January 12, 2015 by C Acunto

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VOLUME 126, NUMBER 1 / January 12, 2015

A CINN Group, Inc. Publication

Serving: New York, New Jersey, Connecticut, Pennsylvania and Washington D.C.

UBER, AIRBNB and INSURANCE - PAGE 10 -

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Contents [ COVER STORY ] 18

Courtside: Contractor Fails to Purchase OCP Coverage for Owner; and Owner Does Not Become Additional Insured on CGL Policy Because Contract Did Not Require It Lawrence Rogak

Looking Back: December, 1989

Classifieds

DFS ENACTS REG 79 CHANGES

[FEATURES ] 4

January 12, 2015 | volume 126 number 1

Foreword: Progressive Steve Acunto, Publisher

Insight: Safe Again! Peter H. Bickford

Exposures and Coverages: Uber, Airbnb and Insurance Jerome Trupin, CPCU

In the Associations: ARIAS•U.S. Elects New Chair and President

In the News: “Telehealth” Bill Betty Flood and Casey O’Brien

The Social Notebook: Tweaking your Agency’s Traditional Marketing Routine Chris Paradiso

On the Level: We’re Not Alone Jamie Deapo

Face to Face: Happy New Year! Michael Loguercio

Cyber Risk: How Underwriters Can Weigh (and Diminish) Cyber Risk Against Critical Infrastructure Lior Frenkel

[ AD FEATURES] 24

PIA: Webinars and CIC Institutes

MSO: Poisoning Prevention

18 Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / January 12, 2015 3

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[ FORE WORD ]

Steve Acunto

Progressive

e mourned the death of former Governor Mario Cuomo as did so many across the State. He was a refreshing liberal personality in that he was always clear in what has been lately called “progressive” orthodoxy in taking positions on the issues that faced New Yorkers. In financial services, he was responsible for the De Wind Commission that liberalized Depression Era wall-offs of banking and insurance, he tackled health care providers and presided over a period of economic change. As a man, he was a good example as a father, husband and Italian American. Politics is the ultimate compromiser. Mario Cuomo stood strong against that force and protected his humanity and his personhood from the potential scandalous perils of office. R.I.P. … No relief is in sight for reinsurers facing rate reductions, low ROI’s and increasing competition GOVERNOR MARIO CUOMO from new capital sources. A recent report issued by Willis states that “downward pressure on reinsurance rates has continued across nearly all lines and geographies, with abundant oversupply of capital continuing to outstrip demand following yet another year of benign loss activity.” The further “tiering” of reinsurers puts real pressure on smaller reinsurers who have the additional burden of competing with the capital funds available to larger entities. M&A activity is at an all-time high reality, as further delays augur a decrease in valuations. “With only a limited supply of attractive target companies, consolidators looking for scale and diversification are moving as company valuations become more reasonable for both parties,” the report goes on to state. Watch Insurance Advocate for news of at least two substantial consolidations in this sector just ahead. … Just before the holiday break, Congress passed the Small Business Efficiency Act providing the firstever federal statutory recognition of Professional Employer Organizations (PEOs). The Act institutes a voluntary certification process for PEOs with the IRS and recognizes the HR outsourcing companies under the federal tax law, creating clarity for PEOs in collecting and submitting taxes on behalf of their clients. Midge Seltzer, Engage PEO president and former National Association of Professional Employer Organizations Chair, started a grassroots program to drive the passage of the legislation. The federal law will allow for PEO certification and will recognize the accrual of tax requirements, providing security for PEO clients. PEOs also now have clear authority under the IRS to collect and remit taxes on behalf of their clients. The new IRS certification program is available to PEOs that meet financial standards and satisfy reporting obligations. A small number of PEOs already qualify for additional client coverage through the Employer Service Assurance Corporation’s (ESAC) financial coverage program, providing clients of accredited PEOs with protection from bonds of up to $16 million. … Really pleased that a compromise has been negotiated in the matter of inspections – see story this issue – and that some of the worthwhile effects of “Reg 79” will not be dumped, while the efficiency of the process for agents is streamlined. Kudos to the parties.[IA] 4 January 12, 2015 / INSURANCE ADVOCATE

VOLUME 126, NUMBER 1 JANUARY 12, 2015

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Rafi Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com PROOF READER Maria Vano SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x117 circulation@cinn.com PUBLISHED BY CINN Group P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN G R O U P, I N C .

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 21 times a year, and once a month in July, August and December by CINN ESR, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing offices. POSTMASTER Send address changes to Insurance Advocate®, P.O. Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN ESR, Inc. and is copyrighted 2014. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Office.

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[ INSIGHT ]

By Peter H. Bickford

Safe Again!

ew York life insurance and annuity beneficiaries can breath easier! They are safe again! Two years after the statutory life guaranty fund was exhausted by the Executive Life Insurance Company of New York failure, the State’s legislature has passed and the Governor has signed into law legislation restoring

“restructured” liabilities were transferred to a new special purpose entity owned by the participating state life guaranty associations. Rather than being a New York entity, however, it was organized as a District of Columbia captive insurer because a similar facility could not be created under existing New York law. The

With these three major fixes the life guaranty fund deficiencies glaringly exposed by Executive Life are now resolved, right? While the changes are on the whole an improvement, the major defect in the Executive Life “estate resolution” remains unaddressed. Peter H. Bickford

the viability of the fund. The new law makes three significant changes to the guaranty fund statute. Most importantly, it removes the $500 million aggregate limit on assessments on licensed life insurers to cover future insolvencies. In early 2012, the law’s aggregate limit was exhausted by the fund’s commitment to the court approved plan for Executive Life to help fill a $2 billion hole. Stopgap legislation had to be adopted to increase the cap to $558 million to cover the plan, but nothing further for future insolvencies. Removing the cap altogether provides the fund with flexibility in addressing future instances of financially stressed life insurers. The law was also amended to cover all eligible policyholders of a NY licensed company and not just resident policyholders. This change was enacted to address the “orphan” policyholder issue exposed by Executive Life when at the time of the liquidation a number of annuitants lived in a state where Executive Life had not been licensed and therefore were not eligible for guaranty fund coverage. The third major change was to permit creation of “resolution facilities” in the State. Under the Executive Life plan, the

new law removes these impediments to using a New York entity to administer and dispose of the business of troubled New York life insurers. With these three major fixes the life guaranty fund deficiencies glaringly exposed by Executive Life are now resolved, right? While the changes are on the whole an improvement, the major defect in the Executive Life “estate resolution” remains unaddressed. What, then, are the effects of these revisions? Not as much as advertised! Take the removal of the fund cap, for instance. The cap was never really an issue in Executive Life. Yes, the restructuring plan approved by the court committed the fund for an amount in excess of the cap, but that excess was already covered by the stopgap legislation increasing the cap to the committed amount. The removal of the cap in the new law is more about addressing future financially strained life companies. Practically and politically the administration, legislators and industry could ill afford to ignore the depleted fund for very long. Addressing the orphan policyholder issue was definitely an important fix. Ironically, the change was a reversion to

the old law before it was changed in 1985 to impose the residency limitation and set the aggregate capacity to $500 million. As we now know, these changes ultimately proved to be problematic under the Executive Life plan. The most curious change, however, is the provision allowing for the establishment of “resolution facilities.” It is curious for a number of reasons. Why, for instance, is such a special purpose vehicle necessary under the existing elaborate statutory receivership process? It has never been clearly explained why it was important to create this vehicle in the first place, other than to further remove the New York receiver from his own mess. The existing statutory authority seemed quite adequate – if properly used – to accomplish an estate “resolution.” And if “resolution facilities” are necessary, why is the authority to form them given to the guaranty association and not to the receiver? The new law states that their purpose is for “administering and disposing of the business of the insolvent domestic life insurance company.” Isn’t that the superintendent’s job as receiver? Is this just another way for the receiver to shirk his or her responsibility? But, hey, why quibble over such mundane details as who runs the rehabilitation or liquidation of a life insurer. Who cares so long as policyholders and beneficiaries of New York domiciled life insurance companies are secure knowing that past defects have now been addressed and cannot recur. Perhaps you may want to pause a moment before concluding that your life insurance products are protected, particularly annuities. The main purpose of the revisions was to remove the aggregate cap so that there would be assessment authority available for future insolvencies. However, the $500,000 per claim limitation remains untouched. On its face this does not appear to be unreasonable, particularly because New York has among the highest per claim limits in the US. The problem is that half of the $2 billion Executive Life continued on page 8

6 January 12, 2015 / INSURANCE ADVOCATE

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[ INSIGHT ] Compare this treatment to the treatment of workers compensation claims in the event of a carrier’s insolvency. Unlike life guaranty funds, workers compensation security funds almost universally do not have per claim limitations or caps in recognition of the nature of WC claims. Unfortunately, the life guaranty fund system does not distinguish between lump sum payouts under standard life policies and periodic payment contracts such as structured settlement annuities. The result

continued from page 6

shortfall was foisted on a small minority of claimants, almost all of whom were structured settlement annuitants who could least afford to have their benefits slashed. The reason they took the brunt of the shortfall was because the per claim limitations in the state life guaranty fund laws are not designed for or adequate to cover contractual obligations that could go on for decades.

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Unfortunately, the life guaranty fund system does not distinguish between lump sum payouts under standard life policies and periodic payment contracts such as structured settlement annuities. The result is an inherent discrimination in the law against the latter.

is an inherent discrimination in the law against the latter. Thus, structured settlement annuitants needing lifetime support from disabling injuries or conditions bore the brunt of the restructured (i.e., drastically reduced) benefits under the Executive Life plan. This was the single most devastating effect of the Executive Life insolvency, but has been totally disregarded by the administration and the legislature in their life guaranty fund fix. Not only is this issue ignored, the statute emphatically states that not a dime more can ever be used for Executive Life. Talk about pouring salt on a wound! There remain other shortcomings in the life guaranty fund system, but one is particularly galling. The revised law leaves untouched the archaic and arcane Section 7718 strictly prohibiting advertising of life guaranty fund coverage. Not only should this section be removed, it should be replaced with a required notice – like a surgeon general’s warning – that your policy may not be fully protected in the event of your life company’s insolvency, and if you are the beneficiary of a periodic paying annuity . . . forgetaboutit![IA]

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[ EXPOSURES AND COVERAGES ]

By Jerome Trupin, CPCU

Uber, Airbnb and Insurance

hat do Uber and Airbnb have to do with insurance? Sounds like the opening line to a bad joke, but it’s no laughing matter. When each started, Uber and Airbnb wanted as little to do with insurance as possible. It’s not working out that way. The insurance problems each presents are similar, but since they involve two different types of insurance, auto and homeowners, let’s look at them one at a time.

Uber and Insurance

Uber is a smartphone application car service (they’re sometimes called transportation network companies or TNCs) that’s threatening to dismantle the conventional taxi industry. At its simplest, customers register with Uber to get the app on their smartphones and car owners register to drive passengers for a fee. The customer uses the Uber app when he or she wants a ride. When the request is received, Uber sends notices to a few drivers near the customer who have logged in indicating their availability. The driver generally has fifteen seconds to accept before Uber sends the request to others. Payment, in most cases, is made through the credit card the customer has pre-registered with Uber. After deducting its share, Uber pays the driver by direct deposit into the driver’s bank account. Generally, no money changes hands between the passenger and the driver. Uber is a disrupter. Like other internet start-ups, it challenges the operations of established businesses—think music, books, etc. It has contributed to a substantial decrease in the value of taxi medallions—the NY Times reported that the sales price of individual taxi medallions have dropped 25% in the past few months. 1 (Medallions, which peaked at more than $1,000,000 in June 2013, are required to cruise and pick up passengers at curb-side

in New York City.) The value of medallions derives from the low number allowed by law in NYC. There are only 13,237 NYC yellow cab medallions; the last increase in that number was in 1987 when the population was under 7.3 million and Ed Koch was mayor. The population is now over 8 million. According to the Taxi and Limousine Commissioner, New York needs between 15,000 and 17,000 medallions to meet demand.2 The political power of the taxi industry has made an increase in the number of medallions unlikely; it would require City Council and State Legislature approval. An artificially controlled market is a prime target for disrupters. There’s a little known fact that further complicates hailing a cab in New York City: yellow cabs are water soluble. When it rains, they disappear! The insurance issues with smartphone car hailing services were highlighted when an Uber driver killed a six-year old girl in an intersection accident in San Francisco on New Year’s Eve 2014. Her mother and younger brother were badly injured. The driver had dropped off his fare and was logged on hoping for another fare at the time of the accident. Uber says its insurance does not apply because the driver neither had an Uber passenger nor was on his way to pick one up. The attorney for the child’s family says that Uber is responsible because the driver was distracted by the app as he was watching for new fares. Uber states that it carries insurance: $1,000,000 liability coverage that’s excess over the driver’s insurance, but will drop down if the driver’s insurance does not apply. The California Public Utilities Commission set that required limit for TNCs last year. It also provides at least $40,000 contingent comprehensive and collision insurance covering the driver’s continued on page 12

1 Josh Barro “Drop in Taxi Medallion Prices Continues as Rivals Multiply” NY Times January 8, 2015.http://www.nytimes.com/2015/01/08/upshot/new-york-city-taxi-medallion-prices-keep-fallingnow-down-about-25-percent.html?_r=0&abt=0002&abg=1 (accessed 1/8/15) 2 Dana Rubinstein “The Curse Of The New York City Taxi Medallion” Capital, Jan. 31, 2013 http://www.capitalnewyork.com/article/politics/2013/01/7399052/curse-new-york-city-taximedallion?page=all (accessed 1/1/15)

10 January 12, 2015 / INSURANCE ADVOCATE

Jerome Trupin

Jerome “Jerry” Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, nonprofit and governmental entities. He is, in effect, an outsourced risk manager. Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses. Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Society publication, the Insurance Advocate, and others. He can be reached at jtrupin@aol.com. Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.

“Uber states that it carries insurance: $1,000,000 liability coverage that’s excess over the driver’s insurance, but will drop down if the driver’s insurance does not apply.”

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[ EXPOSURES AND COVERAGES ] continued from page 10

car—more in most cities. In a nice addon, Uber’s policy provides $1,000,000 uninsured and underinsured coverage; few people have that much in their own policies. But, and as the San Francisco accident shows it can be a big but, coverage only applies while the driver has a passenger or is en-route to pick up a passenger who has ordered a ride. Uber plays down this gap. Its website says: “As a practical matter, the vast majority of personal insurance policies cover this period (when the driver is waiting for an assignment) either by the plain terms of the insurance policy, or due to the insurance requirements set by state. In the New Year’s Eve case…the driver’s insurance company has offered up the limits of the driver’s personal auto policy.”3 The fact that the San Franciscan driver’s company tendered its limits doesn’t mean that the insurer agrees that the accident falls within its coverage. The combination of a death claim, two other serious injuries and a high profile incident may have motivated the company to pay its limits and get out rather than spend a small fortune contesting the case. Minimum required limits in California are only $15/30/5,000, so there may not have been that much involved in any event. The interesting question for us is whether personal auto insurance policies do provide coverage when the driver is waiting for an assignment or is returning from dropping off a fare. Here’s the pertinent exclusion from the ISO personal auto policy: “We do not provide Liability Coverage for any…‘Insured’s’ liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance.” (The form states that the exclusion does not apply to a share-theexpense car pool.) The terms public or livery conveyance are not defined, so the ordinary meanings of those words would apply. Here’s a defi-

Airbnb is to hotels and motels what Uber is to taxis. Using Airbnb, you can book everything from a shared room for one night to an entire home with 4 bedrooms or more for months.

nition of public conveyance: “Any railroad car, streetcar, ferry, cab, bus, airplane, or other vehicle (emphasis added) that carries passengers for hire.”4 And here’s one of livery conveyance: “The transporting of people and/or goods for hire, such as by a taxi service….”5 Those definitions don’t clearly answer the question of whether the exclusion applies during the time the driver is waiting for an assignment. The driver’s insurer could argue that waiting for passengers is part of the use of a vehicle as a livery. The driver could argue that the exclusion is ambiguous and therefore insurance coverage applies. What is clear is that this is not an exposure contemplated by personal auto insurance rates. Taxi-type operations present more passenger liability than usual vehicle use and the taxis operate for many more hours a day than a typical car. Taxi insurance rates are substantially higher than family auto insurance. Insurers should clarify the coverage they intend to provide. Interestingly, Erie Insurance Company is experimenting with a specific endorsement to cover ride-sharing. It’s been introduced in Indiana and Illinois and may be offered in other states depending on consumer response.6

The insurance situation will be different in New York City, where UberX is legal, but UberX drivers in NYC must have livery licenses and livery insurance. It’s the law. In some cities, e.g. Boston and Toronto, standard taxis can respond to Uber calls, which means their insurance will apply. There are other TNC car services; Lyft and Sidecar are most similar to Uber. Lyft says this about insurance on its website: “Lyft is the first to provide drivers with additional insurance, including a $1M liability insurance which applies as primary to a driver’s personal automobile insurance policy when matched with a passenger (emphasis added). If you already carry commercial insurance, Lyft’s policy will continue to be excess to your commercial insurance coverage.”7 Notice that the coverage is primary to the driver’s insurance. That means the driver and the claimants won’t be caught in the middle of a squabble between insurance companies. But, the coverage only kicks in when the driver is matched to a passenger — no coverage while waiting for a passenger and none after the passenger is dropped off. Lyft also says it will be excess to the driver’s commercial insurance coverage. Is that a tacit admission that a personal auto policy is not appropriate?

Airbnb and Insurance

Airbnb is to hotels and motels what Uber is to taxis. Using Airbnb, you can book everything from a shared room for one night to an entire home with 4 bedrooms or more for months. (Just as there are other sites that are similar to Uber for autos, there are other sites similar to Airbnb for finding accommodations.) I don’t know of any headline stories about Airbnb insurance claims, 8 but Airbnb’s website says that, effective January 15, 2015 it will provide liability coverage for hosts. The coverage will apply in the US for bodily injury or property damage claims by a guest injured in the listed prop-

3 “Eliminating Ridesharing Insurance Ambiguity” UBER.COM March 14, 2014 http://blog.uber.com/uberXridesharinginsurance (accessed 1/2/15) 4 “Public Conveyance” Termwiki http://www.termwiki.com/EN/public_conveyance (accessed 1/1/15) 5 “Public Or Livery Conveyance Use” Likeforex.com http://www.likeforex.com/glossary/w/public-or-livery-conveyance-use-2917 (accessed 1/1/15) 6 “Erie Insurance offers unique, new ridesharing coverage for drivers” Nov. 18, 2014 PRNewswire http://investor.shareholder.com/erie/releasedetail.cfm?ReleaseID=883533 (accessed 1/1/15) 7 “What is Lyft?” https://www.lyft.com/drivers (accessed 12/31/14) Like Uber, Lyft drivers in New York have livery licenses. 8 Airbnb insurance was the topic of two articles in the New York Times in December: Ron Lieber “A Liability Risk for Airbnb Hosts” NY Times 12/5/14 and Ron Lieber “The Insurance Market Mystifies an Airbnb Host” NY Times 12/19/14

12 January 12, 2015 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] erty or elsewhere in the building during a stay. Airbnb’s insurance will be excess over any insurance that the host carries. Airbnb also provides direct coverage for the host for damage to the host’s property caused by a guest. As with auto insurance, homeowners and tenants policies are not totally clear about coverage for a host who rents to Airbnb guests. ISO’s homeowners and tenants forms exclude business use of the property, but do cover, via an exception to the exclusion, the occasional rental of the entire property or unlimited rental of the entire property to no more than two roomers or boarders. Clearly there’s no coverage for renting the property to others for a year, but just where do you draw the line on “occasional”? A New York Times columnist posed the question to several insurance agents and companies and received conflicting answers. One agent at first said there was no coverage at all. The company said that occasional rental would be covered. The article didn’t discuss what’s meant by occasional.9 The columnist was told by one company, Chubb, that it has a different approach to the problem. He reported that Chubb provides coverage for incidental business activities that do not yield more than $15,000 a year in gross revenues. What he didn’t mention is that Chubb’s policy only covers when the use conforms to local, state and federal laws. According to a study by the NY attorney general’s office, as many as 72 percent of the private, short-term New York City rentals it reviewed were illegal.10 So much for that solution. (If the liability coverage is provided to the hosts by Airbnb—this is being written prior to 1/15/15—that will close the gap for many hosts.) In some locales, there’s a lot of Airbnb activity. The attorney general’s study found 23,711 listings in Manhattan that handled, in total, 328,729 reservations. That’s a lot of potential claimants. Insurance compa-

The columnist was told by one company, Chubb, that it has a different approach to the problem. He reported that Chubb provides coverage for incidental business activities that do not yield more than $15,000 a year in gross revenues.

nies should clarify the exclusions for Airbnb-type use. This will be good for the insurers, but will also work to the advantage of those who don’t rent their homes. If the claims are not excluded, the losses will factor into the calculation of premiums, thereby increasing the premiums for all homeowners and tenants, including those who don’t rent their abodes.

E&O Loss Prevention Suggestion

In 2009, Quincy Mutual reduced replacement cost coverage for its homeowners policy from unlimited to 25% more than the policy limit. In 2010 Paul Valentine’s house in Rockland County, insured with Quincy, went up in flames. His claim to replace the house was much more than 25% greater than the policy amount. Quincy said the new wording applied and turned down the claim for the excess over 25%. He said he’d never been notified of the change. Quincy had sent the 2010 policy to Valentine’s broker, Tim Sheridan Insurance, with a notice detailing the change as required by NY insurance law. Sheridan did not forward the notice to Valentine.

Valentine sued Quincy. He also sued his broker and Quincy sued Sheridan for not sending the notice to Valentine. The case wound up in the Appellate Division of the NY Second Judicial Department.11 The court decided that Quincy had an obligation under the law to provide notice to the insured and that having failed to do so, it could not enforce the limitation. It also decided that Sheridan, as an insurance broker, did not have such an obligation and dismissed the case against Sheridan. Nevertheless, I think Sheridan made a mistake. Even though he wasn’t obligated to notify his insured, it’s good E&O risk management to do it. Not only did he wind up with an E&O claim on his record, but he created tension with one of his insurers and ill-will with one of his clients. I’d urge producers to send on the notice of changes directly, even if they believe the insured received the notice from the insurer. It’s an inexpensive loss control technique and it can demonstrate your desire to serve your insureds. Who knows, it might even generate a sale to close the gap created by the change in coverage.

Pay the Ransom?

In my column about cyber/data breaches in the November 22, 2014 issue of the Insurance Advocate12, I discussed two people who suffered “data-kidnapping.” That is, their computer files were encrypted by a hacker who demanded $3,000, in Bitcoin, to unlock the files. I wrote: “IT people generally feel that making a payment will not generate any response other than, possibly, a demand for more payments.” The lead article in the New York Times this morning (January 4, 2015) tells the story of the reporter’s mother whose data was kidnapped. Her mother paid the ransom and her files were unlocked. The kidnappers even reduced the price when she explained why she was late in making the payment!13[IA]

9 “Protection Against Accidents for Airbnb Hosts in the US” https://www.airbnb.com/host-protection-insurance (accessed 1/2/15) 10 Ellen Huet “New York Slams Airbnb, Says Most Of Its Rentals Are Illegal” Forbes 10/16/201 http://www.forbes.com/sites/ellenhuet/2014/10/16/new-yorkslams-airbnb-says-most-of-its-rentals-are-illegal/ (accessed 1/2/15) 11 Paul W. Valentine, et al., v Quincy Mutual Fire Insurance Company and Tim Sheridan, doing business as Tim Sheridan Insurance, etal. Appellate Division of the Supreme Court of New York, Second Department. 2013 NY Slip Op 88017(U) Decided 12/14/14. 12 Jerome Trupin “Cyber/Data Breaches” Insurance Advocate November 22, 2014. 13 Alina Simone “How My Mother Got Hacked” NY Times January 4, 2015 Sunday Review Section p 1. In my defense, the article does say that that Internet Crime Complaint Center, a partnership between the FBI and the National White Collar Crime Center, also says not to pay the ransom.

INSURANCE ADVOCATE / January 12, 2015 13

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[ IN THE ASSOCIATIONS ]

[ IN THE NEWS ]

Eric Kobrick and Elizabeth Mullins Chosen as ARIAS•U.S. Chairman and President for 2015

“Telehealth” Bill

ric S. Kobrick, Vice President, Deputy General Counsel & General Counsel, Claims, Reinsurance, Operations and Technology at American International Group, Inc. (AIG), was elected Chairman of ARIAS•U.S. at its 2014 Fall Conference in New York City. He succeeds Jeffrey M. Rubin, Senior Vice President, Director Global Claims at Odyssey Reinsurance Company, who has retired from the Board. Elizabeth A. Mullins, Managing Director and head of Global Dispute Resolution & Litigation at Swiss Re America Holding Corporation (Swiss Re), was elected President succeeding Mr. Kobrick. Also at the conference, James I. Rubin, head of the reinsurance litigation and arbitration practice at Butler Rubin Saltarelli & Boyd LLP, and Ann L. Field, Vice President in Zurich Insurance Group’s Reinsurance Department, were elected Vice Presidents. In addition, at its Annual Meeting held during the conference, ARIAS•U.S. members re-elected three Board members and elected one new member. Ms. Field, Ms. Mullins, and John Nonna of Squire Patton Boggs (US) LLP were elected to second, three-year terms. Brian Snover, Senior Vice President and General Counsel at Berkshire Hathaway’s Reinsurance Division, was elected to a first term, succeeding Mr. Rubin as a reinsurance representative. At AIG, in addition to a wide variety of other responsibilities, Mr. Kobrick oversees reinsurance dispute resolution (litigation, arbitration and insolvency proceedings), as well as reinsurance contract wording, regulatory, and transactional issues. He is an ARIAS•U.S. Certified Arbitrator, served on the ARIAS•U.S. Long Range Planning Committee, and was Chairman of the ARIAS•U.S. Ethics Discussion Committee. He also serves on the Finance and Executive Committees. Mr. Kobrick received a B.A. in Government from Cornell University and a J.D. from Columbia Law School. Prior 14 January 12, 2015 / INSURANCE ADVOCATE

to joining AIG, he clerked for Judge Miriam Goldman Cedarbaum of the United States District Court for the Southern District of New York, and he was an associate at Simpson Thacher & Bartlett LLP in New York City. At Swiss Re, Ms. Mullins leads a team of lawyers with global responsibility for advising on and managing a wide range of disputed matters and investigations, including certain insurance and reinsurance disputes. She is Chairman of the ARIAS•U.S. Certification Committee, CoChair of the Strategic Planning Committee, and serves on the Finance and Executive Committees. Ms. Mullins received both her B.A. and J.D. degrees from New York University and is a member of the Bar of the State of New York. Prior to joining Swiss Re, she was a litigation partner with Stroock & Stroock & Lavan LLP in New York City.[IA] ARIAS•U.S. is a not-for-profit corporation that seeks to improve the insurance and reinsurance arbitration process by providing training and education in the skills necessary to serve effectively on an insurance/reinsurance arbitration panel. ARIAS•U.S. is the leading trade association for the insurance and reinsurance arbitration industry. It has nearly 1000 members, including professional arbitrators and representatives of insurance and reinsurance companies and law firms with substantial interest and involvement in the arbitration process. Through conferences, seminars, workshops, webinars, and publications, ARIAS•U.S. seeks to strengthen the arbitration process to meet the needs of today’s insurance/reinsurance marketplace.

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889

By Betty Flood and Casey O’Brien ALBANY, NY—Gov. Andrew M. Cuomo has signed a bill into law as Chapter 550 of the Laws of 2014, which will require insurers and medical assistance for needy persons to provide coverage for the provision of telehealth and telemedicine services. The bill defines telehealth as delivering health care services by means of information and communications technologies such as telephones and remote patient monitoring devices. Telemedicine is defined as the delivery of clinical health care services “by means of real time two-way electronic audio visual communications, including the application of secure video conferencing.” Sponsored by Senator Catherine M. Young (R/C/I-Allegany), and Assemblywoman Addie J. Russell (D/WF-Jefferson), this new law will amend subdivision 1 of Section 2 of the public health law to provide definitions for “distant site,” “health care provider,” “originating site,” “telehealth,” and “telemedicine.” “Distant site” means a site at which a health care provider is located while providing health care services by means of telehealth or telemedicine, unless otherwise defined. “Health care provider” is defined as someone licensed and acting within their scope of practice at a lawful entity such as a hospital, home care service agency, or hospice. “Originating site” means the site where a patient is located at the time health care services are provided. The insurers and providers can agree to an alternative site, if it is agreed upon by all parties. “Telehealth, including telemedicine, can benefit patients, especially rural patients, hampered by economic or geographic restrictions, in many ways,” said Senator Young. “Due to significant quality and fiscal improvements, patients see fewer hospitalizations and costly visits to emergency rooms, expanded access to providers, faster, more convenient and timely treatment, better continuity and coordination of care, reduction of lost work time and travel costs, and the ability to remain within support networks and age in place at home.” The law went into effect on January 1, 2015, applying to all policies and contracts issued, renewed, modified, altered and amended on or after this date.[IA]

lit Lim

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[ THE SOCI AL NOTEBOOK ]

By Chris Paradiso

Tweaking your Agency’s Traditional Marketing Routine

s marketers in the insurance industry, we have a responsibility to make our campaigns as effective and efficient as possible. Over the past several years, we have learned that this is accomplished through inbound channels like social media, search engine optimization and content for lead generation. But as inbound has matured and merged with traditional marketing channels, the way we think about marketing has become just as important as the way we execute our marketing strategy. Inbound marketing is NOT just a practical technique – it is a guiding philosophy. The more effort and energy Chris Paradiso we put into our inbound channels and marketing, the more we can reconsider how we do traditional outbound marketing. Why, you may ask? Because we still need outbound marketing for the short-term, quick hit wins while we focus on the long game plan that is inbound marketing. But rather than standing in opposition to one another, the two styles should be complementary. So the question is HOW can you make traditional outbound marketing work with our inbound marketing efforts? Here are tips to get you going in the right direction:

MEASURE YOUR AGENCY’S ENGAGEMENT

Outbound marketing has often been focused on just one step: The final conversion. As anyone who has ever done an outbound campaign knows, it’s not unusual to have leads neither engaged nor qualified fill out that form for “Get a Free Quote” or “Request a Consultation.” What’s even more common is hearing from sales that the leads generated fail to qualify. Well, I have heard that before but the amazing thing is that how most of these leads come in is because the prospect either has no idea who to go to for advice, or they have no confidence in their present agent. See – these are qualified leads! 16 January 12, 2015 / INSURANCE ADVOCATE

The key is to remain in front of [our prospects] and remain on their minds. The faster you reach out to these individuals, the higher your closing ratio will be. One of the biggest advantages of inbound marketing is the ability to measure the engagement level of your leads. Being able to measure is key to success here. Since inbound channels are most often digital, tracking a prospect from a raw lead to a customer and knowing these steps that get them there has made it possible to determine how well a channel is performing.

MINIMIZE THE INTERRUPTION

One of the biggest differences between inbound marketing and outbound marketing is interruption. Inbound leads, by nature, come to you and opt-in for engagement, while outbound leads rarely have the option to opt-in to your marketing. The question is HOW do we minimize the interruption? Well, here are a couple tips for you and your agency. • The first tip is make the outbound channels opt-in • The second tip is focus on hyper-targeting throughout your agency’s outbound channels Let me give you a quick example. Instead of sending out an unsolicited direct mail piece to a list of contractors who never heard of your agency, you should send out a piece to prospects who quoted with you in the past but for one reason or another your agency didn’t close. This practice is spending your marketing money more wisely because those prospects have heard of you and you have a better chance of closing that business at a much lower cost. Let’s quickly go over your agency’s outbound channel. Is your agency communicating with prospects? Let’s say they are not. Well, let’s talk about several ways you can communicate with them. First if you’re targeting more B2B people, start with LinkedIn. Your agency should put together

a target market and a budget and start to go after whom your agency wants to insure. If your agency is more on the personal lines side, then target Facebook with promoted boosts, but when doing this you must put together a social strategy with your agency’s branding identity and a budget.

INTEGRATE EXPERIENCES

So if your agency is at a Home Show, rather than capturing leads on a digital scanner or putting out that ridiculous fish bowl for business cards, log your leads into your (CRM Tool) marketing system immediately on a tablet or smartphone and start sending lead nurturing emails immediately. If you’re running a print advertisement or sending direct mail, include a landing page URL for a piece of educational content rather than a “just the bottom of the funnel” offer. We must be creative along with being in front of our prospects because if you look at the Lizard’s funnel, you will see they are in front of our clients in every aspect of their day. We will win more business if we just keep a simple message in front of our prospects. The key is to remain in front of them and remain on their minds. Another key is to use the right blend of traditional and digital marketing with a message that doesn’t waiver, and that message must remain consistent in all of your marketing avenues. [IA]

Christopher Paradiso, CPIA, is President of Paradiso Financial & Insurance Service. He has been acknowledged by several insurance publications as a leader in the industry for his use of digital marketing and social media to help brand his agency and promote other small businesses within his community. Chris has also been recognized for his charity work with The Connecticut Children’s Medical Center. In 2011, Chris introduced “Paradiso Presents LLC,” a social media program aimed at teaching small agencies to not only survive, but compete in today’s complex online marketing world. Chris resides in Stafford Springs, CT with his wife and two children, Mia and Gianni.

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[ COVER ]

DFS MODIFIES REG 79

Compromises Reached as Mandatory Inspection Reg Undergoes Intense Scrutiny, Revision

Agents “Satisfied” as Changes Offer Needed Relief, While DFS and Other Advocates Hold on to Fraud Fighting Aspect

set of compromises has been reached in the matter of Reg 79 requirements as the DFS adopted modifications to the long-controversial regulation governing automobile photo inspections. Of the several parties to the compromised changes, many reported satisfaction with the Department’s action, taking steps to streamline the inspection process for policyholders, agents, carriers and vendors of the inspection service to comply with mandatory photo inspection rules, all while keeping in tact the State’s and the industry’s shared goal of combatting insurance fraud and related crimes. According to the DFS, eleven parties appeared to state their views (summarized in the text below) on Reg 79, some, like PIANY advocating for the elimination of this requirement in toto; others seeking the modifications that were realized. The revisions, effective April 1, 2015, will: - increase the inspection deferral period from 5 to 14 calendar days. - reduce the minimum time frame from 4 years to 2 years for an insured to be eligible for an inspection waiver for an additional and/or replacement automobile when the insured has been continuously insured for automobile insurance, with the same insurer or another insurer under common control or ownership; - allow an inspection waiver when an insured under a new policy had the automobile continuously insured for physical damage coverage by a previous insurer that inspected the automobile within the prior two years; - provide for the use of new technologies (digital photography, electronic storage and retrieval of inspection reports and photographs, use of email). - expand the current renewal inspection notice requirement 18 January 12, 2015 / INSURANCE ADVOCATE

from 33 days prior to renewal date to at least 45 days but no more than 60 calendar days prior to the annual policy renewal date; - amend the definitions to clarify the types of vehicles subject to the inspection requirement and establish definitions for certain autos and providers. On our December 31st deadline date – at 12:15 pm to be exact – PIANY’s statement arrived expressing concern with the requirement set forth in 11 NYCRR 67.3(b)(7), (8) and (10) that in order to waive the mandatory inspection requirement, a vehicle must be physically inspected by the previous insurer, particularly in the case where the vehicle is new or has not been sold or transferred. Yet, overall, “PIANY is extremely pleased with the amendments adopted and we are grateful for the receptive participation of the Department of Financial Services as well as everyone involved with this successful effort,” said PIANY President Anthony A. Kubera, CIC. “We also want to acknowledge the receptive ear agents received from lawmakers, particularly Assemblyman Kenneth P. Zebrowski, who, as chairman of the Administrative Regulations Review Commission, weighed in to support the proposed regulatory changes and has, for years, sponsored legislation to repeal the regulation entirely.” The Department has indicated that they will take under consideration the applicability of these waivers when the vehicle was originally new and the inspection was waived by the previous insurer pursuant to § 67.3(b)(2), but did not want to delay implementation of the proposed amendment at this time, PIANY added. (Insurance Advocate welcomes comment and analysis on this regulation from all parties by January 16 at 5:00 PM and will include other releases and statements received after deadline).

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[ COVER ]

Full DFS Summary and Analysis from NY State Register December 31st 2014:

Mandatory Underwriting Inspection Requirement for Private Passenger Automobiles. Effective Date: 2015-April -01

Revised Regulatory Impact Statement:

Action taken: Amendment of Part 67 (Regulation 79) of Title 11 NYCRR.

1. Statutory authority: Insurance Law section 3411 requires insurers to inspect private passenger automobiles insured for physical damage coverage except as provided for in a regulation prescribed by the Superintendent. Article 53 authorizes the Superintendent to approve plans for providing motor vehicle insurance coverage to persons who are unable to obtain coverage in the voluntary insurance market. The New York Automobile Insurance Plan (“NYAIP”), also commonly known as the Assigned Risk Plan, is the mechanism for providing such coverage. Insurance Law section 5303 specifies coverages that are available through the NYAIP, and subjects those coverages to the requirements of Insurance Law section 3411 as well as other provisions in the Insurance Law.

Statutory authority: Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 3411, 5303 and art. 53 Purpose: Revise requirements regarding the inspection of private passenger automobiles for physical damage coverage. Substance of final rule: Section 67.1 amends the definitions to clarify the types of vehicles subject to the inspection requirement and establishes definitions for a new, unused automobile, durable medium, and New automobile dealer. Section 67.3(b)(3) is amended to reduce the minimum time frame from 4 years to 2 years for an insured to be eligible for an inspection waiver for an additional and/or replacement automobile when the insured has been continuously insured for automobile insurance, with the same insurer or another insurer under common control or ownership. Section 67.3(b)(11) is added to allow an inspection waiver when an insured under a new policy had the automobile continuously insured for physical damage coverage by a pervious insurer that inspected the automobile within the prior two years. or ownership. Section 67.4(b) is amended to increase the inspection deferral period from 5 to 14 calendar days. Section 67.5 is amended to recognize the use of new technology (digital photography, electronic storage and retrieval of inspection reports and photographs, use of email). Section 67.7(c)(1)(i) is amended to expand the current renewal inspection notice requirement from 33 days prior to renewal date to at least 45 days but no more than 60 calendar days prior to the annual policy renewal date in order to track with Insurance Law section 3425. The proposed rule also includes non-substantive technical changes designed to clarify various provisions in the regulation. Final rule as compared with last published rule: Nonsubstantive changes were made in sections 67.3(b)(6), 67.4(b), 67.5(a) and 67.12 FORM A.

2. Legislative objectives: Insurance Law section 3411 directs the Superintendent to promulgate regulations implementing the section, which, among other things, requires insurers to inspect private passenger automobiles (“automobiles”) when issuing physical damage coverage on the automobiles. 3. Needs and benefits: Insurance Law section 3411 prescribes a framework when insurers provide physical damage coverage for automobiles and the duties of insurers and insureds with respect to inspections of automobiles. Inspections of automobiles have been mandatory since 1977 in order to combat insurance fraud, and only under limited circumstances has the current rule permitted insurers to waive or defer inspections. However, with advances in technology to combat automobile physical damage insurance fraud, certain provisions of the current rule have been rendered obsolete or unduly burdensome to insurers and insureds. This proposed rule updates the regulation, which should reduce unnecessary expenses to insurers and consumers, while maintaining necessary requirements to combat fraud. The proposed rule also clarifies various provisions of the regulation, including the types of automobiles subject to the inspection requirement, and expands the optional inspection waivers available to insurers. 4. Costs: The proposed rule imposes no compliance costs on state or local governments. The proposed rule should reduce costs to insurers overall for the administration, processing of paperwork, operations and underwriting of automobile physical damage insurance. These savings ultimately should be passed on to consumers. 5. Local government mandates: None.

continued on page 20

INSURANCE ADVOCATE / January 12, 2015 19

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[ COVER ] continued from page 19

6. Paperwork: The proposed rule does not generate any additional paperwork, other than a revised Plan of Operation that insurers would file with the Department if insurers chose to incorporate the optional waivers in the proposed rule. However, the rule reduces the paperwork requirements on an insurer by permitting an insurer to use separate entities such as CARCO Group, Inc., to maintain a central repository of its physical damage inspection reports. 7. Duplication: None. 8. Alternatives: Recognizing advances in technology and measures to reduce automobile insurance fraud, the Superintendent submitted an outreach draft to various stakeholders for comment. Some of the more significant comments that the Superintendent considered are set forth below. Stakeholders recommended adding a number of optional waivers to the inspection requirement, including waivers for certain types of insureds, where the insured has other types of coverage with the insurer, and when the vehicle is at least three years old rather than seven years, as the current rule provides. The Superintendent considered those optional waivers and concluded that waiving the inspection requirement under those circumstances may present improper inducement and discrimination concerns, and could lead to increased instances of fraud. Other suggestions for optional waivers already were addressed in the Department’s amendments to the current rule. The Superintendent also considered a suggestion that the rule no longer should require inspection reports to settle physical damage claims because to do so is counter-productive and would delay settlement. The Superintendent rejected this suggestion, concluding that using an inspection report in settling a physical damage claim is necessary to protect both the consumer and the insurer because the report confirms the condition of the insured’s automobile, thus deterring fraud, which in turn may lower insurance rates. Stakeholders also recommended that the five-day inspection deferral period be expanded to 10-14 days. The Superintendent considered this alternative and agreed that a 10-day deferral period would give insureds at least one full weekend in which to comply with the inspection requirements. However, the Superintendent originally rejected any time longer than 10 days on the ground that a longer time could lead to increased incidence of fraud. All interested parties who subsequently submitted comments to the proposed amendments regarding the Department’s increase in the deferral time period for inspections after the effective date of the policy supported that change, but continued to recommend that the deferral period be longer than 10 days to provide more flexibility to consumers trying to obtain inspections. Although the Department was originally concerned that a deferral period longer than 10 days would lead to increased incidence of fraud, the Department has reconsidered that position. 20 January 12, 2015 / INSURANCE ADVOCATE

The Superintendent also considered a suggestion that the rule no longer should require inspection reports to settle physical damage claims because to do so is counter-productive and would delay settlement. Advancements in the use of technology mean that insurers now get almost instantaneous reports from car inspection sites, whereas it used to take several days to mail the reports. Because the reports get into the hands of the insurers sooner, there is no substantive difference between the 10 days plus mailing that the Department was considering as the period and 14 days with electronic reports. Accordingly, the Department agrees with the commenters and will increase the deferral period to 14 days as some commenters suggested. Fourteen days will allow more time for consumers to obtain inspections without having an adverse impact on other anti-fraud measures in the regulation. 9. Federal standards: None. 10. Compliance schedule: There is no compliance requirement placed on insurers because changes made to the regulation are optional and insurers could maintain their existing procedures. Insurers that opt to adopt those optional changes would be able to do so as soon as they file revised Plans of Operation with the Department. Revised Regulatory Flexibility Analysis The Department of Financial Services (the “Department”) made a nonsubstantive change to section 67.3(b)(6) in order to add language to conform to other provisions in the regulation. In response to a public comment received, the Department also has made a non-substantive change to section 67.4(b) to change the deferral of inspection from 10 calendar days to 14 calendar days for reasons specified in the Revised Regulatory Impact Statement. The Department also made a non-substantive language change in section 67.5(a), and deleted “motorcycle” from Form A because a motorcycle is not a “private passenger automobile” under the regulation. Because these changes have no effect on the last published Regulatory Flexibility Analysis for Small Businesses and Local Governments, it is not necessary to revise the previously published Regulatory Flexibility Analysis for Small Businesses and Local Governments. Revised Rural Area Flexibility Analysis The Department of Financial Services (the “Department”) made a nonsubstantive change to section 67.3(b)(6) in order to add language to conform to other provisions in the regulation. In response to a public comment received, the Department also has made a

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[ COVER ] non-substantive change to section 67.4(b) to change the deferral of inspection from 10 calendar days to 14 calendar days for reasons specified in the Revised Regulatory Impact Statement. The Department also made a non-substantive language change in section 67.5(a), and deleted “motorcycle” from Form A because a motorcycle is not a “private passenger automobile” under the regulation. Because these changes have no effect on the last published Rural Area Flexibility Analysis, it is not necessary to revise the previously published Rural Area Flexibility Analysis. Revised Job Impact Statement The Department of Financial Services (the “Department”) made a nonsubstantive change to section 67.3(b)(6) in order to add language to conform to other provisions in the regulation. In response to a public comment received, the Department also has made a non-substantive change to section 67.4(b) to change the deferral of inspection from 10 calendar days to 14 calendar days for reasons specified in the Revised Regulatory Impact Statement. The Department also made a non-substantive language change in section 67.5(a), and deleted “motorcycle” from Form A because a motorcycle is not a “private passenger automobile” under the regulation. Because these changes have no effect on the last published Job Impact Statement, it is not necessary to revise the previously published Job Impact Statement. Initial Review of Rule As a rule that requires a RFA, RAFA or JIS, this rule will be initially reviewed in the calendar year 2017, which is no later than the 3rd year after the year in which this rule is being adopted. Assessment of Public Comment The Department received comments from 11 interested parties in response to its publication of the proposed Fifth Amendment to 11 NYCRR 67 (Insurance Regulation 79) in the New York State Register. • The Department received comments from the following entities: • Property/casualty insurers; • Trade associations comprised of New York State automobile insurers; • An insurance agency; • Trade associations comprised of insurance agents in New York State; • A member of the New York State Assembly; and • A motor vehicle inspection company. Summaries of the comments on the proposal and the Department’s responses thereto are as follows: General comments The motor vehicle inspection company strongly supports this proposed rule and asserts that pre-insurance physical damage inspections should remain mandatory because those inspections continue to serve as a valuable tool in combating systemic vehicle thefts by organized stolen car rings.

One insurer trade association recommended that the definition of “private passenger automobile” in § 67.1(a) be amended to exclude private passenger vehicles primarily used for commercial purposes or that are insured under commercial vehicle policies because fraud involving those vehicles is “highly uncommon.” One insurance agent trade association supports the Department’s proposed changes to the regulation, and suggests additional changes for consideration. However, insurers and another agent trade association generally do not support any statute or regulation establishing mandatory underwriting inspection requirements because of advances in technology to combat automobile insurance fraud and theft, and even question the need for the mandatory photo inspection of motor vehicles, contending that national databases such as CARFAX® and the National Insurance Crime Bureau store vehicle identification numbers and motor vehicle claims information that can be used to determine whether a motor vehicle to be insured actually exists and whether it has any previous physical damage. However, Insurance Law § 3411 requires that an insurer conduct an inspection of an automobile prior to issuing coverage for physical damage and Insurance Regulation 79 implements that statutory mandate. Moreover, the Department disagrees that there is no need for the mandatory inspection of motor vehicles; rather, the regulation is a necessary tool to aid in combating insurance fraud and abuse and organized automobile theft rings in the state. The Department recognizes, however, that in light of advances in technology to combat automobile physical damage insurance fraud, certain provisions of the current rule have become obsolete or unduly burdensome to insurers and insureds. The proposed rule modifies those provisions without compromising the proven effectiveness of photo inspections of motor vehicles in reducing fraud and abuse. Comments on specific parts of the proposed rule are discussed below. RE: Proposed 11 NYCRR 67.1 (“Definitions”) Comment One insurer trade association recommended that the definition of “private passenger automobile” in § 67.1(a) be amended to continued on page 22

INSURANCE ADVOCATE / January 12, 2015 21

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[ COVER ] continued from page 21

exclude private passenger vehicles primarily used for commercial purposes or that are insured under commercial vehicle policies because fraud involving those vehicles is “highly uncommon.” Alternatively, the association recommended that all references to “private passenger” be removed from the regulation because the term implies that the rule may not apply to commercial vehicles. The association also asserted that applying the Vehicle and Traffic Law definition to “farm vehicle” may be confusing because insurers and agents may not be able to determine which vehicles fall within that definition, and suggested that “farm vehicle” should be defined as “a vehicle predominantly used for farm purposes.” Department’s Response The Department is not persuaded that there is an insignificant amount of fraud relating to vehicles insured under commercial vehicle policies, and the association has proffered no evidence that this is the case. The regulation uses the term “private passenger” automobile because that is the term used in § 3411. The Department also believes that the definitions of “private passenger” and “farm vehicle” in the regulation and the VTL are clear and unambiguous. Comments One insurer recommended that 11 NYCRR § 67.1(g) be clarified to address whether a licensed repair shop’s or an authorized representative’s visual inspection, along with photographs from an insured satisfy the inspection requirement for out-of-state vehicles. The insurer suggested waiving the inspection requirement for out-of-state vehicles or permitting only a visual inspection. The insurer also recommended that § 67.1(j) be amended to permit an insurer to manually reproduce an inspection report rather than have to produce an exact copy of the report as the provision requires, because “systems limitations” may not permit the reproduction of exact copies. Another insurer suggested that the rule be clarified to not require insurers to use a particular motor vehicle inspection service, and that an insurer be permitted to designate an agent or staff member in the agent’s office to conduct inspections. Department’s Responses 11 NYCRR § 67.1(g) was amended to eliminate the licensing or registration requirement for motor vehicle inspection companies because the Department performs no such licensing or registration. The proposed rule only requires that the individual or entity selected to perform motor vehicle inspections be “properly qualified” to do so, and does not require an insurer to use any particular motor vehicle inspection service. The Department is not persuaded by the insurer’s claim that it is more difficult to reproduce an exact copy of an inspection report, given today’s advances in technology, than it is to manually copy information from an inspection report. Comment One insurer asserted that this provision could have an adverse impact on consumers by delaying new coverage or amending 22 January 12, 2015 / INSURANCE ADVOCATE

One insurer asserted that this provision could have an adverse impact on consumers by delaying new coverage or amending existing coverage until a vehicle is inspected. existing coverage until a vehicle is inspected. According to the insurer, such a delay also could have “adverse consequences under the state’s “financial responsibility laws for those making a legitimate request for insurance,” and the insurer suggested that more waivers of the mandatory inspection requirement would minimize those consequences. The insurer also questioned whether this provision would adversely impact the practice that when a vehicle is added as a replacement for a covered vehicle or a new vehicle, coverage under an existing policy is extended for a brief period until a new policy is issued. Department’s Response The Department does not find the insurer’s comments compelling enough to warrant additional waivers of the mandatory inspection requirement. With respect to the “brief ” extension of coverage to a replacement or new vehicle to be added to an existing policy, § 67.4(i)(1) provides a limited exception to § 67.2 whereby an insurer may extend coverage to a replacement vehicle for five calendar days from the date the insured acquired the replacement vehicle. Lastly, since the inspection requirements do not impact liability insurance coverage, the Department does not understand how they could have adverse consequences under state financial responsibility laws. Comment One insurer trade association sought clarification regarding § 67.2 and its relationship to § 67.4(i)(1), particularly with respect to the notice that an insured is required to provide its insurer when it obtains a new vehicle, and regarding why § 67.4(i)(1) only applies to replacement vehicles and not additional vehicles. Department’s Response The proposed regulation is clear that the notice requirement in § 67.4 shall commence at the conclusion of the five-calendar-day period with regard to the limited exception. 11 NYCRR 67.4(i)(1) provides a limited exception to the mandatory inspection requirement set forth in § 67.2 when the named insured acquires an automobile that replaces an automobile currently insured on the policy and has yet to inform the insurer of the acquisition of the replacement vehicle. This limited exception exists in the current regulation and the only change being made is the duration of the automatic extension of coverage. The Department has approved policy form filings that provide such automatic extension of coverage to a replacement vehicle. continued on page 26

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[ COVER ] continued from page 22

Comments One insurer proffered several comments regarding this provision. The insurer recommended (1) that the waiver be applied to vehicles more than four years old rather than at least seven years old, as proposed in the rule; (2) that the current requirement that the age of the vehicle be calculated as the model year of the vehicle as of January 1 remain unchanged, rather than having the age be calculated as of the effective date of the coverage as the Department proposed, because that proposal would result in unduly burdensome costs to the insurer; (3) that the waiver be applied to six months of continuous coverage, just as in New Jersey, which has amended its waiver provision, rather than to two years as the Department proposed; (4) that the requirement that an insured must agree to the transfer of coverage in order to comply with the waiver be eliminated because this requirement is “unnecessary” to the inspection process; (5) that the two-year continuous coverage without a lapse requirement for the waiver be eliminated, or alternatively, that “without a lapse” be eliminated as unnecessary; (6) that the requirement that the inspection waiver be based on underwriting criteria be eliminated as unnecessary; (7) the elimination of the provision mandating that coverage not be suspended during the initial policy term because the insured failed to submit the requisite documents, and the requirement that if an insured fails to produce the documents prescribed in § 67.3, then the insured must have the vehicle inspected, because they would result in “programming” costs to insurers; (8) that the insurer requesting either a copy of the window sticker/advanced dealer shipping notice or a copy of the bill of sale should be sufficient rather than both as the rule requires; and (9) that the insured should be required to send a copy of the window sticker and bill of sale within a prescribed time rather than having until its anniversary coverage renewal date as the rule proposed because this proposal would result in “programming costs” to the insurer. Department’s Responses The Department does not find any of the insurer’s comments compelling. The Department believes that waiving the inspection requirement after two years of continuous coverage without a lapse is a reasonable compromise of the current four-year requirement to establish a trustworthy relationship between an insurer and its insured. The insurer has proffered no evidence that six months of coverage will result in a similar reduction in potential fraud. Also, New Jersey has a four-year continuous coverage requirement and not a shorter time period as the insurer stated. The inspection waiver being subject to underwriting criteria is necessary to ensure that insurers are fairly and consistently applying waivers of inspection to all their insureds. The Department believes it is necessary for the insurer to receive both the window sticker/advance dealer shipping notice and a copy of the bill of sale, because these documents contain different pertinent information. The rule as proposed provides a clear time frame for the insurer to obtain these required documents for applying the waiver of the inspection of a new automobile. If the documents are not received at least 60 days prior to the anniversary renewal, the 26 January 12, 2015 / INSURANCE ADVOCATE

The Department believes that at least two years of continuous coverage is sufficient to provide additional flexibility to insurers to waive inspections when warranted while safeguarding against insurance fraud and abuse. insurer will need to require the mandatory inspection of the vehicle to continue the physical damage coverage upon renewal. Finally, the Department is not persuaded that any programming costs incurred to implement this provision would be unduly burdensome. Comment The vehicle inspection company stated that it did not oppose the proposed reduction from a four-year time period to a two-year time period that the insured must be continuously insured before an insurer can waive the inspection requirement, but recommended changing the time period to three years based on “feedback from law enforcement.” Department’s Response The Department believes that at least two years of continuous coverage is sufficient to provide additional flexibility to insurers to waive inspections when warranted while safeguarding against insurance fraud and abuse. The motor vehicle inspection company has not provided any empirical data or written statements from “law enforcement” that the Department’s proposal would have a deleterious effect. Comment One trade organization representing insurers recommended that the provision requiring consent from the insured before coverage is transferred should be eliminated because a named insured “does not commonly affirmatively consent” to the transfer, but is only advised by its agent of the transfer of coverage. One insurer also asserted that this provision should be eliminated because it is irrelevant to the inspection process. Department’s Response The Insurance Law does not permit any automatic transfers of motor vehicle insurance coverage to another insurer without issuance of an appropriate termination notice by the current insurer unless the policy has been replaced. A replacement policy may not be effected without some form of consent from the insured. This may be done affirmatively or presumptively with appropriate and timely notification provided to the insured but subject to the insured’s rejection of the move. The Department is not compelled to revise the current provision as it exists in the regulation. continued on page 28

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[ COVER ] continued from page 26

Comments The motor vehicle inspection company recommended that the rule should be amended to make payment of a physical damage claim dependent on whether the insurer obtained proof of the prior inspection from the previous insurer as required for specific optional waivers set forth in § 67.3(b) in order to minimize potential fraud. Insurers and their trade associations asserted that requiring inspections as a condition of renewal is largely unnecessary, would only increase costs and burden consumers, and would not deter fraudulent activity because an insured who intends to commit automobile insurance fraud likely would do so within the initial policy year. Therefore, they stated, these provisions should be deleted from the regulation. Department’s Response With respect to the motor vehicle inspection company’s recommendation, it is not appropriate for an insured to not receive payment of a valid physical damage claim solely due to a previous insurer not providing the inspection documents when the insured vehicle had actually been inspected as required by those specific optional waivers. Additionally, the Department does not find compelling the arguments of the insurers and their trade associations that inspections as a condition of renewal will not serve to deter fraud. Those commentators have proffered no evidence that fraudulent activity only occurs during the initial policy year, and the Department finds it implausible that no insured who intends to commit insurance fraud would attempt to do so during a renewal period. Comment An agent trade association expressed concerns with the requirement set forth in 11 NYCRR 67.3(b)(7), (8) and (10) that in order to waive the mandatory inspection requirement, a vehicle must be physically inspected by the previous insurer, particularly in the case where the vehicle is new or has not been sold or transferred. Department’s Response The Department will take under consideration the applicability of these waivers when the vehicle was originally new and the inspection was waived by the previous insurer pursuant to § 67.3(b)(2), but will not delay implementation of the proposed amendment at this time. Comment When the Department sought outreach comments prior to proposing the amendments, stakeholders recommended that the fiveday inspection deferral period in 11 NYCRR 67.4(b) be expanded to 10-14 days. The Superintendent considered this alternative and agreed that a 10-day deferral period would give insureds at least one full weekend in which to comply with the inspection requirements. However, the Superintendent at that time rejected any time longer than 10 days on the ground that a longer time might lead to increased incidence of fraud. All interested parties who submitted comments to the proposed amendments regarding the 28 January 12, 2015 / INSURANCE ADVOCATE

Department’s increase in the deferral time period for inspections after the effective date of the policy supported that change but continued to recommend that the deferral period be longer than 10 days to provide more flexibility to consumers trying to obtain inspections. Department’s Response Although the Department was originally concerned that a deferral period longer than 10 days would lead to increased incidence of fraud, the Department has reconsidered that position. Advancements in the use of technology mean that insurers now get almost instantaneous reports from car inspection sites, whereas it used to take several days to mail the reports. Because the reports get into the hands of the insurers sooner, there is no substantive difference between the 10 days plus mailing that the Department was considering as the period and 14 days with electronic reports. Accordingly, the Department agrees with the commenters and will increase the deferral period to 14 days as some commenters suggested. Fourteen days will allow more time for consumers to obtain inspections without having an adverse impact on other anti-fraud measures in the regulation. Comment Insurers and their trade associations recommended that the notification of mandatory inspection requirements prescribed in 11 NYCRR 67.4(f) et. seq. should be deleted as impractical and that an online transaction should serve as an insured’s consent to receive notice electronically. Department’s Response As the Department has expressed, pre-insurance automobile inspections are critical to thwarting insurance fraud and abuse. These notification of inspection provisions are necessary to ensure that consumers are made aware of the mandatory automobile inspections. The Department does not find it an undue burden, especially with advances in technology, for an insurer to maintain a record of the insurer’s representative who notified the insured in person or by telephone of the inspection requirement and possible inspection locations, or for an insurer to format its online database to ensure than an insured acknowledges the notice of mandatory inspection before completing its transaction. Comment One insurer suggested that § 67.5(a)(1) and (2) pertaining to inspection times and locations be deleted or waived because there may not be a facility convenient to an insured on a Sunday and there may be instances where an insured purchased a vehicle in a state with no inspection requirement or no location within 50 miles of the insured, and the insured may not return to New York State before the inspection deferral period expires. Department’s Response The Department is not persuaded by the insurer’s reasons for deleting or waiving those provisions. These provisions were amended to provide the widest possible latitude for insurers and consumers to comply with the inspection requirement prescribed in Insurance Law § 3411 and Insurance Regulation 79.

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[ COVER ] Comment An insurer expressed concerns with the provision in § 67.5(e)(3) that requires an insurer to send a copy of the inspection report to the insured within seven calendar days of the inspection, if the person presenting the vehicle for inspection was not the insured. Department’s Response This amendment will ensure that the insured receives a copy of the inspection report, and the Department believes that such instances will be infrequent and that insurers will not incur any unduly burdensome costs to comply with this requirement. Comment One insurer questioned why § 67.6(a) was amended to state that the automobile should be made “available” rather than to explain how the inspection should be conducted as set forth in the current regulation. Department’s Response This amendment was made to address the concern that an insured should not be penalized for not complying with the mandatory inspection requirement because the inspection facility was unable to conduct the inspection at the time the vehicle was made available.

The prescribed Confirmation of Suspension of Physical Damage Coverage form is necessary to specifically notify an insured that coverage has been suspended for failure to comply with the mandatory inspection requirement. Department’s Response This provision was removed from Insurance Regulation 79 because it pertains to endorsements and is unrelated to mandatory inspection requirements. This provision may be found at 11 NYCRR 216.12 (Insurance Regulation 64). Proposed 11 NYCRR 67.11 (“Inspection report central repository”)

Comment One insurer questioned the need to provide an insured with a Confirmation of Suspension of Physical Damage Coverage form for failing to comply with the mandatory inspection requirement because, when coverage is suspended, the insurer sends the insured an endorsement policy declaration page that shows removal of coverage.

Comments An insurer asked whether there is any record-keeping requirement should an insurer elect to maintain inspection records in a central repository pursuant to 11 NYCRR 67.11. Another insurer sought clarification as to whether this provision precludes an insurer from maintaining an inspection in its own repository in addition to a central repository.

Department’s Response The prescribed Confirmation of Suspension of Physical Damage Coverage form is necessary to specifically notify an insured that coverage has been suspended for failure to comply with the mandatory inspection requirement. A policy declaration page does not specifically alert the insured of this suspension but simply informs the insured that the coverage is no longer part of the policy, along with providing other information regarding the policy.

Department’s Responses All inspection records, regardless of where maintained, are subject to the record retention requirements prescribed in § 67.5(e)(1) and 11 NYCRR 243 (Insurance Regulation 152), and the insurer is responsible for ensuring that the records are kept in accordance with such requirements. See 11 NYCRR 243.2(d). Nothing in the proposed rule, however, precludes an insurer from maintaining its inspection records in its own repository.

Comment A trade association representing insurers recommended that § 67.8(c) be amended to include the use of a form substantially equivalent to the prescribed Automobile Insurance Inspection Report (Form A).

Proposed 11 NYCRR 67.12 (“Forms”)

Department’s Response Insurance Law § 3411(h) requires that the inspection be recorded on a form prescribed by the Superintendent, and that is Form A. Comment One insurer objected to the deletion of current § 67.9(d), which pertains to the New York mandatory automobile repairs endorsement for physical damage, because the insurer may require a completed Certification of Automobile Repairs.

Comments One insurer suggested that the Insurance Inspection Report (NYS APD FORM A) be amended to include other accessories and optional equipment. Another insurer suggested removing “motorcycle” from the Inspection Report since a motorcycle is not a “private passenger automobile” under the regulation. Department’s Responses Form A contains an “Other” section to include accessories and optional equipment that are not specified on the form. The Department agrees with the technical change to remove “motorcycle” from Form A. The form has been amended to reflect that change.[IA] INSURANCE ADVOCATE / January 12, 2015 29

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[ ON THE LEVEL ]

By Jamie Deapo

We’re Not Alone

t’s easy to feel that you’re alone when you struggle with business issues. One issue I have been struggling with lately is how independent agents and brokers can get consumers to appreciate the value they bring to buying insurance protection. To those of us who work in the system it’s a no-brainer. There is also a group of consumers who understand the value and buy their protection from us. The big question is what it will take to motivate consumers who currently buy direct from companies that Jamie Deapo our method has advantages they shouldn’t pass up. Over the holidays I found myself waiting in Walmart for my wife who was as usual spending way more time shopping than was necessary. I found myself in the books and magazine section so I grabbed the latest issue of Mother Earth News and started to

flip through the various articles. One caught my eye written by Joel Salatin entitled The “New Fashioned” Food System That Helps and Heals. The article was all about the struggle of organic food producers who attempt to provide healthy, safe food in a sustainable way. What I found surprising was how similar their problems were to the ones we encounter attempting to get consumers to appreciate the value we bring to insurance protection. Like us they compete with gigantic food conglomerates that have enormous advertising budgets that allow them to convince consumers that cheap and convenient food is what is important. Their competition also trivialize issues like GMOs, heavy chemical fertilizer use, inhumane treatment of animals and dangerous food additives. Sound familiar?? We compete with large, direct insurance companies that spend significant amounts of money on advertising to convince consumers that buying insurance protection comes down to lowest cost coupled with buying protection as conveniently as possible over the phone or internet. They trivialize our role as a trusted advisor to the

4441 Sepulveda Blvd., Culver City, CA 90230-4847 www.zalma.com | zalma@zalma.com 310-390-4455 | fax: 310-391-5614 http://zalma.com/blog Zalma Insurance Consultants provides expert advice to counsel for insurers and counsel for policyholders. Advice from Zalma Insurance Consultants is indispensable to the resolution of insurance disputes. Consultation from Zalma Insurance Consultants can save you, your counsel or client hundreds of hours of investigative and legal work. 30 January 12, 2015 / INSURANCE ADVOCATE

consumer and downplay the potential risk of buying too little coverage or failing to buy protection that the consumer may very well need. They infer that consumers don’t need an advocate during the claims process and instead should be happy with how quickly their claim is processed. Is it possible that quick resolution of a claim doesn’t allow the consumer to get everything they are entitled to and eliminates their ability to do something about it because the insured has signed off and the claim is closed? The funny thing is that there are consumers who know the value of buying organic and sustainable low impact food, however they are lured away from it by the low cost and the hope that they and their family won’t suffer as a result of their decision. I believe we also have a group of insurance consumers who feel the same way. They are drawn to buying their protection from direct response companies for the premium savings and they hope that they and their family won’t suffer as a result of having missing or inadequate coverage. They believe they are sharp enough to deal directly with the insurance carrier getting all they are entitled to and making sure their claim is handled quickly and fairly. The solution Mr. Salatin recommends for organic food producers is to educate consumers that the methods they use are not old-fashioned but actually new-fashioned because they incorporate the best of today’s knowledge to provide a safe food supply. He encourages those producers to educate consumers to all the benefits their method of food production provides, especially for the health of their family as well as the planet. I believe we are tasked with a similar challenge. We need to show consumers they can get excellent advice and proper coverage provided quickly by an agency that uses technology. We also need them to understand and be confident that we will provide them with proper protection and claims backup at a very competitive price. We need to find a way to educate them to all of the traps and pitfalls associated with not having the correct or enough coverage. Technology,

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specifically social media, can help us do that. Use social media to educate consumers by providing stories of how someone suffered financially, physically and emotionally because of having too little or missing coverage. We can’t forget that inadequate or improper coverage can cause physical and emotional suffering due to not having the funds to assist injured people to fully recover. Too many people don’t see themselves being involved in a significant loss. They equate insurance protection to a fender bender or some minor home damage. Those types of losses aren’t significant enough to cause concern if someone’s coverage is lacking. But have a serious car accident or home loss without enough or proper coverage and a person’s world can be turned upside down. The effect of such an event can last for years and in some cases a lifetime. The point of my article is to say that it’s not only independent insurance agents who suffer from a lack of consumer attention to the quality of its product. Buying cheap and convenient may not be the best value and yet we see it promoted in many businesses. We need to educate consumers to the fallacy of that kind of thinking. Our efforts need to be creative if we are to gain their attention. We need them to truly understand the risk they take should they fail to buy the correct coverage or enough coverage. Yes, not everyone will experience a serious loss; however there is no crystal ball they can consult to see if they will be the one. Choosing wrong could have a disastrous effect on them and their family. Once they know the potential outcome are they still willing to take that risk? If most independent agents really make a sincere effort to get this message out it will start to resonate with consumers. It will encourage them to discuss the issue and ask questions. Most consumers don’t trust insurance companies so it should be easier to convince them that dealing directly with one is not in their best interest. Consumers like the idea of low cost insurance. Would they still like it if it meant little or no coverage when they need it the most? What a terrible feeling to know you could have protected your family better but you were swayed by poor judgment and the opportunity to save a few dollars. It’s our job to educate them to the risk they are taking and to offer them the professional advice and service they need and deserve. [IA]

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[ FACE TO FACE ]

By Michael Loguercio

Happy New Year!

o for my first article of 2015, I want to share with you something that truly doesn’t get enough press, but plays such a huge part in this thing of ours: the Excess and Surplus market. E&S makes up almost 15% of the Commercial Lines direct premiums, but being that the sector is so diverse and specialized it needs more focus in the adoption of standards and data transmission. Thanks to Ron Berg, Executive Director of the Agents Council of Technology (ACT) of the Independent Insurance and Brokers of America Association Inc., I am pleased to share with you the following information: ACT is proud to support the E&S Joint Working Group, which focuses on specific technology needs within the E&S space – the Retail/General agent relationship, Carrier needs, Michael Loguercio and the London/U.S. market.

ES JWG; Let’s Get Together and Share Data Agents Can Benefit As E&S Business Offers More Electronic Handshakes Provided by the E&S Joint Working Group (ESJWG) In 20 years, it’s more than doubled: Excess and surplus lines premiums in the U.S. now make up 13.7 percent of commercial lines direct premiums written as of 2013. That’s up from 6.1 percent share for 1993, according to A.M. Best’s 2014 Special Report, U.S. Surplus Lines - Segment Review, produced in cooperation with the Derek Hughes/NAPSLO Educational Foundation.

That growth trajectory means opportunity for agents: 1) for new business, and 2) for improving the workflow within the sector. The E&S business provides vital insurance protection for businesses and individual clients around the globe. But the sector is diverse, specialized and dispersed — meaning it’s been a relative laggard in adopting standards and data sharing. 32 January 12, 2015 / INSURANCE ADVOCATE

But not for long. Now, it’s time for E&S business and tech pros to lead the next phase of growth for standards and workflow. That’s the aim of a group that’s flown under agents’ radar: The E&S Joint Working Group (ESJWG.org). Since 2011, a core group of volunteer leaders has been updating interface capabilities for the E&S business, aiming for greater interoperability among partners. More in the “5 Quick Queries” section at bottom of this article.

These E&S pros are leveraging their own experience in collaboration with peers in three (3) distinct sectors of the business. Here’s a snapshot of the Subgroups and their key topics: Retail Agent – General Agent Subgroup Co-Chairs: Lisa Parry Becker, William B. Parry & Son / Tate Tooley, Bloss & Dillard The subgroup works on ways for GAs to better support their retail agent business partners who bring them risks. Accomplishments: — Created roadmap for GAs to develop websites for online access for agents. — Provided proof of concept for passing data from agents’ management system to GA system. Action Items: — Calling on business partners in E&S to implement standards. — Aiming to expand activity notes for E&S business within agency systems. — Creating survey of agents to determine direction of tech initiatives. — Looking for ideas to increase involvement of Main Street agencies in the business. Carrier Subgroup Co-Chair: Greg Ricker, Sombra Technologies The subgroup has a track record of expanding existing ACORD standards to encompass E&S customer needs. Accomplishments: — Expanded CGL standard to include E&S business (approved by ACORD Jan. 2013). The CGL standard, familiar throughout the industry, is now extensively available for E&S risks (including claims made, occurrence, professional liability, liquor and more). — Expanded commercial property standard to include E&S business (approved by ACORD Jan. 2014).

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[ FACE TO FACE ] — E&S carriers have implemented rating; quotes, binders, and rate sheets; loss runs and claim download. Action Items: — Expanding inland marine standard for 40 classes of E&S business (submitted to ACORD). — Plotting expansions of standards for: commercial umbrella, excess liability, directors & officers, employer professional liability, and employee benefits, professional liability, and employee benefits. London Subgroup Co-Chairs: Tammie Miller, Risk Placement Services, Inc. / Sarah Thacker, Lloyd’s The subgroup is looking for bridges between the U.S. market and London underwriters. Accomplishments: — Bridged the jargon gap between London and U.S. markets. — Presented proof of concept in 2014 for data exchange between the management system of a U.S. wholesaler and the system of a London underwriter. Action Items: — Encouraging implementation of expanded ACORD standards in CGL and commercial property. — Defining “real time” so business partners have accurate expectations. — Streamlining reporting of premium and risk. E&S is no longer a niche that touches the IA channel on the outskirts. It plainly represents a future opportunity for the independent agent channel, especially to feed the need for agencies to specialize. That’s why independent agents can and should benefit from the progress made to date by implementing existing E&S standards — but also stepping forward to keep pace, give feedback, and even join in ongoing action items to improve E&S business workflows. Contact information: Visit http://esjwg.org/. CJ Ketterer, Agent Facing Technology Manager with Catlin Insurance, Scottsdale, AZ, is co-chair of ESJWG. Note: A.M. Best’s 2014 Special Report, U.S. Surplus Lines Segment Review is available to NAPSLO members by visiting NAPSLO.org. 5 Quick Queries about the E&S JWG 1. What is ESJWG? It’s a coalition sponsored by: NAPSLO (National Association of Surplus Lines Offices) AAMGA (American Association of Managing General Agents) ACORD ACT (Agents Council for Technology)

2. Who does it serve? Managing General Agents (MGAs)/Wholesalers Retail Agents E&S Carriers Vendors 3. What’s ESJWG’s mission? To further the standards-based electronic exchange of information in the E&S market. 4. How many are involved? About 300 business/technology professionals among E&S carriers, general agents, vendors and retail agents are active as volunteers or in following the issues. 5. How does an agent get involved? First, find out more at http://esjwg.org/. Second, ask E&S business partners where they stand and what they can offer. Third, contact one of the volunteer leaders. Until next time when we will be talking about some of the winter conferences happening in our area, such as the PIA of NY’s annual Metro Regional Awareness Program held in the Brooklyn Marriott, I wish you and your families a very happy, healthy, and safe 2015…“Ciao for now!”[IA] Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as a licensed insurance broker and an insurance technology professional. He is an active Past President of the Young Insurance Professionals of New York State, current ACT/AUGIE, Professional Insurance Agents of New York State, Independent Insurance Agents and Brokers of New York State, and Council of Insurance Brokers of Greater New York committee member. NY-YIP/PIA has honored Michael with a “Distinguished Service” award in 2001; “Insurance Professional of The Year” award in 2009; “Lifetime Achievement” award in 2012; and “Special Service” awards in 2013 and 2014. In his community, Michael is the Immediate Past President and current member of the Longwood Central School District Board of Education on Long Island, NY since 2004; is a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of The Middle Island, NY, Rotary Club; Central Brookhaven Lion’s Club; and Ridge, NY, Volunteer Fire Department. He also served two terms on his Church’s vestry, and in 2013 he was awarded the SCOPE “Community Service” award for his dedication to the public. Michael is a regular Contributor to the Insurance Advocate since 2008, and may be contacted at 631-345-9359 or michael.loguercio@ezlynx.com.You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr.

INSURANCE ADVOCATE / January 12, 2015 33

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[ CYBERRISK ]

By Lior Frenkel, CEO and Co-founder of Waterfall Security Solutions

How Underwriters Can Weigh (and Diminish) Cyber Risk Against Critical Infrastructure

ritical infrastructure presents a difficult cyber risk problem for insurance underwriters. The capability for cyber attacks is growing, and they are becoming increasingly targeted. The Havex and BlackEnergy malware strains are but two recent examples of the growing sophistication of high-end capabilities for adversaries of any skill level. Military-grade cyber attack techniques, like those used in the infamous Stuxnet attack on Iranian nuclear facilities, are no longer in the hands of just governments. These attacks have been thoroughly and publically documented, and the techniques are available to everyone from hacktivists to terrorists. Unlike earthquakes, equipment failures and other hard-to-predict natural and man-made events, cyber attacks are carefully planned. In critical infrastructure markets, the question about cyber threat is no longer focused on “if ” or “how,” but rather “when.” While there are countless examples of successful cyber attacks on government and business networks of all types, there are fewer public disclosures of cyber attacks on the control system networks responsible for the safe and reliable operation of large, dangerous physical infrastructures. If relying on disclosures as a benchmark to assess the risk for a utility, an underwriter using an actuarial approach might rate the risk as minimal – but that is a limited view of the real threat.

Targeted persistent attacks (TPAs) threaten remote service centers Modern attackers more or less make it their full-time job to assault an organization over a period of weeks or months. They use continuous, interactive remote control tools called Remote Administration Tools (RATs) to defeat standard IT-style protections, and they can learn these attack techniques in virtually any intermediate security training program. TPAs are routinely practiced, and routinely defeat even sophisticated security software systems protecting corporate networks and control system networks. It takes little imagination to see how devastating such an attack could be if directed at the networks controlling physical processes of industrial sites. 34 January 12, 2015 / INSURANCE ADVOCATE

Consider the turbines power companies use to create electricity. Turbine vendors generally require continuous remote “monitoring and diagnostics” for their turbines as a condition of support contracts and warrantees for that equipment. The vendors continuously monitor equipment for developing problems, and occasionally adjust the equipment remotely to address small problems that have the potential to grow into catastrophic failures. To enable these services, vendors require remote access into the turbine network, in most cases over the internet. Each central “monitoring and diagnostics” site is connected to hundreds or even thousands of turbine control systems, world-wide. A targeted breach of such a central site could result in widespread cyber attack of multiple power plants, nationwide, potentially taking down large parts of the grid. An incident like this would represent a disastrous cost for insurers, as well as a serious impact on society at large. How insurers can encourage better security standards As insurance underwriters determine the risk class of their policyholders, they must consider whether those customers have embraced security best practices for critical infrastructure. Namely, have customers adopted unidirectional security gateways that offer hardware protections and completely block modern, targeted remote control attacks? All software has defects, and many of those defects are also security vulnerabilities. In practice then, all software can be hacked. Software’s open door for hackers has created an environment in which criminals can breach a system remotely via the Internet from the safety of their offices in countries where no one will prosecute these crimes. Traditional IT cyber protections, such as firewalls, encryption, anti-virus systems and security update programs can stave off common malware and botnets, but do little to reduce the risk of modern, targeted attacks. Clearly, there must be a stronger-than-firewalls approach applied to the protection of safety-critical control systems.

Government authorities in several geographies now require such advanced protections for many classes of critical national infrastructures, and an even larger set of authorities is recommending unidirectional security gateways to critical infrastructures. These organizations have done their own risk assessments and concluded that firewalls and other software security systems are no longer sufficient to protect against modern attack capabilities. These organizations assess risk based on capabilities, not incident history, and insurance underwriters must do the same. As insurance companies assess the risks facing their critical infrastructure policyholders, insurers can take steps to encourage the use of stronger cyber security measures. Such measures should include at least one layer of hardware-enforced unidirectional security gateways as a means of protection that cannot be breached directly or indirectly from the Internet or through central monitoring systems. With cybercriminals proving their skill in targeted attacks, we can no longer ignore the capabilities-based risk to utility operations and safety systems. Minimizing that risk must begin with defensive capabilities which are at least as sophisticated as the adversaries’ attack capabilities. Today’s best practices demand the deployment of hardware-enforced unidirectional security gateways.[IA] Lior Frenkel is CEO and co-founder of Waterfall Security Solutions, the leading provider of Unidirectional Security Gateways stronger-than-firewall solutions for industrial control networks and critical infrastructures. The company’s products are deployed in utilities and critical national infrastructures throughout North America, Europe, Asia and the Middle East. Frenkel has over 20 years of experience in large scale hardware and software research and development, including government, military and enterprise-level cyber-security systems. Lior holds a B.Sc. in Computer Science and Statistics from Bar-Ilan University.

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ADVERTORIAL

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cern is that bright colors, fruit flavors and smells are very attractive to children. The proposed Child Nicotine Poison Prevention Act of 2014 would require childproof containers and allow regulation by the Consumer Product Safety Commission (CPSC). (www.aapcc.org) Six people per day die each day from alcohol poisoning, caused by drinking large quantities in a short period of time, or binge drinking. It is interesting to note that these victims are predominantly non-Hispanic white middle-aged men, and not college students. Alcohol dependence or alcoholism is linked to 30% of these deaths. (www.usnews.com) Unfinished drinks or open liquor bottles should not be left where curious children can find them. Pesticides and cleaning chemicals should be stored in their original, labeled containers. Read the labels about use and application, and wear protective clothing when handling. Whenever possible, switch to safer nontoxic methods for cleaning and disease or pest control. For example, vinegar works wonders as a cleaner. Some chemicals are so toxic that just a drop on the skin can be lethal. If someone is exposed to chemicals or

pesticides, remove them from the exposure immediately. Take off contaminated clothing and wash any skin that has been exposed. Different chemicals can affect the body differently, so be sure to let medical personnel know what type of chemical was involved. Read the label for proper disposal of medications, cleaning supplies and other chemicals such as pesticides. Flushing them down the drain is not a good idea, and is illegal in many jurisdictions. Many municipalities offer regular household hazardous waste disposal. Poisonings can often be treated safely at home. If poisoning is suspected, contact a local poison control center. The national helpline number is 1-800-2221222. The 55 centers are available 24/7. Helping clients protect themselves and their family members against accidental poisoning is another value-added service of the true insurance professional.

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[ COURTSI DE ]

By Lawrence Rogak

Contractor Fails to Purchase OCP Coverage for Owner, and Owner Does Not Become Additional Insured on CGL Policy Because Contract Did Not Require It Strauss Painting, Inc. v Mt. Hawley Ins. Co.

y agreement dated September 3, 2008, Strauss Painting, Inc. (Strauss)/Creative Finishes, Ltd. (Creative) contracted with the Metropolitan Opera Association, Inc. (the Met) to perform work on the Met’s premises; specifically, to strip and repaint the rooftop steel carriage track for the opera house’s automated window-washing equipment (hereafter, generally referred to as the contract). The contract was a tailored version of the American Institute of Architects’ “Abbreviated Form of Agreement Between Owner and Contractor For CONSTRUCTION PROJECTS OF LIMITED SCOPE where the Basis of Payment is a STIPULATED SUM” (AIA Document A107 [1978 ed]), with the parties’ attached Exhibits A through D made a part thereof. The first page of the contract designates the Met as “the Owner” and Strauss/Creative as “the Contractor.”

I. Indemnification and Insurance Requirements The contract mandates that Strauss/Creative indemnify and hold the Met harmless, “[t]o the fullest extent permitted by law,” from and against all claims and damages attributable to bodily injuries “arising out of or resulting from” work performed by Strauss/Creative or any of its subcontractors “caused in whole or in part by [their] negligent act or omission,” and “regardless of whether or not . . . caused in part by [the Met].” The contract’s provisions addressing insurance obligate Strauss/Creative to purchase and maintain contractors liability insurance to protect the Met from claims under workers’ compensation and other employee benefit acts, and “claims for damages because of bodily injury . . . which may arise out of or result from [Strauss/Creative’s] operations” under the contract, whether undertaken by Strauss/Creative, any of its subcontractors or “anyone directly or indi36 January 12, 2015 / INSURANCE ADVOCATE

rectly employed by any of them.” Additionally, the insurance “shall include contractual liability insurance” applicable to Strauss/Creative’s contractual duty to indemnify and hold the Met harmless; and “[c]ertificates of such insurance shall be filed with [the Met] prior to the commencement of” the construction project. Importantly, Exhibit D, entitled “Insurance Requirements,” fleshes out Strauss/Creative’s insurance obligations. This contract document requires Strauss/Creative to procure three types of insurance: (1) workers’ compensation insurance (paragraph [a]); (2) owners and contractors protective liability (OCP) insurance with a combined single limit of $5 million (paragraph [b]); and (3) comprehensive general liability (CGL) insurance, with combined coverage for property and bodily injury with a minimum single limit of $5 million, which might be met by umbrella coverage (paragraph [c]). As relevant to this appeal, paragraph (b) of Exhibit D, after identifying OCP coverage as an insurance requirement, specifies that “[l]iability should add [the Met] as an additional insured and should include contractual liability and completed operations coverage”; paragraph (e) directs Strauss to “furnish the Met [with] an Original Owners and Contractors policy,” and also to “provide certificates of insurance for the [Workers’] Compensation, the [CGL] and the ‘Umbrella’ Policy, prior to the commencement of the contract.” The contract was signed on behalf of the Met as “OWNER” by the opera house’s manager, and on behalf of Strauss as “CONTRACTOR” by Ralph Drewes (Drewes) as “VP”[FN1]. Strauss and Creative, although separately owned, shared the same address and some of the same employees[FN2]. At his deposition, Drewes testified that he ran the day-to-day operations of both companies, and reported to both Victor Strauss, the owner and presi-

dent of Strauss, and Hillary J. Klein, the owner and president of Creative. Strauss did not have an agreement with District Council 9, the painters’ union, while Creative did, and the contract between Strauss/Creative and the Met required the construction project to be carried out by “fully insured union painters.” For this reason, Strauss subcontracted the labor to Creative by agreement dated September 3, 2008, consisting of an unaltered standard form contract with an agreed-upon rider and attachments, and the underlying construction contract between Strauss/Creative and the Met (hereafter, the subcontract). The subcontract designates Strauss as “the Contractor” and Creative as “the Subcontractor,” and generally requires Creative to undertake the construction project in accordance with the terms of the contract, and to provide specified insurance and indemnify and hold harmless the Met and/or Strauss. The subcontract makes Creative solely responsible for worksite safety. Victor Strauss signed the subcontract on behalf of Strauss; Drewes testified that he “believe[d] that [he] signed it on behalf of Creative.”[FN3] Creative began work on the construction project on September 4, 2008. At some point, the Met was supplied with a certificate of insurance for a CGL policy issued by Nova to Creative, stating that the Met and Strauss were additional insureds under the policy [FN4]. The Met was never furnished an original OCP policy covering the construction project, and, as it turned out, neither Strauss nor Creative actually purchased an OCP policy to protect the Met. Strauss’s CGL Policy with Mt. Hawley At the time Strauss/Creative contracted with the Met, Strauss had in place a CGL policy issued by Mt. Hawley Insurance Company (Mt. Hawley) for the policy pericontinued on page 38

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[ COURTSIDE ] continued from page 36

od of November 7, 2007 to November 7, 2008. The policy included ISO form endorsement CG 20 33 07 04 (“Additional Insured — Owners, Lessees or Contractors Automatic Status When Required in Construction Agreement with You”), which specifies as follows: “WHO IS AN INSURED is amended to include as an additional insured any person or organization for whom [Strauss is] performing operations when [Strauss] and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on [Strauss’s] policy” (emphasis added). Under the policy, “such person or organization” would be an additional insured with respect to liability for bodily injury so long as the injury was caused, at least in part, by Strauss’s acts or omissions or “[t]he acts or omissions of those acting on [Strauss’s] behalf.” Regarding notice, the policy specifies that bodily injury “will be deemed to have been known to have occurred at the earliest time when any insured listed under . . . WHO IS AN INSURED or any employee authorized by [an insured] to give or receive notice of an occurrence or claim . . . [b]ecomes aware . . . that bodily injury . . . has occurred or has begun to occur” (internal quotation marks omitted). Further, the insured “must see to it that [Mt. Hawley is] notified as soon as practicable of an occurrence or an offense which may result in a claim” (internal quotation marks omitted). The Accident, the Personal Injury Lawsuit and Notice to the Insurers On September 16, 2008, Manuel Mayo (Mayo), a Creative employee, was injured when he fell from a fixed ladder located on the sixth floor of the opera house. This 15foot ladder led to a hatch door in the ceiling, which provided access to the rooftop and thus the steel carriage track. Mayo was trying to close the hatch door at the end of his shift when he lost his footing. Drewes first learned of Mayo’s accident when the receptionist/office manager at Creative’s office fielded a telephone call late in the workday 38 January 12, 2015 / INSURANCE ADVOCATE

on September 16th from someone at the opera house. The caller (not identified in the record) reported that Mayo had been injured and was being transported to the hospital by ambulance. Drewes happened to be in the office at the time the call was received. The next day Drewes called his “primary contact” at I. Dachs & Sons (Dachs), the insurance broker for both Creative and Strauss, to discuss upcoming liability insurance renewals. During this conversation, Drewes brought up Mayo’s accident, and was “[led] to believe by [the broker] that there was no need to notify the carrier, the general liability carrier, because it was a workers’ compensation claim.” Creative timely filed an “Employer’s Report of Work-Related Accident/ Occupational Disease” (Form C-2) to notify the Workers’ Compensation Board and Creative’s compensation carrier about Mayo’s accident. “A couple of days later” or perhaps “a week after” Mayo’s accident while Drewes was at the opera house to check on how the construction project was coming along, he mentioned to the Met’s house manager that “[t]here was an accident, the man was hurt and he [i.e., Drewes] expected him [i.e., Mayo, the injured worker] to come back to work, [and] at that point it was a worker’s comp claim”.[FN5] By complaint dated November 19, 2008, Mayo and his wife sued the Met and Lincoln Center for the Performing Arts, Inc. (Lincoln Center), asserting causes of action for negligence, violations of the Labor Law and loss of consortium in connection with Mayo’s work-related injuries (hereafter, the Mayo lawsuit). Mayo alleged that the hatch door was broken and in disrepair, the ladder’s rungs were worn and not skid-resistant, and there were no proper safety devices such as a cage, safety belt or safety line. The Met received the summons and complaint in the Mayo lawsuit from the Secretary of State on December 5, 2008. That same day, the Met’s in-house attorney wrote to Strauss and Creative, with a copy to Travelers Insurance Company (Travelers), the Met’s primary liability carrier, forwarding the summons and complaint. The attorney advised Strauss that the Met expected to be indemnified and held harmless to the fullest extent permitted by law, as agreed-to by Strauss in the contract. This December 5th letter also referred to

the certificate of insurance provided the Met, which “evidenc[ed] General Liability coverage of $1,000,000 per occurrence/$2,000,000 aggregate from [Nova] and Excess/Umbrella Liability coverage issue[d] by RSUI Indemnity Co. in the amount of $5,000,000 per occurrence and in the aggregate.” Asserting that the Met was an additional insured under these policies, the attorney asked Strauss to “immediately notify these carriers that the Met expect[ed] them to provide, without cost to the Met, a defense in this lawsuit, as well as indemnification.” On December 11, 2008, the Met received another copy of the summons and complaint by mail, this time from the Mayos’ lawyer. The Met’s in-house attorney again wrote Strauss and Creative, with a copy to Travelers, forwarding the summons and complaint and requesting that “the necessary actions” be taken. On December 29, 2008, a representative of Travelers wrote to Strauss, Creative, Nova and Dachs. She stated that Travelers was the general liability insurer for the Met and Lincoln Center, and that Travelers had received a complaint alleging that Mayo had been injured while working for Creative at the opera house; she then recited Strauss’s obligation under the contract to indemnify and hold the Met harmless from claims such as the Mayo lawsuit, and to “procure insurance naming [the Met] as an additional insured.” The Travelers representative enclosed copies of the lawsuit, contract and certificate of insurance, and asked for written confirmation that “a defense and indemnification will be provided, and [for] the identity of counsel assigned to the defense.” On January 12, 2009, Mt. Hawley’s broker received notice of the Met’s claim (including a copy of Travelers’ December 29th letter) from Dachs. Mt. Hawley’s broker then faxed the Met’s claim to Mt. Hawley, which acknowledged receipt on January 14, 2009. Mt. Hawley’s Response to Strauss’s and the Met’s Tenders and the Met’s Third-Party Action On February 3, 2009, Mt. Hawley wrote to Strauss to deny coverage on the basis of late notice because Strauss “was aware of this occurrence on the date it occurred[,] which was September 16, 2008;” and to inform Strauss that Mt. Hawley was “reviewing the information as to whether [the Met] and/or [Lincoln Center] qualify

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[ COURTS IDE ] as additional insureds under the terms of [the] policy.” Finally, Mt. Hawley let Strauss know that it had tendered the defense of the Mayo lawsuit to Nova on its behalf; i.e., by letter dated February 2, 2009, with copies to Drewes and Dachs, Mt. Hawley asked Nova to defend and indemnify the Met and Lincoln Center in the Mayo lawsuit, and to defend and indemnify Strauss in any thirdparty action brought by the Met and Lincoln Center. In a letter to Travelers, also dated February 3, 2009, Mt. Hawley first observed that the contract between the Met and Strauss/Creative nowhere stated that Lincoln Center was to be indemnified or made an additional insured under any policy issued to Strauss and/or Creative. Accordingly, Mt. Hawley denied Travelers’ tender as to Lincoln Center [FN6]. Mt. Hawley continued that it was “attempting to determine” whether the Met qualified as an additional insured under the terms of its CGL policy with Strauss. Referring to the C-2, which showed that Mayo was employed by Creative, Mt. Hawley requested “copies of checks that [the Met] issued for payment of the work required in the contract,” adding that “[i]t [was] questionable as to whether [Strauss] was actually involved in this work.” Mt. Hawley noted that, in light of the additional insured endorsement in its CGL policy with Strauss, “we need to determine whether [Strauss] was actually involved in this work in order to determine whether [the Met] is added as an additional insured”; and that “[a]t this point in time, [Mt. Hawley] reserves the right to assert that [the Met] is not an additional insured under the Policy . . . issued to [Strauss; h]owever, we continue to ask for more information and it may take further discovery to determine our obligations.” Summing up, Mt. Hawley told Travelers that “[a]s we have denied coverage for contractual indemnification to [Strauss] and have reserved our rights as to whether [the Met] is an additional insured under the policy issued to [Strauss], we will not be taking over the defense and/or indemnification of [the Met] at this time. As stated above, we have denied coverage for contractual indemnification as to [Lincoln Center].” On March 4, 2009, Mt. Hawley again wrote Travelers, this time stating that the information requested in the February 3rd

letter (i.e., copies of checks issued by the Met to Strauss to pay for the construction project) had not been received, and that its “investigation [had] yielded information that [the Met] was aware of this loss on the date it occurred [since (a)pparently [the Met] contacted [Drewes] at [Strauss] to inform him of the accident.” Mt. Hawley added that “[s]hould the information that we have been provided be correct, no coverage would apply to [the Met] in this lawsuit,” and requested an affidavit as to when the Met “first became aware” of Mayo’s accident. Mt. Hawley further declared that “[u]ntil such time as we can review the affidavit being provided, [Mt. Hawley] reserves the right to assert that no coverage would apply based on” the CGL policy’s notice provision. Both the Met and Lincoln Center are shown as copied on this letter. That same day, March 4, 2009, Mt. Hawley wrote to Strauss’s attorney, reiterating its denial of coverage to Strauss on the ground of late notice. Meanwhile, on January 28, 2009, Nova responded to Travelers’ December 29th letter by disclaiming coverage of the Met as an additional insured on Creative’s CGL policy due to late notice (see Mayo v Metropolitan Opera Assn., Inc., 2011 NY Slip Op 32943[U], *12 [Sup Ct, NY County 2011]). The Met was not copied on this disclaimer letter sent to Travelers. On February 6, 2009, the Met brought a third-party action in the Mayo lawsuit against Strauss, Creative and Nova. The Met alleged causes of action against Strauss and Creative for common-law and contractual indemnification, and for breach of contract for failure to purchase the OCP policy required by Exhibit D of the contract, and alleged a cause of action against Nova for breach of contract for denying coverage. Strauss’s Lawsuit against Mt. Hawley and the Met and the Decisions Below By complaint filed on March 16, 2009, Strauss commenced this action against Mt. Hawley and the Met, seeking a declaration that Mt. Hawley was obligated to defend and indemnify it in the Met’s then just-filed third-party action. On June 16, 2010, 15 months later, the Met cross-claimed against Mt. Hawley, asking in its first cross-claim for a declaration that it was an additional insured on Strauss’s CGL policy, thereby requiring Mt. Hawley to defend and indem-

nify it in the Mayo litigation; on July 9, 2010, the Met moved for summary judgment on this cross-claim. On July 14, 2010, Mt. Hawley moved to dismiss the Met’s crossclaims as untimely, and on July 30, 2010, Mt. Hawley cross-moved for summary judgment against the Met, seeking a declaration that it was not obligated to defend and indemnify the Met in the Mayo lawsuit. Then on July 26, 2010, Mt. Hawley moved for an order granting summary judgment to dismiss Strauss’s complaint and to declare that it was not obligated to defend and indemnify Strauss in the Mayo lawsuit.[FN7] Supreme Court disposed of these motions and cross-motion in a decision and order dated October 13, 2011 (2011 NY Slip Op 32706[U] [Sup Ct, NY County 2011]). Addressing the Met’s motion and Mt. Hawley’s cross-motion, the judge determined that the Met was an additional insured on Strauss’s CGL policy, and that while the Met’s three-month (counting from the date of the lawsuit) or four-month (counting from the date of the accident) delay in notifying Mt. Hawley was unreasonable as a matter of law, Mt. Hawley did not comply with its statutory duty under Insurance Law former § 3420 (d)[FN8] to promptly disclaim coverage, as the letters from Mt. Hawley to Travelers and/or the Met only reserved Mt. Hawley’s right to do so. Consequently, the judge ruled that Mt. Hawley was precluded from disclaiming coverage to the Met. Relatedly, Supreme Court denied Mt. Hawley’s motion to dismiss the Met’s cross-claim due to untimeliness, chalking up any delay to Mt. Hawley’s neglect to disclaim coverage promptly; and dismissed Strauss’s complaint against Mt. Hawley on the basis of its late notice to Mt. Hawley of Mayo’s accident. In its decision and order dated April 11, 2013, the Appellate Division agreed with Supreme Court that Mt. Hawley was required to defend the Met in the Mayo lawsuit because the contract directed Strauss to purchase liability insurance naming the Met as an additional insured, and the CGL policy issued by Mt. Hawley to Strauss contained an additional insured endorsement (105 AD3d 512, 513 [1st Dept 2013]). The court also agreed with Supreme Court that Mt. Hawley had not timely disclaimed coverage; rather, its letters were only “intended continued on page 40

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to preserve its right to disclaim,” and thus were “insufficient to actually disclaim coverage” (id.). Finally, the Appellate Division rejected Strauss’s claim that its notice to Mt. Hawley was timely, opining that “[Strauss’s] notice of the accident to Mt. Hawley was untimely as a matter of law, and Mt. Hawley timely disclaimed coverage on that ground. [Strauss’s] notice to its broker did not provide timely notice to Mt. Hawley. There is no indication that [Strauss’s] broker acted as an agent for Mt. Hawley or that the CGL policy listed [Strauss’s] broker as its agent” (id. at 514). Strauss now appeals and Mt. Hawley cross-appeals pursuant to leave granted by the Appellate Division on August 20, 2013, asking us whether its order in this matter was properly made (2013 NY Slip Op 82536[U] [1st Dept 2013]). II. In this long-running coverage dispute, Strauss’s appeal calls upon us to decide whether Strauss timely notified Mt. Hawley of Mayo’s accident. Mt. Hawley’s crossappeal poses the threshold question of whether the Met is an additional insured on Strauss’s CGL policy with Mt. Hawley; and then, if it is, whether Mt. Hawley promptly notified the Met that it was disclaiming coverage on account of untimely notice. Strauss’s Appeal Strauss argues that the lower courts erred when they concluded that its notice to Mt. Hawley was untimely as a matter of law. Relying on Mighty Midgets v Centennial Ins. Co. (47 NY2d 12 [1979]), Strauss takes the position that whether it gave notice to Mt. Hawley “as soon as practicable” or, alternatively, whether its late notice was excusable are questions for the trier of fact and may not be decided as a matter of law. This is so, Strauss contends, because Drewes followed his usual and customary practice of promptly notifying Dachs, Strauss’s broker, of Mayo’s accident, with every reasonable expectation that Dachs, in turn, would timely notify the proper insurer. We have long held that a policyholder’s timely notice to a broker does not “constitute the notice contemplated by the [insurance] policy since a broker is normally the 40 January 12, 2015 / INSURANCE ADVOCATE

agent of the insured and notice to the ordinary insurance broker is not notice to the liability carrier” (Security Mut. Ins. Co. of N.Y. v Acker-Fitzsimons Corp. 31 NY2d 436, 442 n 3 [1972]; see also Hartford Fire Ins. Co. v Baseball Off. of Commr., 236 AD2d 334 [1st Dept 1997] [late notice was not excused even though the policyholders “instructed their broker to inform (the primary and excess insurers) about the lawsuit shortly after its commencement”], lv denied 90 NY2d 803 [1997]; Gershow Recycling Corp. v Transcontinental Ins. Co., 22 AD3d 460, 462 [2d Dept 2005] [a policyholder’s “timely notice of the action to its broker is of no consequence” and thus does not excuse the failure to comply with notice obligations under an insurance policy]). Our decision in Mighty Midgets does not alter this fundamental principle. Mighty Midgets was a nonprofit corporation organized to encourage, manage and otherwise support boys’ football teams in Orangetown in Rockland County. The Dunn & Fowler Division of Frank B. Hall & Company (Dunn) secured two insurance policies for the Orangetown Midgets: a liability policy from Centennial Insurance Company (Centennial) and a policy providing accident and health protection with the Hartford Accident & Indemnity Company (the Hartford). We described Dunn as “a leading specialist in athletic team insurance and apparently the organization upon which the more than 2,500 teams enrolled in the national program of which the Midgets were a part would rely for guidance in insurance matters” (Mighty Midgets, 47 NY2d at 17) The roles of Dunn and Centennial were uncommonly intertwined; specifically, in addition to being the solicitor of liability policies with Centennial, Dunn collected the premiums and was designated by the policy as “agent or broker.” Dunn wrote most of its athletic team business with Centennial, which entrusted Dunn with large batches of blank policies already executed by Centennial-authorized signatures, leaving it completely up to Dunn to fill in policy numbers, names of insureds, premiums and the date a policy was to go into effect. On October 18, 1970, a nine-year-old boy, a member of a Midgets-sponsored team, was injured when, right after a game in which he had played, a large pot of boil-

ing water which rested on the counter of an improvised hotdog stand operated by the Midgets as a fundraising activity, was “caused to pour over him”. Robert Halle (Halle), the 21-year-old volunteer president of the Midgets was not present at the time, but he learned of the accident before the day was out and called Dunn to ask “whether he should ‘put it under a medical or [a] liability claim’”. The Dunn representative instructed Halle to notify the Hartford, and Halle dutifully filed a claim with the Hartford, on a form supplied by Dunn. Then on April 7, 1971, the Hartford notified the Midgets that its policy did not cover the accident because it happened after the game in which the nine-year old had played. Although the nine-year old’s father, “an avid supporter of the Midgets,” had never before exhibited the slightest inclination to pursue a liability claim, the Hartford’s refusal to pay his son’s medical claim caused him to consult a lawyer, who wrote the Midgets a letter dated May 25, 1971, indicating that a liability suit was “in the offing”. Halle immediately forwarded the lawyer’s letter to Centennial in care of Dunn. This was the Midgets’ first written notice to Centennial. The liability policy required notice of an occurrence to be made to the insurer in writing and “as soon as practicable.” In light of the seven-month delay, Centennial disclaimed coverage due to untimely notice, and the Midgets brought a declaratory judgment action. On this record, the trial judge, sitting without a jury, found as a fact “(1) that Dunn’s handling of the communications from Halle was negligent; (2) that ‘under the circumstances’, including Halle’s ‘limited . . . understanding of insurance matters’ and the relationship between Dunn and Centennial, the Midgets acted reasonably in that they did all that they ‘could do’ until the arrival of the letter of May 25 first disabused them of the misinformation Dunn had imparted; and (3) that the letter transmitting the . . . lawyer’s liability claim letter constituted written notice given ‘as soon as practicable’ after the claim was made”. The Appellate Division affirmed, with two Justices dissenting (62 AD2d 1014 [2d

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[ COURTS IDE ] Dept 1978]). There was no disagreement about the facts; the dissenters simply would have held the written notice to be untimely. Sitting as a six-judge court, we also affirmed, by a margin of four to two. The dissenters commented that “it [was] especially difficult to conclude that it was not ‘practicable’ to give notice long before the expiration of seven months when the insured gave the agent oral notice the day after the accident” (47 NY2d at 23 [Jones, J., dissenting]). The majority ruled, however, that “in the facts and circumstances” presented, “there was enough evidence from which it could be found that the Midgets’ failure to notify the insurer before it did was not unreasonable and that, consequently, Centennial was not entitled to disclaim. Since our review is limited to determining whether the conclusion of the fact-finding courts finds support in the evidence, we must uphold their determination”. Like the lower courts, the “facts and circumstances” that we considered particularly compelling were not just Halle’s youth and “limited personal and vocational background which was totally alien to either the world of insurance or that of the law”, but also the unusually close ties between Centennial and Dunn, which reasonably caused Halle to solicit and blindly follow Dunn’s advice. Here, by contrast, although Dachs may have long been Strauss’s insurance broker, nothing in this record reveals the kind of close relationship between Dachs and Mt. Hawley that existed between Dunn (which was also Centennial’s agent for receipt of notice of claim) and Centennial. The record here does not support the proposition that the insurer and broker had a relationship sufficiently close to suggest that service to the broker was effectively service to the insurer. By contrast, in a situation more akin Mighty Midgets it might be possible for even a relatively sophisticated representative of an insured to have a good faith, reasonable belief that notice to the broker is sufficient if the insurer’s own actions hold the broker out to be its agent for the purpose of giving notice. In such a case, if the effect of the insurer’s representations is to lull the

insured into a false belief that notice had been provided through the agent, the insurer should not be able to raise the insured’s failure to provide an earlier notice as a defense to coverage. Further, it should be noted that Drewes was not an unsophisticated 21-year old like Halle, unusually dependent upon Dunn, the insurance broker, for advice and guidance. Rather, Drewes was the longtime day-today operations manager of two construction contractors in New York City. Indeed, by virtue of Drewes’s experience in the construction industry, it is a wonder that he did not grasp the overwhelming probability that Strauss would be drawn into a Labor Law lawsuit immediately upon learning that Mayo had suffered an elevation-related injury while on the job. In short, the outcome in Mighty Midgets turned on unusual and extenuating facts, not remotely comparable to the circumstances of this case. Mt. Hawley’s Cross Appeal Under the additional insured endorsement of Strauss’s CGL policy, whether the Met was an additional insured hinges on whether Strauss and the Met “have agreed in writing in a contract or agreement that [the Met] be added as an additional insured on [Strauss’s] policy.” The Met argues that the second sentence of paragraph (b) of the contract’s Exhibit D contains the requisite agreement in writing. Paragraph (b), in its entirety, requires Strauss/Creative to procure the following insurance: “b. Owners and contractors protective liability insurance with a combined single limit of $5,000,000.00. Liability should add the Metropolitan Opera Association as an additional insured and should include contractual liability and completed operations coverage” (emphasis added). Mt. Hawley counters that paragraph (b) simply reflects the Met’s considered choice to require Strauss to purchase OCP coverage to protect the Met from risks arising out of Strauss’s work, rather than mandating that Strauss include the Met as an additional insured on its CGL policy. Mt. Hawley observes that the OCP policy specified in this paragraph would have provided the Met with an unshared $5 million limit; by contrast, as an additional insured on Strauss’s CGL, the Met would have to have

shared the policy limits with Strauss and any other insureds on the policy. We agree with Mt. Hawley that the second sentence in paragraph (b) can only refer to the OCP coverage that Strauss promised to purchase for the Met in the first sentence — but never actually acquired. This conclusion is buttressed by paragraph (c) of Exhibit D, which sets out Strauss’s insurance commitments to the Met with respect to CGL coverage, stating as follows: “Comprehensive General Liability. Combined coverage for property and bodily injury with a minimum single limit of $5,000,000.00 (Limits may be met with an ‘Umbrella Policy’).” Notably, this provision — the only paragraph in Exhibit D addressing Strauss’s insurance obligations with respect to GCL coverage — says nothing about including the Met as an additional insured on Strauss’s CGL policy. We therefore conclude that the Met is not an additional insured on the CGL policy issued to Strauss by Mt. Hawley. Finally, because the Met is not an additional insured under Strauss’s CGL policy, we do not reach and need not decide the question of whether Mt. Hawley promptly notified the Met that it was disclaiming coverage under that policy due to untimely notice (see Zappone v Home Ins. Co., 55 NY2d 131, 134 [1982] [“failure to disclaim coverage does not create coverage which (a liability) policy was not written to provide”]). Accordingly, the order of the Appellate Division should be modified, without costs, by denying defendant Metropolitan Opera Association’s motion for summary judgment on its first cross-claim and, as so modified, affirmed, and the certified question answered in the negative. READ , J. (DISSENTING IN PART): The second sentence of Exhibit D, paragraph (b) in the September 3, 2008 construction contract (hereafter, the contract) states as follows: “Liability should add the Metropolitan Opera Association as an additional insured and should include contractual liability and completed operations coverage.” While this sentence may be awkwardly phrased and infelicitously placed within Exhibit D,[FN1]it is not ambiguous in light of the realities of the insurance marcontinued on page 44

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ketplace. Given the differences between owners and contractors protective liability (OCP) and comprehensive general liability (CGL) policies, this sentence clearly obligates Strauss Painting, Inc. (Strauss) to have in place a CGL policy protecting the Metropolitan Opera Association, Inc. (the Met) as an additional insured. With all due respect to my colleagues, there is simply no other way to read it. Accordingly, I respectfully dissent from so much of the majority’s decision as determined that the Met is not an additional insured on the CGL policy issued by Mt. Hawley to Strauss. For the reasons that follow, I would therefore answer the certified question in the affirmative. I. An OCP policy covers the named insured’s liability for bodily injury and property damage caused, in whole or in part, by the designated contractor’s work for the insured on a specified construction project. The contractor purchases the OCP policy,

which protects the insured from vicarious liability incurred as a result of the contractor’s acts or omissions on the project, and liability arising out of the insured’s own acts or omissions in connection with its “general supervision” of the work performed by the contractor (see generally Donald S. Malecki et al., The Additional Insured Book, International Risk Management Institute [IRMI] at 202-217 [7th ed 2013] [hereafter Malecki]; Craig F. Stanovich, OCP Liability versus Additional Insured Coverage, IRMI [Oct 2009] [hereafter Stanovich 2009], www.irmi.com/expert/articles/2009/stanovi ch10-cgl-general-liability-insurance.aspx). Mt. Hawley insists that the second sentence of paragraph (b) obligated Strauss to include the Met as an additional insured on the OCP policy that the first sentence directed Strauss to purchase for the benefit of Lincoln Center. For this reason, Mt. Hawley criticizes the Appellate Division for “failing to recognize the critical distinction between the OCP Policy, on which the Contractor was expressly required to have the Met named as an additional insured, and the CGL Policy, for which no such

requirement existed”; and argues that “as the owner of the property, Lincoln Center would have been listed as the owner on any OCP Policy. The Met would have been an additional insured on that policy.”[FN3] This is how Mt. Hawley tries to explain away the requirement to make the Met an additional insured. Lincoln Center owns the opera house and is the Met’s landlord; however, as Mt. Hawley itself pointed out when responding to Travelers’ November 29th letter, Lincoln Center (the entity) is nowhere mentioned in the contract, which identifies the Met as the project owner. Thus, there is no basis within the four corners of the contract for interpreting paragraph (b) as requiring Strauss to purchase an OCP policy issued in the name of Lincoln Center. And it is not obvious how such a policy could have been obtained since Lincoln Center was not the party with which Strauss contracted to perform the work. Next, the second sentence of paragraph (b) states that the policy on which the Met is to be included as an additional insured must provide “contractual liability and com-

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[ COURTS I D E ] pleted operations coverage.” “Contractual liability” in this context refers to the liability assumed by Strauss under the contract’s hold harmless and indemnification provision, while “completed operations” refers to coverage for injuries or damages occurring after the construction project has been finished. These coverage options (i.e., contractual liability and completed operations) are available to an additional insured on a CGL policy; they are not, however, available on an OCP policy (see e.g. Craig F. Stanovich, Contractual Liability and the CGL Policy IRMI [May 2002] [www.irmi.com/expert/articles/2002/stanov ich05.aspx?cmd] [explaining how contractual liability insurance, found in the CGL insurance policy, applies]; Stanovich 2009 [“The OCP policy excludes coverage for bodily injury or property damage if such injury or damage takes place after the earlier of when the operation has been completed or put to its intended use by anyone other than another contractor or subcontractor working for the Designated Contractor on that project . . . The ISO CG 20 37 and many insurers’ independently filed additional insured endorsements provide coverage for the additional insured for bodily injury or property damage within the product and completed operations hazard. This coverage option is not available on the OCP policy” [emphasis added]; Malecki at 58-60, 202). In short, the second sentence of paragraph (b) cannot mean that Strauss was required to purchase an OCP policy with contractual liability and completed operations coverage for the benefit of the Met as an additional insured because no such policy option exists. This pair of agreed-to coverages could only be provided by including the Met as an additional insured on Strauss’s CGL policy. The Met sought in Exhibit D to transfer or shift to Strauss in every way possible the risk of financial loss due to bodily injuries or property damages occurring in connection with the construction project by requiring Strauss to have in place (1) workers’ compensation insurance; (2) an OCP policy in favor of the Met as the named insured; (3) a contractual hold harmless and indemnification provision whereby Strauss assumed the Met’s tort liability arising out of construction operations; and (4) a CGL policy including the Met as an additional insured, which provided for contractual lia-

bility and completed operations coverage. Known as the “belt and suspenders” approach, adding an indemnitee (here, the Met) as an additional insured on the indemnitor’s (here, Strauss’s) liability insurance gives “some protection to fall back on in the event there is a problem with the enforceability of the hold harmless agreement” (id. at 59-60, 69 [“(M)ost contractual risk transfers . . . involve using both an indemnity clause and additional insured status to work hand-in-hand”]; see also The Handbook on Additional Insureds, American Bar Association, at 38-39 [Michael Menapace et al. ed. 2012] [“There are multiple reasons for a party to insist on both indemnification provisions and insurance requirements in a single contract . . . (T)he protection afforded by indemnification and hold harmless provisions, on the one hand, and additional insured coverage, on the other, are in many instances complementary and not co-extensive. Thus, to maximize one’s protection, a party should include in the contract both an indemnification and hold harmless requirement and an additional insured requirement”]). Further, “[i]n the construction industry, general contractors and project owners who seek additional insured protection often will insist upon receiving [ISO endorsements allowing] coverage for both ongoing operations and completed operations”. As Mt. Hawley points out, an OCP policy may be an alternative to adding the owner as an additional insured to the contractor’s CGL policy. But while there are advantages and disadvantages to each approach (see generally Malecki at 214-217), an OCP policy and additional insured status are not, as Mt. Hawley implies, mutually exclusive. Indeed, “[i]t is not unusual for an indemnitee to request both an OCP policy and additional insured status in the expectation that one of the coverages will apply in the event of a claim or suit”. Nothing (except perhaps cost and/or relative bargaining power) prevents a project owner from seeking to avail itself of the complementary advantages of both coverages, as the Met clearly did in this case. Finally, Mt. Hawley contends that the Met sought OCP coverage in lieu of additional insured status as part of a “well-reasoned insurance scheme” since “[t]he OCP continued on page 46

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[ COURTSIDE ] continued from page 45

policy would provide the Met with protection arising out of [Strauss’s] work and, more importantly, . . . an unshared $5M limit,” whereas, “[a]s an additional insured on [Strauss’s] CGL policy, the Met would . . . share the policy limits with all other insureds on the Policy — exposing the Met to a wasting of liability limits beyond its control.” Again, Mt. Hawley assumes that a project owner would only bargain with its contractor to provide OCP coverage or additional insured status on the contractor’s CGL policy, not both. It is certainly true that an OCP policy provides the named insured a separate set of limits, while CGL policy limits are shared by all insureds; that is one of the advantages that an OCP policy offers. But Mt. Hawley disputes that the Met was the intended named insured on the OCP policy that Strauss agreed but failed to purchase; therefore, under Mt. Hawley’s interpretation of Exhibit D, paragraph (b), the Met would not, in fact, have enjoyed the benefit of the unshared limits that Mt. Hawley contradictorily also claims motivated the Met to choose coverage under an OCP policy rather than additional insured status under Strauss’s CGL policy. II. Because I conclude that the Met was an additional insured on Strauss’s CGL policy, I reach the issue of whether Mt. Hawley promptly notified the Met that it was disclaiming coverage on account of untimely notice (see Insurance Law former § 3420 [d] [an insurer wishing to deny coverage on account of late notice “shall give written notice as soon as is reasonably possible of such disclaimer of liability and denial of coverage to the insured and the injured person or any other claimant”]). On February 3, 2009 Mt. Hawley stated, in a letter sent to Travelers, that it was attempting to determine whether the Met qualified as an additional insured under the policy [FN4]. The word “disclaim” does not appear in this letter, and the word “denial” shows up only in the context of Strauss or the non-party Lincoln Center. As to the Met, Mt. Hawley advised Travelers that “we need to determine whether Strauss Painting was actually involved in this work in order to determine whether [the Met] is an additional insured. At this point in time, [Mt. Hawley] reserves 46 January 12, 2015 / INSURANCE ADVOCATE

the right to assert that [the Met] is not an additional insured.” In its letter to Travelers dated March 4, 2009, with a copy to the Met, Mt. Hawley stated that it was investigating how early the Met was aware of the Mayo incident. While this letter recited the policy’s notice conditions, it merely cautioned, in the conditional tense, that “[s]hould the information that we have been provided be correct, no coverage would apply” to the Met (emphases added). In sum, the two letters constituted ineffective notice because they did not disclaim coverage; instead, they reserved the right to disclaim coverage in the future (see Hartford Ins. Co. v. County of Nassau, 46 NY2d 1028 [1979] [“A reservation of rights letter has no relevance to the question whether the insurer has timely sent a notice of disclaimer of liability or denial of coverage”]; Norfolk & Dedham Mut. Fire Ins. Co. v. Petrizzi, 121 AD2d 276 [1st Dept 1986] [“A letter from an insurance company to its policyholders which contains a reservation of the insurance company’s rights to disclaim coverage under its policy is not such a notice of disclaimer as to satisfy the requirements of the Insurance Law”]). Because Mt. Hawley never disclaimed for late notice, it waived the late notice defense (see Hartford Ins. at 1029 [“A failure by the insurer to give such notice as soon as it is reasonably possible after it first learns of the accident or of grounds for disclaimer of liability or denial of coverage, precludes effective disclaimer or denial”]).[IA] **************** Order modified, without costs, by denying Metropolitan Opera Association Inc.’s motion for summary judgment on its first cross claim and, as so modified, affirmed, and certified question answered in the negative. Opinion Per Curiam. Judges Graffeo, Smith, Pigott, Rivera and Abdus-Salaam concur. Judge Read dissents in part in an opinion in which Chief Judge Lippman concurs. 2014 NY Slip Op 08214 Decided on November 24, 2014 Court of Appeals Per Curiam

Footnotes

Footnote 1:In other words, although the first page of the contract designates Strauss/Creative as “the

Contractor,” Drewes executed the contract on a signature line identifying only Strauss as “CONTRACTOR” (see Mayo v Metropolitan Opera Assn., Inc., 108 AD3d 422, 424 [1st Dept 2013] [concluding, in the Met’s third-party action against Strauss, Creative and Nova Casualty Company (Nova), Creative’s CGL insurer, that an issue of fact exists with respect to whether Drewes had authority or intent to bind Creative to the contract]). Throughout this opinion, we have generally identified “Strauss/Creative” as the contractor because this is what the contract’s first page says. We do not intend thereby to imply that Creative is bound to the contract, an issue which has yet to be resolved. But, of course, whether or not Creative is bound to the contract, Strauss surely is. Footnote 2:In its corporate disclosure statement filed in this Court, Strauss identifies Creative as an “affiliated corporation.” Footnote 3:The subcontract bears the handwritten signature “Hillary J. Klein” with Drewes’s initials. Footnote 4:The record does not include a copy of this policy, or of the certificate of insurance. Footnote 5:Deposition testimony included in the record, although incomplete, makes clear that the Met’s house manager, assistant director of security and an in-house nurse knew about Mayo’s accident just after it occurred. Footnote 6:The December 29th letter from Travelers did not purport to ask Mt. Hawley to defend and indemnify Lincoln Center, the Met’s landlord. Lincoln Center, the organization (as opposed to Lincoln Center, the Met’s address) is not mentioned in either the contract or the subcontract. Footnote 7:The Mayo lawsuit settled on October 16, 2013. The Met’s third-party action, which had previously been severed from the underlying personal injury lawsuit, remains pending. According to the Met’s counsel, the settlement “preserved the third-party actions and all insurance coverage and contractual indemnity rights among all of the defendant parties and their carriers.” Footnote 8: This provision specified that

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