Insuring Success

Self-reliance in the face of seemingly insurmountable obstacles is a long-cherished element of the American work ethic. It's also something GAWDA members have plenty of experience with, going back to the earliest days of the association, when a group of distributors took it upon themselves to band together and form the National Welding Supply Association for the betterment of the industry as a whole.

That “we can do it!” attitude has permeated many aspects of the industry over the decades, but perhaps none more so than the issue of insurance coverage. More than once in the association's history, distributors have come together, independent of the association itself, to tackle insurance crises facing the industry—not just for their own good, but for the good of their fellow distributors. Today, as the industry faces the looming threat of welding fume litigation and the subsequent disappearance of coverage for welding rods, a new team of distributors is tackling the problem head-on.

WESCAP
Welding fume litigation is by no means the first insurance-related issue GAWDA members have come together to confront. In the mid-1970s, welding distributors were facing an exceptionally tight insurance market, to the point where many distributors couldn't obtain even the most basic coverage. A small group of distributors, seeing disaster on the horizon, realized they needed to do something, and quickly.

The idea they came up with was to form a captive insurance company, which is a special class of insurance company owned and capitalized by its policyholders, who generally are non-insurance entities. The insurance captive, called WESCAP, would be able to provide coverage for the gamut of distributors' insurance needs. The question was whether the distributors would be able to launch the captive quickly and make it a success.

South Jersey Welding Supply (Vineland, NJ) President Robert Thornton Jr.'s father, the late Robert Thornton Sr., was among the founders of WESCAP in 1976. “There were about 12 to 15 distributors at the beginning,” says Thornton. “They started a fundraising campaign in September because they were going to be totally without insurance by the end of the year. They went out and raised over a million dollars and had it ready to go by that December.” WESCAP proved a lifesaver for the industry, and soon several hundred distributors were on board.

“WESCAP was the fronting carrier that carried up to $100,000 of the exposure, and then they had reinsurance beyond that, which moved between a couple of different companies in the time period that WESCAP was writing insurance,” says Jim Madison, president of Prest-O-Sales & Service (Long Island City, NY), whose father, Ed, was also among the original members of WESCAP.

However, as is the nature of the business, the forces in the insurance market that drove the founding of WESCAP soon turned. In the 1980s, the market softened significantly, and other insurance companies once again began writing coverage for welding supply distributors—and at much more attractive rates. “Many distributors weren't willing to pay the higher premiums associated with WESCAP,” says Thornton. “A lot of people didn't stay with the program, to the point where WESCAP wasn't competitive any longer.”

WESCAP stopped writing insurance on July 1, 1988, but the captive insurance company still exists, overseen by a board, of which Jim Madison serves as president. Of the capital contributions that were made into WESCAP, $1.10 on the dollar has been paid back to every member that could be found. However, as long as potential exposures—such as asbestos —exist, the captive insurance company can't be collapsed completely. “We're basically administering the portfolio at this point,” says Madison. “We have substantially more assets than we do exposure and liability.”

Welding Fume Litigation
Less than two decades after GAWDA distributors confronted the insurance issues that drove the creation of WESCAP, a new threat emerged on the horizon: welding fume litigation. By the early 2000s, what might at first have seemed like a distant concern became a more immediate one as lawsuits multiplied and insurance companies took notice. Distributors were caught in the crossfire as insurance providers began to eliminate welding rod fume litigation coverage from their policies, leaving distributors wide open to potential risk.

After a presentation on welding fume litigation by Katherine Henry of Dickstein Shapiro Morin & Oshinsky LLP at a 2004 Spring Management Conference, Sky Oxygen (Carnegie, PA) Vice President Laurie Waller approached then-GAWDA President Wally Brant, president of Indiana Oxygen Company (Indianapolis, IN). “I wasn't quite yet in a full-blown panic, but it was something close to that,” Waller recalls. She expressed her concerns to Brant, asking what distributors could do to combat the growing problem. Brant, in turn, asked her to head up a task force to investigate available options. “At that moment, I wasn't sure exactly what I was going to do,” says Waller. “So I started calling other distributors.”

In August 2004, an exploratory group convened in Pittsburgh—composed of distributors from small, mid-size and large companies, including a handful of GAWDA past presidents—for a day of education provided by a Pittsburgh law firm and a large national insurance broker. One of the group's initial ideas was to resurrect WESCAP, which could provide insurance for more than just welding fume litigation. However, given the obstacles WESCAP's board had confronted in trying to shut down the captive, some distributors were reluctant to go that route again.

It was Brant's insurance carrier, Gregory & Appel Insurance in Indianapolis, who first suggested a promising alternative: a risk retention group. A risk retention group (RRG) is a liability insurance company owned by its members, who must be engaged in similar business, and formed under the provisions of the Liability Risk Retention Act of 1986, which Congress passed in response to the low availability and high cost of commercial liability insurance. Unlike a captive insurance company like WESCAP, which wrote a variety of different lines of insurance, a risk retention group would allow the distributors to isolate the risk associated with welding rod fumes and provide only the coverage they needed.

In 2005, the task force met again in Philadelphia and opened the floor to three insurance brokers who'd done business in the welding supply distribution industry. After listening to their presentations, the distributors agreed that the risk retention group proposal made the most sense. It was time to turn their ideas into action.

NationWeld RRG
When asked what steps the task force had to take to establish a risk retention group, Brant chuckles: “A lot more than I ever dreamed!” The group entered into an agreement with Gregory & Appel Insurance to underwrite and administer the plan, and they in turn recommended Sarasota, Florida-based Risk Services to help the distributors through the steps of setting up a risk retention group. Although those two companies have taken care of a lot of the “grunt work,” there were plenty of steps left over for the distributors.

After the group's meeting in Philadelphia, the full task force met via teleconference several times and elected an executive committee, consisting of Wally Brant as president, Jim Madison as vice president and Laurie Waller as secretary/treasurer. Brant, Madison and Waller met with insurance representatives in November 2005 and spent a full day developing a formula to be used when establishing premium rates, based on an individual distributor's level of risk.

“It's very, very important that every applicant be treated in the same fashion,” explains Brant. “We had to determine the different factors that constitute the formula, such as whether a distributor had been sued in the past for welding fumes, the degree of litigation in the distributor's state, and the size of the distributor's welding rod and wire sales.”

In the end, eight members of the original exploratory group voted to become founding members of the risk retention group, which they named NationWeld RRG. These eight members have contributed not just time, ideas and the benefit of their varied experiences in the industry, but also money, including funding for various steps of the regulatory process and letters of credit amounting to $125,000 each in order to allow NationWeld RRG to be capitalized with $1 million.

After two years of hard work, the risk retention group's license was issued in the District of Columbia in June 2006, which allowed NationWeld RRG to begin providing coverage, including retroactively to the time a distributor's previous welding rod coverage ended. It was a proud moment for NationWeld RRG's founding members.

“I've learned more about insurance during this process than I ever thought I would,” says Waller. “We had to stay focused on what we were attempting to do to stay together as an industry to protect ourselves. If a lot of distributors join the risk retention group, that will give all of us more legal control in how we deal with claims, and we'll have a lot more consistency as an industry.”

Though the risk retention group is not a GAWDA-sponsored enterprise, Brant gives the association a lot of credit for its support. “GAWDA looked at our efforts and said, this seems like something that is good for the industry,” says Brant. “They offered their conference rooms for our meeting in Philadelphia, and they gave us a lot of encouragement because they recognized the need as well.”

Thornton believes that the founding members' experiences in GAWDA are a large part of what will contribute to the success of NationWeld RRG. “GAWDA's very unusual in how people band together and attack a problem,” he notes. “NationWeld is an example of the cooperation and planning distributors can accomplish based on the way they interrelate in GAWDA.”

The Future
If the risk retention group proves a success, the board hasn't ruled out expanding its offerings to include other types of insurance coverage, such as general liability or workers' compensation. “But right now, that's not the need,” says Brant. “We're doing this one step at a time, and the need right now is for defense and protection against judgments from welding fume verdicts.”

Waller recognizes that not every distributor views welding rod litigation as a major threat, especially in light of recent defense victories, including the Solis decision in June. “We are having some great positive momentum on the defense side, but if you look at the history, asbestos did very well for a long time too before the plaintiff verdicts started coming in,” she points out. “I hope that distributors will take the welding rod threat seriously and start protecting themselves, whether that means getting indemnity agreements from their manufacturers or looking at buying insurance. If one person's unprotected, it's a hole in the industry for all of us. It really is a team effort.”

And as the founders of WESCAP and NationWeld RRG know, an enterprise—or an industry—is as strong as the dedication of its team members.