Big I Virginia, Winter 2015 by Blue Water Publishers, LLC

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WINTER 2015

BIG I The

Official Publication of the Independent Insurance Agents of Virginia

Virginia

Nettie Ardler, CPIW, DAE, AIAM Insurance Account Executive aardler@iiav.com Robert N. Bradshaw, Jr., MAM President & CEO rbradshaw@iiav.com cell (804) 929-4134 Teri Chester Executive Secretary/ Receptionist & Membership Coordinator tchester@iiav.com Sherry Grubbs, AISM Accounting Manager sgrubbs@iiav.com Joe Hudgins, CPCU Technical Consultant jhudgins@iiav.com cell (804) 929-4138 Bonnie Joyce Insurance Administrative Assistant bjoyce@iiav.com

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia 8600 Mayland Drive, Richmond, VA 23294 Phone: 804.747.9300 / Toll-free: 800.288.IIAV (4428) Fax: 804.747.6557 E-mail: members@iiav.com / Website: www.iiav.com

Inside this issue

IIAV STAFF

Melanie Kjar Communications/Website Director mkjar@iiav.com

6 8 10 12

Message from the Chairman of the Board - William H. Talley, IV, CIC Message from the State National Director - James P. Bradner Message from the President and CEO - Bob Bradshaw Certificates on Policies Written Through Wholesalers

14 16 26 28 30 34 36 42 44 45

Highlights from the 2014 IIAV Young Agents Conference The Importance of E&S Markets 13 Caveats Using E&S Markets Connecting Agents with Download Managing Emotions in the Workplace In the Event of an E&O Claim - You’ll Need a Good Lawyer Minimizing E&O Exposures From Excess Surplus Lines Rainmaking With Personal Umbrellas What Would You Do If Your Agency Had a Data Breach? Data Breach? Don’t Become Part of the Statistics

IIAV extends our appreciation to the following sponsors of this publication:

Linda Loving, CIC, AISM, AIAO IIAV Chief Operating Officer & VFSC Executive Vice President loving@iiav.com cell (804) 929-4133

AIM / Bloss & Dillard Agency

JMWilson 31

Anderson and Murison

Jackson Sumner & Associates

Atlantic Specialty Lines

Johnson & Johnson

24, 25

Atlas General Services

Millers Mutual Group

Danny Mitchell Vice President Business Development dmitchell@iiav.com cell (804) 929-4135

Builders Mutual Insurance

Nationwide 15

Coastal Agents Alliance

Susan E. C. Perkins Membership/Education Coordinator sperkins@iiav.com Kristina Preisner IIAV Director of Education & VAIA Executive Director kpreisner@iiav.com Marie Toney Sales Associate mtoney@iiav.com cell (804) 929-4136 Bonnie J. Warren, ACSR, CPIW, DAE, RPLU Insurance Account Executive bwarren@iiav.com

IIAV is an organization devoted to promoting, enhancing, serving and assisting independent insurance agents.

THE BIG “I” VIRGINIA • Winter 2015

Burns & Wilcox

Penn National Insurance

Preferred Property Program

FCCI Insurance Group

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Harleysville Insurance

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For information on advertising please contact: Jim Aitkins, Blue Water Publishers, LLC / 22727 161st Ave SE, Monroe, WA 98272 phone: 360.805.6474 / fax: 360.805.6475 / jima@bluewaterpublishers.com

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia and is published quarterly by Blue Water Publishers, LLC. IIAV and Blue Water Publishers, LLC do not necessarily endorse any of the companies advertising in the publication or the views of its writers.

3 21 5 31

Strong Agencies Made Stronger

For over 30 years Iroquois has helped make strong, independent agencies even stronger and more independent. And it shows.

LEADERSHIP Iroquois recognizes some of its members who have recently played key leadership positions within the industry: Ryan M. Andrew

Douglas B. Megill

John W. Atkins, III

Crystal Miller-Johnson

Barry K. Carper

J. Vince Mullins

W. Montgomery Dise

Michael Partlow

Dawn Dotson

Jordan Reynolds

Michael F. Funkhouser

Robert T. Short

Frances P. Garrett

Dennis C. Winfree

Shannon H. Herring

Benjamin G. Winters

VFSC Board of Directors The Andrew Agency, Inc.

District 5 Director, IIAV McLean Insurance Agency, Inc.

President, VFSC Board of Directors Lewis Insurance Associates Immediate Past President, PIA of VA & DC Insurance Center of Winchester Second Vice Chair, IIAV Asset Protection Group, Inc.

First Vice Chairman, IIAV Associated Insurance Systems Services, Inc. Board Member, PIA of VA & DC Huffman Insurance Agency, Inc. VFSC Board of Directors Partlow Insurance Agency, Inc.

VAIA Board of Directors Robins Insurance Agency, Inc.

Independent agents with premium from $1 million to $100 million join The Iroquois Group® for market optimization and strategies to increase their revenue, profits and agency value—without giving up their independence.

Board Member, PIA of VA & DC SWVA Professional Insurance Agency, Inc.

Vice President, VFSC Haun Magruder Inc.

Immediate Past Chairman, IIAV Short Insurance

Past President, PIA of VA & DC Chas. Lunsford Sons & Associates, Inc. Young Agent Liaison, IIAV Hubbard Insurance Agency, Inc.

VAIA Board of Directors Wood Insurance Agency District 3 Director, IIAV Winters Oliver Insurance Agency

Edward C. Kellam, Jr. District 2 Director, IIAV Ware Insurance

The

IROQUOIS Group

To learn more about how Iroquois could further strengthen your agency, contact Matt Ward at 804-320-6984 or mward@iroquoisgroup.com and visit our website at www.iroquoisgroup.com

Winter 2015 • THE BIG “I” VIRGINIA

Chairman of the Board William H. Talley, IV, CIC wht4@whts.com

n today’s ever changing insurance environment, the Excess & Surplus houses and Wholesalers plays a vital role in the success in all of our agencies. Many of our smaller and newer agencies are extremely unfamiliar with the availability and use of Excess & Surplus Marketplace in general. They are not familiar with their existence and certainly less familiar with how they can become a valuable resource for their agency. The surplus lines market serves an important function in our industry. Many times certain niche coverages your clients may need to cover unique risks may only be available on a surplus lines basis. However, it is extremely important that producers understand the differences and nuances in placing business with non-admitted carriers and must be made with prudence while thoroughly informing your client of the circumstances involved when acquiring coverage through this market. First, it is important to know that regulation of non-admitted insurers is extremely limited and, in some respects, non-existent. If the insurer is non-admitted carrier there is no protection being provided by the Virginia Property and Casualty Insurance Guaranty Association. Since surplus lines insurers do not necessarily utilize standardized forms, you

THE BIG “I” VIRGINIA • Winter 2015

cannot make any assumptions as to what is covered. Reading the form is the only way to know what coverage is provided and even then may be subject to interpretation. And finally, if price is a driving consideration for the consumer, you certainly want to fully explain the “buyer beware” conditions that come along with those savings and thoroughly discuss coverage differences relating to the placement so the consumer is making his or her decision with their eyes wide open. With all this being said, the brokerage business can rapidly change regarding market access and appetite for classes of business. By doing business with ABC Surplus Broker today may differ greatly by next month. An agency can access Both Standard and NonStandard markets via brokerage with access to Personal Lines becoming more common. Remember when you partner with any one of our outstanding E&S Broker associate members, their main focus is to compliment and add to the relationship by finding you a solution for those areas that your standard companies won’t or can’t provide. Whether you need them once a year or need them twice a day, our E&S Broker Partners stand ready to help each one of us by providing markets to help increase our agency’s revenue!

Winter 2015 • THE BIG “I” VIRGINIA

State National Director James P. Bradner jbradner@towneinsurance.com

s your representative on IIABA’s board of directors let’s look at the issues and opportunities facing us on the National level. Of course the BIG item is TRUSTED CHOICE. It’s been 15 years since Trusted Choice’s introduction as a designation within the IIABA family to allow agencies to show a superior level of service and expertise over fellow IIABA agencies. It was a flawed concept that needed to change or go away. Well, what’s been done with it is remarkable. If you look at what our direct writer competitors spend on advertising and brand recognition (I’m told Geico spends almost $ 1 Billion on the lizard each year) the independent agency system can’t put those kind of Warren Buffett resources to work. So what do we have to go against the dollars spent by our competition? We have thousands of large and small businesses located in cities and towns throughout America. We have numbers and influence. Trusted Choice has evolved into our identity, our gecko, so to speak. Remember CAP, the website where consumers could go to and get “quotes” on personal auto? Well, that’s

THE BIG “I” VIRGINIA • Winter 2015

now TrustedChoice.com…and it’s evolved also, now offering information on commercial lines and driving business to agencies who participate. Four years ago the National Board voted to go “all in” on Trusted Choice. That means all agencies that are members of IIAV are automatically able to access Trusted Choice. Our insurance company partners have embraced Trusted Choice. It’s time, whether your agency is large or small, to understand and participate in this “game changing” effort to brand our business, the best business model to deliver our very valuable products. To get started call Danny Mitchell at IIAV. You won’t regret it! One quick word or two on INSURPAC. As I write this article, it is 2 weeks before the mid-term election. As you read it we’ll know the results. Hopefully we’ll be pleased with the results!! A $50 or $100 donation to INSURPAC helps make sure we have a voice in dealing with the Federal issues we face. Things like Flood, TRIA, Federal intrusion into our State regulated businesses, NARAB II and who knows what else those guys can think of….look at it as an investment.

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President and CEO Bob Bradshaw rbradshaw@iiav.com

Surplus Lines Brokers Are Our Friends!

ecently we’ve been working on some pretty contentious legislation related to transportation network companies like Uber, Lyft, Sidecar and others. Our interest is making sure that riders and others are adequately protected from TNC drivers in the case of an accident. The taxi cab industry of course is objecting to virtually any regulatory exclusion as it would place the taxi industry at a competitive disadvantage – and it’s difficult not to see their point. Sometimes, however, the taxi industry is grasping at straws in their objections to TNC business practices, at one point saying that Uber’s announcement of providing insurance through a surplus lines carrier was somehow not adequate and that the insurance was suspect. I sent the taxi lobbyist a strongly worded email stating something to the effect of “wait one darn minute” and “don’t go in that direction” or we can part coalition partners right now. Having said that, the taxi industry needs to take a look at their own coverages. Our surplus lines/non-admitted carrier partners serve an important need in the difficult or unique to insure market. I have no doubt that sometime soon some company on the admitted market side will come up with a product for TNC’s. However, to date there appears to be one specific companying willing to write TNC’s and that’s to be applauded. Sometimes the only way to get

THE BIG “I” VIRGINIA • Winter 2015

coverage is through the non-admitted market and all I can say is thank goodness they are there. Otherwise there would be greater political pressure to put political interests in the middle of coverage decisions on the admitted market. Sometimes there are greater risks on the surplus lines market….and they’re priced accordingly. That’s to be expected. If you’re going to build that $1 million house on a sand dune…. yep, that’s probably only going to be written on the non-admitted market. You pay for what you need. Remember a couple of years ago, before you were able to write on the surplus lines market, you had to get three declinations from the admitted market? How absurd was that? Perhaps that was necessary some time ago but it is simply not necessary today. IIAV was instrumental in getting that requirement stricken from the Code. In fact, I got a call from a gentleman upset that I didn’t get that bill passed in New Jersey! Sorry but New Jersey isn’t exactly my responsibility. Many IIAV members are surplus lines brokers and companies are our members. We ask that you support them and get to know them. In time of need, they can be your best friend! And you can get to know many of them at the IIAV Convention and Trade Show in Virginia Beach on June 22, 2015 so mark your calendar now. You must have known I would get that plug in somehow, right?

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11 11

Certificates On Policies Written Through Wholesalers

hen a certificate of insurance is needed on a policy written through a wholesaler, an entirely new set of issues arises for the retail agent.

(Note: For the purpose of this article, the term “wholesaler” means any insurance entity that serves as an intermediary between a “retailer” – an agency that has direct contact with an insurance policy holder or prospect – and the insurance company that serves as the risk-taker on an insurance policy. Wholesalers are known by a variety of titles, both by themselves and the rest of the insurance industry including broker, managing general agent, surplus lines agent or broker, and program underwriting manager. In this context, it can even mean a retail agent that allows another retail agent to “broker” a policy with the former, because the latter doesn’t have a market for the account.) Many wholesalers do not have the authority to issue certificates of insurance for at least some of the companies they represent. In conversations with several wholesalers, some do not issue certificates because they don’t want to – they either refuse to provide certificate service or they tell the retailer to issue certificates as needed. Some retailers apparently are under the mistaken impression that they have the authority to issue certificates of insurance on business written through wholesalers, when in fact they do not. Note Virginia Code 38.2-1801 A. A licensed agent shall be held to be the agent of the in12

THE BIG “I” VIRGINIA • Winter 2015

surer that issued the insurance sold, solicited, or negotiated by such agent in any controversy between the insured or his beneficiary and the insurer. No licensed agent or any other person shall claim to be a representative of, authorized agent of, agent of, or other term implying an appointed relationship with a particular insurer unless such agent has become an appointed agent of that insurer. For the purpose of notice of claim or suit, the agent or producer of record shall be deemed to be the agent of the insurer. In the case of policies of life insurance, accident and sickness insurance, annuities and variable annuities, such notice shall be given to the insurer at its home office as shown in the policy of insurance. This section clearly states that a licensed agent shall be held to be the agent of the insurer that issued the insurance sold, solicited, or negotiated by such agent in any controversy between the insured or his beneficiary and the insurer. It further states, “No licensed agent or any other person shall claim to be a representative of, authorized agent of, agent of, or other term implying an appointed relationship with a particular insurer unless such agent has become an appointed agent of that insurer.” The Bureau has seen violation of this section when agents sign certificates of insurance and binders representing themselves as authorized representatives or some other term for an insurer with whom they are not appointed. This most often occurs when agents broker business through other agents and agencies. An agent should not sign as the authorized representative on any document for an insurer for whom he or she is not appointed unless the agent has the

All roads lead to Interstate.

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Winter 2015 • THE BIG “I” VIRGINIA

express written permission of the company granting authorization to issue such a document. If an insured requests a certificate of insurance from an agent who brokered a policy and the agent is not appointed with the company that issued such insurance, unless the agent has the written permission of the insurer to issue documents on its behalf, the agent should instruct the insured to contact either the insurer or the agent with whom he brokered the business to obtain the needed certificate or other documents. The ACORD instruction guide includes the following statement concerning the Authorized Representative section of the certificate: Form must be signed by an agent, broker, or other representative authorized by all companies to issue certificates. E&O RECOMMENDATIONS SPECIFIC STEPS TO DECREASE EXPOSURE Below is a summary of steps the agency can do take reduce its exposure to E&O claims from certificates of insurance: 1. Make sure all staff is aware of state regulations and penalties relating to issuing certificates. 2. Be up front with your customers that the agency will only provide current, accurate information on certificates. 3. Establish a procedure for handling certificates. 4. Consider discontinuing contract reviews for customers and instead ask them to provide insurance requirements within the contract for the agency to review. 5. Always use the current editions of ACORD forms. 6. Never modify ACORD forms in any way without the express consent of ACORD. 7. Remember it may be a filed form in your state as well. 8. Never issue a non-ACORD form without the written approval of the insurer. 14

THE BIG “I” VIRGINIA • Winter 2015

9. Always send all of the pages of the certificate. 10. Only indicate coverage that exists at the time of certificate issuance and never specify coverage that does not exist. 11. Be sure qualified staff members handle these important transactions because of their level of complexity. Portions of this information was reproduced from IIAT publication “ Best Practices for Certificates of Insurance”, “Common Problems found During Agent Investigations” by the Virginia Bureau of Insurance, “E&O Risk Management: Meeting The Challenge of Change” by IIABA with additional information by Linda Loving of IIAV.

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The name and likeness of Dale Earnhardt Jr. and other related trademarks and copyrights are used with permission of Hendrick Motorsports, LLC and JR Motorsports, LLC. Paid endorsement. © 2012 JR Motorsports, LLC. NASCAR® is a registered trademark of the National Association for Stock Car Auto Racing, Inc. The NASCAR Nationwide SeriesTM logo and word mark are used under license by the National Association for Stock Car Auto Racing, Inc., and Nationwide Mutual Insurance Company. Nationwide, the framemark and On Your Side are service marks of Nationwide Mutual Insurance Company. © 2014 Nationwide Mutual Insurance Company. All rights reserved. Underwritten by Nationwide Life Insurance Company. EBO-0156VA (01/14)

Winter 2015 • THE BIG “I” VIRGINIA

The Importance of E&S Markets While there are issues that agents should be aware of when using E&S markets, in an increasingly hard market, we think it’s time we pointed out the many pluses that E&S markets bring to the table. To do that, we polled our faculty and a number of agents and risk managers from around the country and the world.

he traditional use of excess and surplus lines (E&S) markets has been to place what is considered less desirable or more risky business. That definition has not changed in the new, tougher market we face

today. What has changed is many standard insurers’ definitions of “desirable” and “risky.” More independent agents and brokers are finding that surplus lines carriers are much more eager for their business while standard carriers are finding reasons to avoid it. Presently, most standard carriers require that a business be operating and have insurance for at least three years and possess a proven track record with few or no losses. Many small business accounts cannot meet these qualifications. Therefore, when they find that they do not qualify for standard markets, it is time to turn to the specialty markets to fill their needs. Two years ago, these same accounts would have been gladly accepted by almost any standard company. But now they are not ‘desirable.’ There is too much ‘risk’ involved.” Independent agents and brokers say they are finding that many of the same stringent underwriting criteria applied during previous hard markets are being re-employed by standard markets today. Surplus lines have consequently become a necessity to write almost any account with an unacceptable level of risk that will cause an underwriter to either rate up an account, exclude a vital coverage on an account, or decline to renew or even quote a new account. Therefore, the E&S market has emerged as a critical industry component. In the ’80s, his agency placed business with a huge stable of standard markets that could handle almost everything they had. Using an E&S market was uncom-

THE BIG “I” VIRGINIA • Winter 2015

mon—usually for special events cover or certain types of professional liability. Now the starting point seems to be the E&S markets. “In 1983, I could get 20 quotes on a high-rise condo building and have underwriters brawling in the hall in hopes of getting the order,” one agent told me recently. “Today I can’t get three.” The Independent Insurance Agents & Brokers of America (IIABA) has responded by helping agents better understand and use specialty markets by providing them an online gateway to connect member agents with select insurance company partners and a host of specialized insurance products and services with no volume commitments or access fees. The program handpicks its highly rated insurance partners and provides agents efficient access to underwriting and coverage information, program administrator and insurer credentials, educational tools and policy forms. Furthermore, IIABA also offers independent agents free access to hundreds of specialty lines through an online specialty insurance network. By calling a toll-free number and using a directory of four-digit access codes for the specialty lines they need, agents and brokers are immediately faxed information about MGAs and underwriters who are ready to help them. If the current hard market is anything like past cycles, count on the amplified use of E&S markets due to increased

We look for the best independent agents and build relationships that last the duration. We are committed to the independent agency system as the only means to deliver our products. Because of that, we work hand-in-hand to help our agencies grow profitably.

Our agents set us apart. Business • Surety • Auto • Home

www.PennNationalInsurance.com Visit our website to find out more. Winter 2015 • THE BIG “I” VIRGINIA

demand and the inability of admitted markets to get regulatory approval of coverage reductions or rate increases. One broker in Fort Lauderdale, Fla., is finding that “most of the surplus lines markets are swamped with submissions and it is difficult to get a quote in a timely manner for your client or prospect.” He then went on to echo the sentiment of many independent agents and brokers by adding, “I am thankful that they are a market during this difficult time.” In developing the preceding information, we polled the VU faculty, along with a number of agents and risk managers from around the country and the world. Below are their observations about the value of E&S markets (along with a few complaints too. The traditional use of the Surplus Lines or Brokerage market has been for use on the less desirable and therefore hard to place and more risky classes of business. That definition hasn’t changed in the new, tougher market we face. What has changed is the standard insurance companies’ definition of “desirable” and “risky.” No, I’m not going to talk like an old timer and say something like, “In the good old days...” because I started in this business in 1970 and there was a really HARD market going and blowing back then. I know what it was like then, and it seems that many of the same tactics are being newly reemployed by standard markets today. Surplus likes has now become a necessity to write almost any standard account that has a spot of underwriting “Goo” on it. (My definition: “Goo” is anything that will cause an underwriter to either rate up an account, exclude a vital coverage on an account, or decline to renew or to even quote a new account.) In the present marketplace, most standard carriers require three years in business with insurance and a proven track record of little or no losses via loss runs. Most small business accounts cannot meet those qualifications. Therefore they are covered in “goo.” So, when they drop into an agent’s lap and ask for coverage, (Oh no, a lap full of goo!) or when an agent asks for their business only to find out that they don’t qualify with his standard markets (gooier), he must turn to the brokerage houses to fill those needs. Now, two years ago, these same accounts would have been gladly been accepted by almost any standard company, but now they are not “desirable” (gooie). The good agency will have already established a good working relationship with several brokers who can help him out. The good agent will always send a faxed or emailed, completed application to the broker and will not ask for ASAP service unless he really needs it, and then only as an exception. The good agent is familiar with the broker’s appetite for the risk, the rates and audit procedures and, most importantly, the exclusions and exceptions to 18

THE BIG “I” VIRGINIA • Winter 2015

standard ISO forms of the carrier/broker. He will sell these idiosyncrasies to the customer, as the needs of the customer dictates. Now that’s a mighty fine set of words but what do they mean? Got any goo on ‘em pardner? For instance, there is a crisis of some proportions in my state for small contractors. A major market that had been writing them has pulled out and left many contractors asking we agents for coverage. All standard markets require prior coverage and many will not tolerate a lapse of more than 30 days (no goo on their new accounts). Almost all standard markets will not write a general contractor who subs out more than 50% or 75% of his work. (These are really gooie according to these underwriters!) These are called paper contractors or contract managers. (Gooier contractors?) Some contractors have let their expiration slip up on them and have not sought other coverage in a timely fashion. (Gooiest contractors?) Many subs are now looking for coverage for the first time. (Gooie subs?) The ONLY market for them is surplus lines. (The gooie stoppers?) Ok, OK, I’ll stop with the goo now! You have my permission to un-goo the above if you want. (It was fun while it lasted!) We represent one broker that has a General Liability program for new subs and even paper contractors. They have a specialty application that is simpler and easier than an ACORD Application. They publish their rates (which are

reasonably competitive, but usually higher that a standard company’s rates) and they pay a reasonable (by today’s standards) commission (8-10%). We also have another standard company that will accept the contract manager, home builders, but they have been inundated with so many applications that they have demanded a 30-day underwriting look before they will approve any new business, and they have put all of their agents on a quota system for new business issued in 2003 because they cannot hire and train people to write any more than that volume of new business. Pretty smart on their part, but lousy tactics if you are trying to write a lot of new business as an agent. We had relied on one broker for “quickie” quotes of small contractors and paper contractors until they started requiring draconian steps to be taken for a general contractor to be covered for work done by a sub. They wanted certificates with additional insured endorsements on them, on file in the general contractor’s office, before any work was done by the sub. A noble ideal, yes, but a near impossible task for most contractors who are good about getting things done, and not so good about the paperwork that is needed. They tend to do the paperwork last. The problem was that the broker’s policy had a warranty in it that said there was no coverage unless these things were done in a very strict manner. There were no exceptions allowed in the policy/endorsement wording.

Needless to say, we do not write that type of account with that broker any more. We still do business with the broker because they were kind enough to point out to us that it was a bad policy provision. We’d like to think that all brokers would do the same. This just goes to show you that an agent must be very careful of the policy forms and those pesky exclusions and “additional conditions” imposed by some of the surplus lines carriers. Most brokers are good about telling an agent about these items, but some agents may tend to focus on the price and limits of coverage and only read the fine print after a loss has been filed and denied. Then it’s time to call his E&O carrier. The good broker will publish rates for most of the common policies either on the web, in a set of manuals which are distributed to “selected” agents, or which actually appear on a specialty application. A better broker will allow agents to fax completed applications to them and get rate confirmation or a rate quote over the phone back the same day. The best broker, in my opinion, will let the agent rate it and send it in for issue and a binder that same day, as long as it meets certain set guidelines. No binding authority, but as close to it as you can get without actually having it Good brokers require an agreement that sets the relationship between the broker and the agent on a formal basis and clearly outlines who is responsible for premium payment, audits, claims processing, binder and certificate issuance and commission payment terms. Good brokers will have been around in the business a while and already enjoy a fairly good reputation within the agency community. Good brokers will change underwriting companies and rating structures to keep pace with the growing demands we agents are placing on the surplus lines marketplace. Good brokers will NOT try to go direct to the customer and bypass the agent. Agents have long memories. From an agent’s perspective, a big problem is the Surplus Lines / Managing General Agents not proposing per the application. They do not address the coverage requested, and omitted from their quotation. A big E&O exposure, and must be watched very closely. Most of the Surplus Lines markets are swamped with submissions and difficult to get a quote in a timely manner for your client or prospect. I am thankful that they are a market in this difficult time. The standard insurance companies are not Winter 2015 • THE BIG “I” VIRGINIA

doing much to take up the slack. As a risk manager, my question is: Does the “Standard Market” still exist? With a couple of exceptions, I haven’t had a major line of coverage placed with a standard market in many years. Maybe it’s just the nature of the companies I have worked for but I don’t think so. When I was an agent in the 80’s we placed business with Big Aetna, Little Aetna, Buckeye Union, Cincinnati Insurance, CNA, Commercial Union, Fireman’s Fund, Great American, Hartford, Home, IRI, Maryland Casualty, Mission, Royal, St. Paul, Travelers, others I don’t remember, and numerous regional insurers. A huge stable of standard markets that could handle almost everything we had. Using an E&S market was an uncommon occurrence, usually Special Events cover or certain types of Professional Liability. Now the starting point seems to be the E&S markets. In 1983 I could have had 20 quotes on a high rise condo building and underwriters brawling in the hall in hopes of getting the order. Today I can’t get 3. As an underwriter in 1974, my personal underwriting authority on the best property was $22,000,000 (in 1974 $’s). You rarely get that capacity today from any market other than one or two, at least on the primary layer. So what exactly does the so called “Standard Market” actually write? Welcome to the hard market and the way it, reinsurance, capacity, risk, underwriting, etc. work. Sometimes it only applies to a type of risk, an industry, a line of coverage, etc. No different from the stock market. Money flows to the areas with a better possible return. OR it flows to where the carrier can transfer risk to a third party. OR it flows to a party that has sufficient size or volume to quantify risk. OR it flows (if there is a true underwriter) to the better qualified risks (here you may have a point. But this always happened in a hard Market! But, there

THE BIG “I” VIRGINIA • Winter 2015

are fewer underwriters in the field, now. But, there are fewer carrier management around for the long term. But, But, But........ I remember in 1985-86, no one was writing D&O, or wanted to write utilities. New companies started when prices when up. I also remember there was only one lead umbrella underwriter and few below 25 million during the same period. I remember in the early 70’s only one carrier in the US and maybe the world wrote coverage for pharmaceuticals (maybe I should even say one underwriter) I even remember when there were only one or two GL forms that did not exclude D&O, EPLI, Pollution, Discrimination, etc. Gee, a small deductible or tabular retro plan was ART! I remember when no one would write Hospitals in the 70’s and 80’s and, if they did, they wrote it at 150% of the aggregate limit and you need to keep in mind that then there were few, if any, general policy aggregate limits like we see now. Unfortunately, when you look around the carriers, the people that were good underwriters may now be in the E&S market and have the trust of the companies they deal with (many are standard markets but a different side of the house), or the programs they set up. Unfortunately, in a hard market those wholesalers or E&S markets that did not protect their program with good underwriting are in the same boat as everyone else looking for markets to write their program. I could go on and on, but to KISS it, nothing has changed, just the emphasis of the market in the times we are in and following similar patterns as the past. Boy, now I really feel old. I work in an industry that for years has been insured by the E&S/surplus lines market. That industry is Public Housing (i.e., government housing for indigent and disabled individuals). The E&S market plays a vital role that the standard market will not. I believe this is because of

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misperceptions and bad loss experience by the standard market because it does not have the time to learn the companies they do business with. When I mention Public Housing to insurers, they perceive crime infested projects in inner cities; the insurers automatically say we won’t insure that. Yet most public housing in the USA is a great risk to write if you know the industry. In the industry I work in, decisions to not insure housing authorities is made by staff at insurance home offices which are located in big inner cities where underwriters see and hear horror stories of the local big bad housing authority and they throw out the proverbial baby with the bath water Yet I can show you thousands of housing developments across the United States that are owned by housing authorities and that people are not afraid to live in. I’m talking about properties that you would not mind living in. I have this reoccurring fantasy of going to an underwriters’ convention and showing pictures of beautiful housing in really nice neighborhoods and then revealing who owns those buildings (housing authorities), but we do not need the competition. The 17 captives insuring housing authorities in the U.S. make an underwriting profit almost every year. When I began managing risk for a large inner city housing authority, during the last hard market, the insurer who had insured the housing authority for 12 years was unaware of the California Tort Claims Act, which is a prerequisite to filing a claim...it contains strict time requirements for filing claims. The in-house adjusters for the incumbent standard market insurer had waived defenses by not knowing the laws and immunities that California public entities enjoy. I eventually insured that housing authority with a Risk Retention Group and saved $300,000 in premium and got better coverages. The Risk Retention Group allowed us to direct and “gate keep” claims filed. The former standard market insurer eventually pulled out of the habitational market and the E&S market began to solicit that Housing Authority’s business. The same goes for the current fear in the market place towards mold. Recently, medical information is being disseminated that mold is not as dangerous as many plaintiff attorneys and the media would like us to believe. Mold is being treated the same as yesterday’s highly feared perils of whiplash, power line electromagnetic fields, radon gas, and cancer from cell phone use etc. From time to time the standard market sees a big award and excludes that coverage. The E&S market eventually steps in to cover what the standard market will not. Does the E&S market have tricks up their sleeves that the standard market does not? I do not think so, but more often than not, the E&S insurers hire underwriters that learn and understand the risk they undertake. It appears to me that the standard market does not have the time to do the same because they allow too many types of risks to come in the door and be insured. Other players taking the risk that standard insurers do not have the time to learn are: Risk Retention Groups, industry captives and self insurance pools. 22

THE BIG “I” VIRGINIA • Winter 2015

The difficult part of using the E&S market is that they are not included in Solvency Guarantee funds and there is no standardized policy wording, which makes analysis of different insurer’s coverages for a given account more difficult because you will be comparing an “apple with an orange.” In the standard market, you compare an “apple with an apple” when looking at coverages. This is my own perception within my industry and readers should be aware that I have never worked in an underwriting department for an insurer but I have heard many insurers say we do not insure housing authority related properties without even looking at the property or loss runs, yet they write privately owned commercial housing. WHY does the E&S market (generally) have better underwriters? Is it a vestige of the times when commercial insurance rates were highly regulated in most states, which would slightly diminish the motivation to keep experienced underwriters? After all, it doesn’t take much talent to class underwrite or to give almost every risk the maximum credit in a soft market. This would make sense to me as a possible explanation, but I wonder if someone sees other explanations as well. Because if it is simply a result of a commercial lines regulation in the admitted market, it would seem like the gradual deregulation of commercial lines would tend to diminish this effect. That is, might this difference become less apparent in 10 or 15 years? Having been on both the Standard and E&S side of the house, it’s not that E&S underwriters are smarter. They are simply given the ability to utilize imagination and their own expertise to underwrite and price a potential risk. Generally speaking, the bureaucracy that exists in the standard market arena, with multiple layers of management trying to develop profitable results, has almost eliminated the authority for a line underwriter to make a decision. When the chief underwriting officer mandates a pricing change, for example, by the time this is filtered down to the line underwriter, layer upon layer of underwriting manipulations must be performed before a quote can be released. The easy way is to decline. While staying within a filing is sometimes restrictive and imagination as respects terms and conditions might not be within their filings. The underwriting expertise of most not all of standard market underwriters is atrophying. In the 70’s, the coverage, terms, conditions and exclusions were in the standard forms. It was not very common to negotiate amendments to standard language and I don’t recall a single standard exclusion that was routinely attached, although I’m sure some of you other old-timers out there will remind me of at least one. The policy I found today was written with an E&S carrier and included the following endorsements to the standard form: • Exclusion - Designated Professional Services • Absolute Exclusion - Asbestos Liability • Exclusion - Engineers, Architects, Surveyors or Contractors Professional Liability

• • • • •

Absolute Pollution Exclusion what “5 ton” meant in this case. Exclusion - Employment Related Practices The current standard market is now controlled, like it or Nuclear Energy Liability Exclusion not, by the financial people, not the insurance people. They Exclusion - Earth Movement like to think they can design internal controls to reach satisfacExclusion - Construction Management Errors and tory underwriting results. The standard market underwriters Omissions of today are not allowed to make real underwriting decisions. • Exclusion - Lead Contamination They take the data and push it through the computerized filterAnd if I want coverage for any of the excluded exposures, ing system. I need an E&S market. E&S underwriters look at the risk, but at other relevant isThe E&S market has greater flexibility in coverage forms sues also. In most E&S underwriters’ minds, credibility is proband pricing than the standard market as their forms and rates ably the most important thing. The London market for years are not necessarily filed for use. Pricing can be less than marused this standard in addition to other underwriting considerket or higher, depending on the market conditions and the risk. ations. It certainly paid off for them. I have a seafood processor that the standard markets I once heard of an agent who had an agency made up were unwilling to write, even though they had a filed rate for of junk business. Classes and types of risks most everyone the class, because they thought that the rate that they were avoided. The secret was that the agent select only the best able to charge was less that what they needed to defend in these poor classes. The high rates for the good accounts claims. This had to go to the E&S market. In other situations, produced real profit I had an extremely competitive E&S quote for a client, but I don’t believe that standard markets want to take the time also a quote from an admitted carrier, I was not able to place to develop underwriters with the intuitive expertise necessary coverage with the E&S carrier unless they were providing to be a “real underwriter.” broader coverage or coverage that was unavailable in the Thanks for bearing with me for a few minutes of nostalgia. standard marketplace. (The insurance commissioner’s attempt I still believe credibility is the most important thing a person in to protect the admitted carriers!) this industry can have along with experience and knowledge. The E&S market does have the ability to think outside Note: Portions of this article were originally published in the Febof the box as was indicated earlier. Further, there are insurruary 24, 2003 issue of National Underwriter. ers that are admitted insurers in some venues, but in others venues transact as an E&S carrier because of the volume of business in the particular state does not warrant the expense. In addition, being an admitted carrier may force them into writing their proportional share of pool business and participate in the guaranty fund. The E&S market, because of their non-filing requirements, allows them to quickly enter into niches in the marketplace to facilitate needs that arise. This was evident with employment practice liability coverage when first written, and food borne illness coverage for restaurants, etc. Right before my mother retired after about 35 years as an independent You and your clients. You and Harford Mutual. We’re committed agent, she submitted a “clean” risk on a to protecting their business and building yours. homeowners to a standard market. It was rejected. She couldn’t for the life of her figThat’s what mutual success is all about. ure out why, so she called the underwriter. He said he declined the risk because the applicant had a 5-ton refrigerating unit on the roof and obviously, the company Explore P&C insurance couldn’t accept a risk with that amount of opportunities at weight on a roof. It just wasn’t safe. She www.HarfordMutual.com had to explain to him (and his supervisor)

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Caveats in Using

By Bill Wilson

here are some excellent excess and surplus lines markets in this industry, many providing products and services superior to those in the standard market. However, there are inherent dangers in using some E&S markets that agents should be aware of. In this article, we’ll present thirteen of them. If the current hard market is anything like past cycles, one thing you can count on is the increased use of excess and surplus lines markets. Most likely, we’ll be seeing more players in the E&S markets due to increased demand and the inability of admitted markets to get regulatory approval of coverage reductions and/or rate increases. While there are many strong participants in this marketplace, agents must proceed with caution, particularly when using markets, companies, brokers and products, they are not familiar with. Below are thirteen areas where agents should be vigilant. Before I start receiving any nasty emails, let me once again say that the purpose of this article is not to dissuade the use of E&S markets where appropriate. Rather the idea is to make sure that agents properly risk manage their books of business by proceeding with caution. 1. Know and obey state laws. Many states prohibit some lines from

THE BIG “I” VIRGINIA • Winter 2015

Markets being written in an E&S market and laws may prohibit placing any business with an E&S carrier when there is an admitted market available to the agent. In some states, any business placed in the E&S marketplace can be placed only after a “diligent search,” and must include a list of admitted carriers who declined the risk. In many states, an E&S carrier has to be on the DOI’s “approved” list...in at least one state, if an unapproved E&S carrier becomes insolvent, the producer (or whomever’s name is on the contract) is PERSONALLY liable – not the agency, the individual. 2. Consider that paperwork might increase. The agency will have to make sure that all personnel involved are properly licensed surplus lines agents in various states. The agency may also have to file monthly reports and be responsible for paying surplus lines taxes. It’s likely that there will be less reliance on automated systems for work processing. Keep in mind that, in most instances, surplus lines licenses and tax filings will not be required to place business in an E&S market, but there are exceptions.

3. Evaluate carrier financial stability. Theoretically, admitted carriers are better regulated for solvency and usually have to meet more stringent financial requirements and tests. As far as I know, only NJ has an E&S guaranty fund. For more information on this issue check out the article “What You Can Do About Insurer Insolvency.” 4. Make your clients aware of possibly more stringent policy conditions. In many, or most, states, certain laws (e.g., cancellation and nonrenewal) may not apply to E&S carriers. I’ve seen policies that did not require any reason for mid-term cancellation and notice of only 5 days. That can be critical, even fatal, in a hard market where it is much more difficult to move business quickly. ALWAYS use an E&S Waiver letter! 5. Be wary of more restrictive or nebulous policy provisions. It’s hard enough to know what the ISO forms mean. If you’re dealing with a proprietary form, with no real case law history, it may be difficult to determine what is or isn’t covered. Any DOI prohibitions or restrictions on terrorism, mold, etc. exclusions might not apply to

E&S carriers, so the agent should be wary, particularly if moving a client from a standard to an E&S program results in coverage reductions. 6. There could be fewer services. The E&S carrier may not be able to offer the same level of claims, loss control, audit, etc. services that an insured is accustomed to. This and product scope should be considered when comparing prices. 7. Guarantee continuing ownership of expirations. Just make sure YOU still own the business, not the E&S broker or carrier. While it may be rare that the E&S market would seek ownership of business, make sure the brokerage agreement clearly specifies the retail agent as the owner. 8. Review contractual agreements VERY carefully. I’d be wary of any agreements signed with E&S brokers, particularly hold-harmless provisions. I saw one a few years ago that made the retail agent liable for the E&S broker’s mistakes...most E&O policies don’t cover contractual liability. In addition, some agreements make the agent responsible for more than just negligence, including fines, penalties, etc. – you can be almost assured that your E&O policy won’t cover these. There may be a limited ability to impute liability to a company when there is no contractual relationship with the carrier. 9. Outplacement could create a broader duty to insureds. Depending on statutory or case law, the agent may now be considered a broker, representing the insured rather than insurer. This may create a higher standard of care than owed by an agent of a company. Another ramification is that the

knowledge of the agent may not necessarily be imputed to the insurer, leaving the agent on the limb in an E&O claim. 10. You will most likely have no binding authority. The agent may not be able to place coverage quickly, which can be an asset in a hard market, nor issue urgently needed certificates (if the agency can issue certificates at all). 11. Consider other pricing issues and ability to negotiate effectively. The premium may be cheaper, but there could be a large minimum premium requirement. In addition, by abandoning a long-term relationship with a standard carrier, the insured might lose negotiating clout if they return. Also, the agent may have little or no influence on the carrier in contractual or claims situations...this ability to be an advocate for insureds is a hallmark of being an independent agent. 12. There could be potential remarketing problems. Example of a notification problem involving an intermediary...Wholesale broker moves claims made coverage to another company...Renewal application discloses existing claim...Renewal application is not forwarded to old carrier with disclosure...Wholesale Broker moves coverage without informing agent they have not sent renewal application to old carrier... Claim rises from known law suit that is covered by old policy...Old policy is voided by notice provisions, through no fault of agent. While these are probably rare occurrences, be vigilant because they can happen. 13. Never do business with a company smaller than your agency.

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As indicated above, it goes without saying that there are certainly advantages in using an E&S market. Winter 2015 • THE BIG “I” VIRGINIA

Connecting Agents with Identifying New Download Opportunities for Agencies

THE BIG “I” VIRGINIA • Winter 2015

By Paul Warga

ince the introduction of ACORD-based interface, the industry has struggled to identify the overall penetration of download into the independent agency channel, as well as help agents identify the available, but unrealized carrier interfaces. In early 2013 IVANS began a project to measure the industry utilization of download, and to provide insight into areas of opportunity. The first results confirmed that ACORD and IVANS have been VERY successful in their efforts over the past 30 years. Today, over 250 carriers send over 120 million ACORD download messages to 25,000 IA agencies every year. That is amazing success for the entire industry. Based on that insight, IVANS then turned the question around, and used data analytics to identify download opportunities available from carriers that were NOT being used by their independent agencies. The results were staggering! For all of the success in interface that IVANS initially found, IVANS also discovered over 40% of all potential downloads from carriers to their agencies were not setup for delivery. That is a lot of efficiency to be gained by agencies, and thus the IVANS Connections project was born. Examining Agency Connections In late 2013, IVANS began a test project with Westfield Insurance Company to roll out Activity Notes download transactions and, at the same time, provide Westfield’s independent agencies with a Connection Report (example attached). The Connections Report for Westfield was a personalized company report used with agencies to identify any download connections from any of the agencies’ carriers that were inactive or not “turned on” with the carrier. IVANS also began to work with agency solution providers such as NASA, Applied Systems, Vertafore and SIS, as well as the major software user groups, to provide additional agencies personalized connections reports. Dispelling Misconceptions The IVANS Connections Report has determined that more than 40% of the total available download connections from carriers are inactive, largely because many agencies have a misconception about the availability of download connections from their carriers. “When we received our connections grid, it was an eye opener,” said Casey Hearring, system administrator, Schultheis Agency. “I thought we were downloading EVERYTHING we possibly could. The IVANS Connections Report showed lines of business that we weren’t downloading and alerted us to new downloads offered by carriers.”

IVANS Connections Report is an agency’s first step toward fully automating information exchange with carriers. By activating all lines of business available from carriers, an agency strengthens its carrier relationships and maximizes agency efficiency by reducing time spent on administrative tasks. “This is such a great tool,” said Christine Horne, system support manager, Bankers Insurance. “Seeing a real, tangible analysis of the download connections available to our agency has given us greater insight into our interface setups: where we are, where we want to go and what we need to do, strategically, to get there. This is a key part of leveraging interface to create greater value and efficiencies for our agency.” Maximizing Agency Efficiency According to the ACT/AUGIE 2013 Real-Time/Download Survey, personal lines download saves almost an hour and a half per employee per day; commercial lines download saves nearly one hour per employee per day. However, there are more benefits to fully automated download than just time savings. “Our report told me there were lines of business available from carriers that we weren’t leveraging,” said Debbie Miner, technical services manager and bond specialist, Henriott Group. “I was surprised to find out that we were missing commission download from a carrier whose statement has traditionally been difficult for us to manually enter into our system. One of the first things we did after learning this was to sign up for their commission download.” Agencies can begin to see the immediate benefits of turning on all available download connections by requesting a personalized IVANS Connections Report and activating on all available downloads. To request your personalized connections report, contact IVANS via email at connections@ ivansinsurance.com, or register on the web at http://insight. appliedsystems.com/IVANS-Connections_Register.html. See an example of an agency report at http://www. independentagent.com/Resources/AgencyManagement/ ACT/Pages/efficient/Download/Connecting%20Agents%20 with%20Download.aspx . Paul Warga is the Vice President of Product Management for IVANS Insurance Solutions, a division of Applied Systems. Paul has a wide variety of leadership experience on implementing solutions for business and technical issues across software and web-based products, using effective development methodologies.

This article reflects the views of the author and should not be construed as an official statement by ACT. Winter 2015 • THE BIG “I” VIRGINIA

EMOT ! ONS in the Workplace

Managing By Claudia St. John

ome time ago, we were contacted by a client who was having a significant challenge within the organization. The company was experiencing significant growth and was promoting managers and supervisors who were not trained to handle the stress and challenges of managing others. Even senior managers were struggling with the stress of rapid growth. After doing a little investigation, we discovered the main culprit – poorly developed “emotional intelligence” among middle and senior management. Emotional intelligence, often called EQ, is the ability to recognize, understand and use the power of emotions to facilitate high levels of collaboration and productivity. In essence, it is the ability to effectively manage one’s own emotions. 30

THE BIG “I” VIRGINIA • Winter 2015

When emotional intelligence is low, managers find themselves diverting time and energy to dealing with emotion-driven conflict among team members. And in some instances it is the manager’s own emotions that sabotage performance. An organization suffers the greatest productivity loss when a manager’s low EQ behavior impacts others within the organization. If managers are unable to manage their own emotions, their negative behavior can sap the energy of staff. The emotions with the most potential to cause negative repercussions in the workplace are anger and fear, which can temporarily impair the brain’s ability to think rationally. The brain is wired to be on alert status from a threat of any kind, whether real or imagined. Anger and fear activate the brain’s “fight, flight or freeze” response, as the part of the brain

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that generates emotion floods the area in charge of executive functions with hormones. As a result, attention, problem solving and access to memory are all impaired. A person’s planning and organizational abilities are diminished and his or her ability to concentrate is all but eliminated amid the distraction of trying to process their reactions and plan a response. Since logic and critical thinking are executive functions of the brain, the person’s ability to calm down is reduced as the emotional flooding continues. The longer the emotional flood gates are open, the more difficult it becomes to get back on track. Typically it can take up to four hours for the person’s thinking process to return to normal. Anyone who has ever struggled to stay focused after an emotional interlude knows this to be true. So how do we help clients develop and improve their workplace EQ so they can stay on track? First, we establish the clear understanding that EQ is NOT about avoiding emotions at the workplace – that is an unreasonable expectation to set. Instead, EQ assesses how quickly you can move beyond your emotions to a point where you can effectively become productive.

There are two phases to EQ: Intrapersonal EQ (what happens inside a person), and Interpersonal EQ (what happens between oneself and others). There are three dimensions to Intrapersonal EQ: 1. Self-awareness: The ability to recognize and understand your own moods, emotions and drives, as well as their effect on others. 2. Self- Regulation: The ability to suspend judgment so as to think before acting, and to enable oneself to choose to control or redirect disruptive impulses and moods. 3. Motivation: A propensity to pursue goals with energy and persistence, sometimes with a passion to work for reasons that go beyond a desire for money or status. There are two dimensions to Interpersonal EQ: 1. Empathy: The ability to understand the emotional makeup of other people. 2. Social Skills: A proficiency in managing relationships and building networks.

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BIV14_Ross_7.675x4.9.indd THE BIG “I” VIRGINIA1 •

Winter 2015

10/27/14 11:40 AM

The first step to developing EQ is to become more “selfaware.” This self-awareness is the essential building block for EQ development. What does it feel like to be in an emotional state? When do you know you are in such a state? When have you recently felt out of control to your emotions? Once individuals are aware that they are in an emotional state, they can work toward “self-regulation,” where they practice techniques and methods for controlling their disruptive emotions. These are the two critical steps in managing EQ. Once individuals have worked on self-awareness and self-regulation, they are more able to quickly become motivated to act and to work collaboratively with others using empathy and social skills. Our work involves helping individuals understand EQ conceptually and work on developing their skills at each step of the EQ spectrum. In some cases, we administer an online EQ assessment that helps individuals identify their own emotional development in each of these five dimensions. And here’s the good news: Once people learn about emotional intelligence and its components – and I do mean simply becoming aware of the dimensions of

emotional intelligence – they are better able to develop and improve their own EQ. It’s a learning that lasts for life – once they learn to manage their emotions, they will always be better able to do so. In our client’s case, it was clear that their managers had a high potential for superior performance but had been falling short of it due to a lack of emotional stability. Fortunately, by simply learning about emotional intelligence – being able to recognize when and why they are in an emotional state and then knowing the techniques that can regulate their emotions – their abilities as managers improved dramatically. In other words, a little bit of EQ training went a long way in enabling managers to develop themselves and their direct reports in profound and sustaining ways – a win-win for the whole team and the company at large. Claudia St. John is president of Affinity HR Group, LLC, IIAV’s affiliated human resources partner. Affinity HR Group specializes in providing human resources assistance to associations such as IIAV and their member companies. To learn more, visit www.affinityhrgroup.com.

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Winter 2015 • THE BIG “I” VIRGINIA

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ALTHOUGH YOU HOPE YOU’LL NEVER NEED A LAWYER TO DEFEND YOU IN THE EVENT OF AN E&O CLAIM, IF YOU DO, YOU’LL WANT THE BEST LAWYER ON YOUR SIDE. One of the biggest advantages of placing your professional liability coverage with IIAV /VFSC through Westport is the strength of our endorsed attorney, Doug Palais. Douglas M. Palais, Esq, JD Park Palais Attorneys BIOGRAPHY Doug is a founding member of Park Palais. His practice focuses on complex securities matters, defense of insurance agents/brokers, and defense of law firms and lawyers. Doug is a seasoned, effective and influential advocate with more than 30 years experience in state and federal courts and before arbitration panels. He has defended significant, complex securities cases with hundreds of millions of dollars at stake. He has defended hundreds of insurance agent/brokers and legal errors and omissions claims. And he has been lead counsel in arbitrations throughout the country. His expertise includes defense of a broad range of professional liability and directors and officers liability claims. Before starting his own firm, Doug practiced for decades with nationally recognized law firms. He began his career as a judicial law clerk for the Fourth Circuit Court of Appeals. He has been selected

for inclusion in The Best Lawyers in America for Insurance Law and Securities Law and in Virginia SuperLawyers. He has also been named in the list of the Legal Elite by Virginia Business for appellate practice. Doug graduated from Northwestern University School of Law (1978) where he served as Notes and Comments Editor on the journal of Criminal Law and Criminology. Doug was also an instructor in legal writing at Northwestern. He earned his undergraduate degree magna cum laude from Lafayette College (1975). Doug teaches Insurance Law as adjunct faculty at Virginia Commonwealth University School of Business. Doug regularly writes and speaks on issues relating to insurance agents and brokers. He is also a frequent speaker for IIAV on professional liability, and regulatory matters. He also makes himself available to member agents in connection with legal problems.

DISTINCTIONS • • • • •

Currently listed in The Best Lawyers in America for insurance law and securities litigation Currently listed as a Virginia Super Lawyer for insurance and securities litigation Adjunct Professor, Insurance Law, Virginia Commonwealth University School of Business, 2006 – present Instructor in Legal Writing, Northwestern University School of Law, 1977 - 1978 Notes and Comments Editor, journal of Criminal Law and Criminology, Northwestern University School of Law, 1977 - 1978

THE BIG “I” VIRGINIA • Winter 2015

Minimizing

E&O Exposures

From Excess & Surplus Lines

ot every account fits the underwriting appetite of carriers in the standard marketplace for a variety of reasons including risks with unique exposures, accounts with poor claims history, customers requiring excess limits capacity and coastal exposures. To meet the unique needs of these customers, agencies must often look to the excess and surplus lines market, also referred to as the non-admitted or nonstandard market. The E&S market offers agents a viable solution for hard-to-place risks. However, agents need to familiarize themselves with the laws affecting the E&S marketplace, find a quality broker with financially stable insurers, and carefully scrutinize policy forms. By performing proper due diligence and implementing agency procedures when working in the E&S market the agency can reduce exposure to E&O claims. Statistics show that an agency’s risk of incurring an errors and omissions claim is increased when dealing in surplus lines insurance. The reasons are obvious: policy forms are different, the agency’s relationship with the insurer is different, insurance laws regarding surplus lines placements are different, and more parties are involved in the transaction. The first thing agency staff needs to understand is the differences between admitted and non-admitted insurers. These fundamental differences are the basis for reducing E&O exposure. An admitted insurance company is one that is authorized and licensed to do business in a given state. The insurance company must conform to the regulations of state insurance departments and file its forms and rates, which the state must approve. A non-admitted company is not licensed in specific states and therefore is not subject to the same regulation by state insurance departments. While non-admitted insurers need to be on an approved list to do 36

THE BIG “I” VIRGINIA • Winter 2015

business in the particular state, their rates and forms are not regulated. There are both positives and negatives of operating on an admitted and non-admitted basis. The admitted company has the benefit of falling under the state’s guaranty fund where the state will step up and pay an insurer’s claims, up to a determined limit, should it become insolvent. Keep in mind that guaranty fund limits can vary by line of business. Policyholders of non-admitted insurers don’t receive the benefit of the guaranty fund should they become unable to pay claims. This provides an added level of security for customers written in the admitted marketplace and agents should be familiar with guidelines of guaranty funds in states where they place business. Policies written through nonadmitted insurers in Virginia are required to have Virginia Form SLB-9 attached which states they are not protected under the Virginia Property and Casualty Insurance Guaranty Association Act of the code of Virginia against default of the company due to insolvency. An advantage that non-admitted insurers have is increased flexibility in their pricing and can modify their policy terms more easily. This allows them to more effectively manage and price risks, expanding their underwriting appetite. From the agency perspective, their ability to modify policy terms makes reviewing policies and sharing restrictions with customers even more important, including renewal policies. In addition, non-admitted policies usually include taxes and fees and often have minimum earned premium requirements that should be explained to policyholders. Prior to placing any customer in the non-admitted marketplace agencies should verify the insurer is approved to write business in a specific state. A list of approved non-admitted markets can be found in what is called a

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Winter 2015 • THE BIG “I” VIRGINIA

“whitelist” provided by the insurance department. This list is often updated on a quarterly basis so agencies should have a process for periodically reviewing it. In Virginia, you can look up the status of a carrier on the Bureau of Insurance’s website. It will designate a status of “surplus lines carrier”. Knowing the laws for placing business with a non-admitted insurer is also critical, such as any diligent search requirements. In addition, some states may also have mandatory disclosure wording that must appear on documents, such as proposals. In addition, agents should be familiar with their E&O policy in case there are exclusions relating to the types of carriers used and their financial rating. It is worth noting that just because a carrier is doing business on a non-admitted basis does not necessarily mean it is less financially stable than admitted companies. Agencies need to look to financial rating agencies, such as The AM Best Company, for this information. No matter whether admitted or non-admitted, agencies should have a process in place for periodically tracking the financial strength of their insurers and notify customers of any changes in ratings. When selecting E&S brokers to work with, agents need to be certain the broker is properly licensed in the state where it does business. It is important to confirm the broker has significant experience in the E&S market and has a trustworthy reputation. Agents should determine how much E&O coverage the broker carries before placing coverage. It is advantageous if brokers have access to multiple markets to provide good representation of products available. These markets should be financially strong with a preferred rating of A- or above. Responsiveness of the broker is key as E&S submissions often occur with little time prior to expirations. Most agencies access the non-admitted market through E&S brokers. Developing a relationship with a professional broker is very important given the complexity of the marketplace and the fact that the companies they do business with are not regulated by the state insurance departments. Some things to consider when selecting a broker to work with include making sure they are properly licensed in the state where the risk resides, obtain evidence of E&O coverage by the broker, confirm the broker has significant experience in the E&S market and check on the broker’s reputation, review the markets the broker can access and check their financial ratings with AM Best, quotes should be presented to you in writing and in a way that is clear and understandable, and make sure the broker has backup personnel in place to make sure there isn’t a lapse in service. As a business practice, brokers will require signed agreements from producers that set the expectations of the relationship. The agreement should outline the responsibilities of the agent and broker, include a mutual indemnification agreement, and make clear who has ownership of expirations. Carefully scrutinize all written agreements between the agency and the E&S broker 38

THE BIG “I” VIRGINIA • Winter 2015

to make sure there are not onerous hold-harmless or indemnification clauses which place the liability on the agency for the broker’s misconduct, or attempt to exonerate the broker from all liability. Market conditions often change insurer underwriting appetites, tolerance for risk, and increase the importance of E&S markets. This is especially true in a hardening market which can increase agents E&O exposure because of carriers exiting markets, reducing coverage terms and adding exclusions, and increased price shopping of accounts. To operate competently, professionally, and within the law in the non-admitted marketplace, agents should consider the following to mitigate their E&O exposure: •

•

Know your State’s Law – Agents should know the requirements that must be met before “exporting” business to the non-admitted market. Educate your Customers - Before reviewing the offer of coverage with your customers, educate them on the implications of placing business with a nonadmitted carrier. Thorough Review of Policies – A thorough understanding of any gaps in coverage, unusual exclusions or provisions is necessary to be able to fully explain the coverages, conditions, restrictions, or limitations to the customer.

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Binders, Certificates, and Claims Reporting – Agents should not issue binders, certificates, or other evidence of insurance on business placed through a surplus lines carrier – request these items directly from the carrier unless they have given the agency specific written authorization to do so. Report any claims promptly to the surplus lines carrier. Procedures – Prepare a written procedure for dealing with placement through surplus lines carriers.

By performing proper due diligence and implementing agency procedures when working in the E&S market the agency can reduce exposure to E&O claims. As a reminder to Virginia agents, effective July 1, 2008, the Virginia legislature eliminated the due diligence requirement that surplus lines brokers attempt to procure insurance from a licensed insurer before he provides a surplus lines policy. An affidavit affirming that notice has been given to the insured that the insurance is not placed with a Virginia licensed insurer must still be filed within the Virginia State Corporation Commission within 30 days after the end of each quarter. WHOLESALER CASE STUDIES Case Study #1 The Scenario The insured purchased a policy for a jet ski rental operation. The agent placed the coverage with an offshore, Non-admitted carrier, due to the difficulty of the risk. Following an accident in which a customer of the insured was injured in a jet ski accident, the insured found that the carrier was not handling the claim promptly. In fact, the insurer had become insolvent. The insured made a claim against the agent. The insured alleges they were not told by the agent of the significance of having coverage with a nonadmitted carrier. The Issues • Placing coverage with a non-admitted carrier. • Failure to advise the policyholder of the significance of non-admitted carrier placement. The Outcome In this case, the customer had signed a waiver releasing the jet ski rental company from liability in case of injury. The waiver was legal and the case was settled by payment from the agent of a nominal amount of money for the cost of defense of the insured. Prevention Tips This is a rather common error when an agent faces a 40

THE BIG “I” VIRGINIA • Winter 2015

difficult-to-place risk. It requires special care and handling to advise policyholders of the differences between the standard and nonstandard markets. • Observe all statutes and regulations pertaining to placement in a non-admitted market. • Perform a diligent search of the market before placing coverage in a non-admitted carrier. • If coverage must be placed in a non-admitted carrier, verify the financial status of the company prior to placing business there. • Have the insured sign an acknowledgment of placement in the non-admitted market that includes the effect of guarantee association payments and other issues. Case Study #2 The Scenario The insured operated a bar and coverage was placed by the agent with a non-admitted carrier. The agent was to have added the building owner as an additional insured under the policy. A patron of the bar was injured in a slip and fall accident and sued both the insured and the owner of the building. At the time of the accident, the building owner was not named as an additional insured. Prior to the settlement of the claim, the bar went out of business and the nonadmitted insurer was declared insolvent. The claim against the bar was for over $1 million. The Issues • Failure to conduct a diligent search of the admitted market. • Failure to comply with state regulations regarding placement of insurance in a non-admitted market. • Failure to notify the insured of the consequences of placement in a non-admitted market. • Failure to include building owner as additional insured as requested. The Outcome Since the bar owner and the insurance company were out of business, the agent represented one of the remaining sources of recovery in this case. There was no file documentation to support the agent’s assertion that the insured had been notified of placement in a non-admitted market. $350,000 payment to injured party in excess of the agent’s retention. $104,131.20 in defense costs Prevention Tips It was difficult to tell from the agent’s file if coverage had been placed through a licensed surplus lines broker. Without proper documentation, the E&O carrier was not able to

defend the insured successfully. • Follow all statutory requirements pertaining to placement in a non-admitted market. • Keep complete records of all transactions with surplus lines brokers and non-admitted carriers. • Notify the insured in writing and have them sign and acknowledge receipt of information regarding the consequences of placement with a non-admitted carrier including the lack of a guarantee fund.

Coverage on the road.

Wholesalers Case Study #3 The Scenario The insured applied for residential property insurance with the agency. Following a series of disasters, coverage was not widely available in admitted markets for property situated in a coastal area. The agent therefore placed coverage in a non-admitted market. A fire loss occurred and the insured suffered a coinsurance penalty due to the underinsurance of the property. Coinsurance provisions are not generally included in standard market property insurance. The agent alleges that he advised the insured to increase the limit. The insured stated that the agent had not so advised him. The Issues • Placing coverage in a non-admitted market. • Failure to advise insured of inadequacy of policy limits. The Outcome The E&O carrier and agent settled the claim with the insured within the agency’s retention. $7,404.88 in defense costs Prevention Tips In this case, the agent’s file was well documented showing an offer of higher limits and indicating the insured’s rejection of that recommendation. There would probably have been a defense verdict, but the case was settled to avoid prolonged litigation. • Document all conversations with an insured regarding placement in a non-admitted carrier. • Perform a diligent search of the admitted market for placement of all risks. • Advise the insured in writing of any restrictions in coverage versus that available in standard markets. • Have the insured sign and acknowledge any nonstandard policy provisions. Resource information for this article obtained from the Independent Insurance Agents and Brokers of America, Swiss Re Corporate Solution, and Independent Insurance Agents of Texas.

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Winter 2015 • THE BIG “I” VIRGINIA

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Presonal Umbrellas

ast year sales of RLI’s Personal Umbrella product skyrocketed across the country. New applications submitted by IIABA members increased 53 percent while total premium written grew almost 25 percent. In addition to being priced competitively, the RLI umbrella can be written as a stand alone product with limits of up to $5 million. In our increasingly litigious society, no one is safe from the threat of being sued. Your customers need to know that they face the risk of devastating financial loss, and it’s your job to educate them about their potential liability. Here are some marketing ideas to consider implementing in your agency to draw attention to the need for an umbrella policy. Generating awareness is critical. Offer an umbrella policy every time you offer an auto, homeowner or renter’s policy. When working up these quotes, also provide an umbrella a quote. Explain why an umbrella should be considered. Don’t ask permission to do the umbrella quote, just do it and assume your customer will understand the need after you educate him or her. Cross-selling is a key strategy in growing your agency. Consider implementing a cross-sales process that includes cross selling specifically for umbrella protection. With a phone based process you can call your customers 60 days prior to renewal and ask questions to uncover a need. For example, customers with low auto liability limits need to be coached on the wisdom of increasing the limits and it makes it easy to transition into a conversation about umbrella protection. 42

THE BIG “I” VIRGINIA • Winter 2015

Verify discounts by making sure all of your customers are getting the discounts they qualify for. If they are not, add the ones they deserve and suggest that the premium saved be allocated to an umbrella policy. For customers with only one line of business, the personal umbrella is an inexpensive policy to get as a second line, often qualifying the customer for a multi-policy discount. The premium saved on the discount can offset a good portion of the umbrella premium. Recommending higher deductibles is another way of saving premium that can be re-invested in an umbrella policy. These objectives can also be met by using a mail based process to get the needed information. At the end of the questionnaire, provide a checkbox for products customers might want to know more about and make sure personal umbrella is listed as an option. Just ask. Implement a “Just Ask” program. Have your CSR’s “just ask” everyone who walks or calls in if they have a personal umbrella policy. Have a brochure ready to hand out. You might be surprised at how much business can be generated by a simple question. Personal umbrellas sales are a great way to round out any customers portfolio while earning commissions and improving retention. For more information on stand-alone RLI Personal Umbrella Policy and In-Home Business Policy, contact your state administrator, Bonnie Joyce, at bjoyce@iiav.com

Winter 2015 • THE BIG “I” VIRGINIA

What Would You Do If Your Agency Had A Data Breach? 80% of businesses fail to recover from a breach because they do not know this answer. Responding to a breach is a complicated process that requires assistance from many different professionals. Failure to notify the affected individuals “without unreasonable delay” could cost your agency up to $1,500,000 in fines from government agencies. Add this to the $200,000 average cost to comply with notification laws, the legal liability and the reputational harm caused by the breach and you can quickly see how this exposure can be devastating to your agency. Independent Insurance Agents of Virginia has partnered with Arlington/Roe & Co., Inc. to offer our members an exclusive program to help protect their agencies from information security breaches. This program is a holistic risk management process that will help train your staff on privacy compliance in addition to handling data breach notification and third party suits. This program offers the following benefits;

THE BIG “I” VIRGINIA • Winter 2015

PE Data Breach 1

Could your insurance agency weather a data security breach? A full 80 percent of businesses that experience one don’t.1 The right insurance can keep your agency from becoming part of this startling statistic. If that is not enough reason to consider purchasing data breach protection for your business, here are six more: Data breaches are common among smaller businesses like yours. Some 55 percent of small businesses responding to a recent survey have experienced a data breach and 53 percent have reported multiple incidents.2 If you collect sensitive information from policyholders, you are at high risk. 3

Data held by small businesses is low hanging fruit... hackers know these enterprises lack the security resources of their larger counterparts. Only 38 percent of breaches in the latest Verizon study impacted larger organizations.3 Responding to a breach is not only costly – running an estimated $200,000 – it’s complex. Experts from multiple disciplines -- from forensic investigators, to public relations firms, to privacy counsel -- may be needed to mount a coordinated response to even a small incident. Botch the response and your reputation can be irreparably damaged. There is also the specter of regulatory fines and penalties and legal liability.

A single laptop left on a commuter train or stolen at an airport can cost an agent nearly $50,000 – most of that being expenses to respond to data breached – or potentially breached.4

Package policies are not up for the task. Your commercial package policy may have a cyber liability extension, but take a hard look at the coverage it provides. Endorsements typically carry low limits and few options. If first-party coverage is provided, limits may be inadequate for the exposure. For third-party liability, coverage may fall short in key areas, such as responding to acts of rogue employees. Does it address regulatory fines and penalties? Does the insurer have the duty to defend?

You are obligated to protect data you collect. This might include everything from personal information, such as addresses, Social Security and driver’s license numbers of employees, policyholders or prospects, as well as corporate information -- including sensitive financial information on commercial clients. If you handle employee benefits, you may have personal health information in your care.

State and federal regulations dictate proper handling of private information. If this information is breached, agents must navigate the different laws in 46 states that mandate how victims must be notified. 5 Even if you outsource data handling, your exposure stays in-house. You may feed data into third-party agency management or document management systems or outsource data storage to a cloud provider. Still, if your agency’s data is breached, you are obligated to respond.

Some 70 percent of small businesses report that breaches are more likely to occur when outsourcing data.6

WWW.BEAZLEY.COM/PE

PE Data Breach The exposure is not just from hackers intruding on electronic systems. Breaches are caused by everything from lost, discarded, or stolen laptops, PDAs, smartphones, and portable memory devices, to innocent procedural errors and acts of disgruntled employees.

Records breached

What can happen A computer network used by insurance agents was breached by cybercriminals. While the attack was discovered and contained quickly, the personal information -- including Social Security and driver’s license numbers of one million policyholder and non-policyholders was comprised.7

How it adds up

Total 563.9 million Since 2005

Source: Privacy Rights Clearinghouse, 10/18/2012

Hacking or malware – Electronic entry by an outside party

56%

Portable device – Lost, discarded or stolen laptop, PDA, smartphone, portable memory device, CD, hard drive, data tape, etc

30%

Every data breach is different. Generally speaking, however, in considering the cost of a response you can expect to pay from $10,000 to $100,000 just for a forensics expert to get to the root of a breach and contain it. Creating and mailing notification letters to victims is in itself costly. Once you do that, you typically must also set up a call center to respond to inquiries from victims, and offer credit monitoring to victims to help mitigate damages. Smaller businesses are less likely than larger ones to have the internal resources and expertise to handle a breach response, so they are more likely to have to pay outside experts -- including specialized privacy counsel, consultants, crisis management and public relations professionals -- to assist. Then there is the cost of any regulatory actions, penalties, or lawsuits that could arise from the incident.

Insider – Someone with legitimate access intentionally breaches information – such as an employee or contractor

Unintended disclosure – Sensitive information posted publicly on a website, mishandled or sent to the wrong party via email, fax or mail

Stationary device – Lost, discarded or stolen stationary electronic device such as a computer or server not designed for mobility

Payment card fraud – Fraud involving debit and credit cards that is not accomplished via hacking. For example, skimming devices

Physical loss – Lost, discarded or stolen non-electronic records, such as paper documents

Being protected = Being prepared to respond

Unknown or other

It could be a lost flash drive, or a persistent attack by hackers a world away. Every breach is different -- and every one requires a smart, strategic response.

What amps up an insurance agency’s exposure? Answering yes to any of the following questions: Do you have employees? Do you keep employee records? Do your client records include third party corporate information (such as company financials)? Do you handle personal lines? Do you offer premium financing? Do you have computers, back-up tapes, a copier, a fax machine?

With Beazley Breach Response, your agency can secure comprehensive coverage for the expenses incurred to respond to a breach -- and have experts standing ready to deliver the well-coordinated response you need to mitigate financial damages and protect your reputation. It encompasses everything from forensic investigation, legal, compliance and public relations services, to breach notifications, call center servicing, and on-going credit and data monitoring. To learn more, contact your Beazley territory manager or underwriter or go to www.beazley.com/pe. 1. 2. 3. 4. 5.

Privacy Rights Clearinghouse: Chronology of Data Breaches Ponemon Institute. (Also citation 6) Verizon2013 Data Breach Investigation Report, p. 5 California Attorney General/Privacyrights.org (Also citation 7) http://www.ncsl.org/issues-research/telecom/security-breach-notification-laws.aspx

The product is available on an admitted basis in some but not all US jurisdictions through Beazley Insurance Company, Inc., and is available on a surplus lines basis through licensed surplus lines brokers underwritten by Beazley syndicates at Lloyd’s. The exact coverage afforded by the product described herein is subject to and governed by the terms and conditions of each policy issued. The publication and delivery of the information contained herein is not intended as a solicitation for the purchase of insurance on any US risk. Beazley USA Services, Inc. is licensed and regulated by insurance regulatory authorities in the respective states of the US and transacts business in the State of California as Beazley Insurance Services (License#: 0G55497).

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Let’s face it. Those who choose human services as a career aren’t in it for the money. And when your life’s work is caring for others—the elderly, the disadvantaged, those with physical or intellectual disabilities—there’s little time to think about insurance. That’s where your agency comes in. With Harleysville’s OthersFirst® Protection Package, you can give human services prospects the basic protection they need, plus coverage for industry-specific risks like liability from alleged abuse or molestation. So, whenever you have clients whose business is to care, think of OthersFirst—from Harleysville. Our underwriters have decades of segment experience. Interested in representing Harleysville for human services? Call 800-523-6344, ext. 5016, or visit us online at www.harleysvillegroup.com.