may seem to be the subject of discrimination, but I doubt that they are. After all, some of the biggest cave owners have insurance. The NSS, SCC and some of the other conservancies have coverage, so it is available at a cost. Insurance is a matter of large numbers. Auto accidents are common and frequently tragic and expensive. But if an insurance company insures 3,000,000 cars, they can tell you, with an amazing degree of accuracy, how many of each type of claim they will have during the next year and about what they will have to pay out for claims, settlements and court suits. And if there is a particularly large judgement that pushes them into the red in one year, they can be confident that over the next year or two they will more than make that up from all of the other insureds, perhaps with the help of a small rate increase.

The law of large numbers will not work for cave owners. The farmer who has one or more caves on his property is not going to pay extra because of it; likely he never mentioned it to the insurance company in the first place. When you eliminate commercial caves, governments and the other accidental cave owners, whose coverage is for activities not dealing with cave preservation, you are left with fewer than 50 cave owners whose focus is caves. Underwriters, those who cost out the insurance offers, cannot rely on any claim being made up by the premiums from all of the other cave owners.

If you think this unreasonable, consider a hypothetical case. As a cave owning organization you have 10 fairly wealthy members. The organization needs $1,000,000 of liability coverage, so it is proposed that these wealthy members each guarantee to pay up to $100,000 or a proportionate share in the event of a claim. To compensate these members their dues are waived and the organization agrees to pay each of them $2,000 annually for the risk they are assuming (by the way, the $2,000 will be taxable to them.) How many of them do you think will agree to such an arrangement?

But we want an insurance company to provide a $1,000,000 of coverage for $2,000 or less. It is a risk that neither the organization, nor the insurance company can properly calculate.

The cost seems to be unreasonable in many cases, but consider the alternative, self-insurance. It has been proposed that the NSS self-insure for the first $50,000 of claims (a $50,000 deductible) similar to one of the techniques for keeping medical insurance costs down. However, in medical insurance, more than 95% of the claims are for less than $50,000 and a carrier’s expenses would be greatly reduced. With liability insurance there are few claims for less than $50,000 when the cost of the defense is included, so the insurance carrier would see neither a significant reduction in risk, nor in administrative expense. Also, if there were a $20,000 claim, would the insurance company vigorously defend the organization? No, they would likely point out that it is below the deductible and it would be up to the organization to do what it could to defend against it, negotiate it down or pay it.

If the NSS was to self-insure completely and there was a claim, the cost of the defense would rest entirely on the inexperienced shoulders of the NSS. The cost of a defense against a suit could easily climb into the $100,000 range. To avoid that, the Society could find itself settling suits that were less than meritorious, because it could not afford the defense and the possibility of a judgement. This could make the NSS a more attractive target for suits.

Please keep in mind that when two parties go into court, the outcome does not always reflect the relative strength of their respective cases or, in some cases, even the law!!

How did we get to this point and why did the situation change? It is not about 9/11. That event involved relatively few insurance companies, but has been used as an excuse for increasing costs. In reality it was the stock market crash in 2000 and 2001 that set us on this course. During the 1990’s the reserve funds of the insurance companies were invested in the stock market and provided relatively fantastic returns. Many companies made so much on their investments, that it become more important to bring in more premium dollars that could be invested, than it was to properly price the insurance. The earnings on the reserves of insurance companies turned negative in 2000 as a result of the tech crash in the stock market. Everything else follows from that. Many of the property casualty policies that were written in the 1990's carried premiums that did not cover their costs, but suddenly that began to matter. Since then insurance companies have been raising their rates and reducing costs in an effort to make a profit on underwriting and, as with most pendulums, it has swung too far.

Further, some of the companies that were too badly hurt by the crash did not survive which reduced competition. This made it much easier for the surviving companies to increase rates. Also, as part of an effort to reduce their costs, many insurance companies (and brokers) have increased the minimum policy/premium that they will write. One company, which had been writing policies with premiums as low as $25,000, will no longer consider premiums that are less than $100,000. This certainly reduces their administrative costs, but further reduces competition for small policies. In an effort to get coverage for Great Saltpetre Cave, three insurance brokers were contacted, but when they learned that the premium could not be significantly more than $2,000 a year, they just said that it would not be cost effective for them to make the effort. Fortunately the Cincinnati folks were able to find local coverage.

Unfortunately, a cave owning organization that is actively educating the public about caves through classes on the property, cave tours, perhaps permitting picnicking and camping, increases the possible liability. If money is charged for such activities, then the risk is further increased. Once the public is paying for goods or services, their expectations are increased and so are the standards to which the authorities will hold the organization.

To the best I have been able to determine there has not been a caving accident or incident that has caused a loss, thereby setting off this round of non-renewals. (Incidentally, the British cavers have recently lost their insurance coverage, despite having no significant claims.) There appears to be no reason to believe that accumulating caving/accident data will have a meaningful impact on the problem. Collecting reliable data would be amazingly difficult and those real cavers from whom data could be collected are not really the problem. No amount of statistics would provide useful data on the others. Far more important than how safe NSS members are, to the underwriters who understand the situation, is the concern about visitors who may not be cavers or not NSS cavers; they may be Boy Scouts, high school or college kids (possibly drunk,) or a Sunday school group with flashlights. Caves can be looked at as an attractive nuisance, they attract children and trespassers. The best caving statistics available are in American Caving Accidents and it is great, most of the reported accidents are minor. But the occasional mortality would, perhaps unreasonably, really scare the underwriters.

Comprehensive data about how many people go caving, how much they go caving and the type of caving they do is not available. Still, even if that data were available, there are not sufficient cave owners among whom to spread the risk. That is the crux of the problem. The expense of one successful quarter million dollar claim would likely exceed all of the insurance premiums paid by all of the caving organizations in the last 20 years.

If there is a solution to the insurance problem it will revolve around combining the underwriting of cave preserves with other entities (perhaps other nature preserves) so that there will be sufficient insureds over whom the risk can be spread.

For your consideration:

• Try to get coverage locally (property bought from a farmer, especially if he let cavers visit the cave, might be covered by the agent/company that provided coverage to that farmer.)
• Stress the protection provided to landowners by state laws against hunters and trespassers.
• Do not lie about what is being done, but stress the conservation and preservation aspects.
• Karst preservation will sound a lot less threatening in some circles, than cave preservation.
• Particularly if an organization does not have cave in their name or in the name of the preserve, focus on the acreage to be covered.
• Do not put cave in the name of new preserves.
• Review the activities to be conducted on the preserve to determine if they are cost effective (It may be cheaper in the long run to rent a farmer’s field adjacent to the preserve, than to permit camping and athletic activities on the preserve itself.)
• Keep in mind that an organization’s web site will be examined closely by an insurance company prior to them offering a quote.