January 13, 2014 by C Acunto

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VOLUME 125, NUMBER 1 / January 13, 2014

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Contents

January 13, 2014 | volume 125 number 1 48

Courtside: Cellar Stairs Accessed by Sidewalk Trap Door are Not Covered by Building Code Lawrence Rogak

Classiﬁeds

[FEATURES]

Looking Back: September 1988

Foreword: Reg. 79: Opinion Steve Acunto, Publisher

In the Associations: Michael A. Zarcone to Chair LICONY

Insight: Resolutionary Wars Peter H. Bickford

[COVER STORY ] 20

IFNY 99th Annual Free Enterprise Award Luncheon

Exposures and Coverages: Leaseholds Interest Insurance Court of Appeals: VMM & Sec. 240 Decisions Super Bowl & the Weather Outside is Frightful Jerome Trupin, CPCU

In the News: Demotech Co-Founder Named One of Twenty People to Know in Insurance

In the Associations: NYIA Wrap Up: Property and Casualty Industry Gears Up for 2014 as NYIA sets Priorities

In the Associations: Utica Mutual’s Bernard Turi to Chair NYIA

Regulatory Update: FIO Long Awaited Report Calls for “Hybrid” Regulatory System Mike Nelson and Susan Stead

Regulatory Update: Big “I” Responds to FIO Report

On My Radar: Sit on Your Rights - Lose Arbitration Award Afﬁrmed Barry Zalma

[ AD FEATURES] 33

MSO: Key Person Insurance

20 Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / January 13, 2014 3

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[ FORE WORD ]

Steve Acunto

$4M to Fight Fraud

VOLUME 125, NUMBER 1 JANUARY 13, 2014

ver the past few years we have tried to assess the impact of Governor Andrew Cuomo on the insurance business and on the environment that affects the insurance business in New York State. This has not been simple. On the one hand we have what we find to be a tendency toward the legalization of marijuana for medical uses (and then most likely into the same crazy use as Colorado and others). Then, on the other hand, we have a Governor who is proposing tax cuts and appropriating law enforcement money to fight motor vehicle theft and insurance fraud. On the one hand we have a liquidation bureau that needs attention and on the other hand we have a hard working insurance department which distinguished itself during hurricane Sandy and in other ways as well. On the one hand we have a Governor who is quick to move into insurance exchanges and the realm of Obamacare, on the other hand we have a Governor who runs ads that encourage start ups and claim that New York is pro-business. In short, the messages are mixed. Of course, he is running again so the mix may be purGOV. CUOMO poseful. We cannot be but pleased with some of the measures

“Under the State’s Motor Vehicle Theft and Insurance Fraud Prevention program, we are empowering local law enforcement agencies with additional resources to combat this problem, enhancing efforts to track down those who break the law and increasing protection for our consumers.” - Gov. Andrew Cuomo

he has undertaken recently and note, with particular interest, his recent $4M appropriation to fight motor vehicle fraud and theft, a long time advocacy in these pages. The Governor will provide nearly $4 million in grant funding to 29 police departments, district attorneys’ offices and other agencies to combat motor vehicle theft and insurance fraud in the State, stating to the media: “Motor vehicle insurance fraud is a crime that costs New York’s consumers and insurers millions of dollars every year,” Governor Cuomo said. “Under the State’s Motor Vehicle Theft and Insurance Fraud Prevention program, we are empowering local law enforcement agencies with additional resources to combat this problem, enhancing efforts to track down those who break the law and increasing protection for our consumers.” The grant is available through the state’s Motor Vehicle Theft and Insurance Fraud Prevention program, which is overseen by a 12-member board that develops the state’s strategy for combating motor vehicle theft and insurance fraud, in addition to reviewing grant applications and making the grant awards. The state Division of Criminal Justice Services (DCJS) serves as the staff for the board and administers the grant program, which targets the state’s urban centers and is funded through a $10 fee assessed on insurance policies issued for vehicles registered in the state. Recipients will use the grants to target suspected motor vehicle insurance fraud and continue efforts to combat motor vehicle theft, which has been steadily declining in New York. Since 1997, the number of motor vehicle thefts reported in the state has declined 90 percent. In 2012, 18,677 incidents of suspected motor vehicle insurance fraud were reported to the Insurance Frauds Bureau of the state Department of Financial continued on page 18

4 January 13, 2014 / INSURANCE ADVOCATE

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Raﬁ Michael Loguercio 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 SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x126 circulation@cinn.com PUBLISHED BY CINN Group, Inc. 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 Worldwide, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing ofﬁces. POSTMASTER Send address changes to Insurance Advocate®, PO 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 Worldwide, Inc. and is copyrighted 2013. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

For high-quality article reprints (minimum of 100), including e-prints, contact Gina Balog at g@cinn.com or call 914-966-3180, x113

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[ INSIGHT ]

By Peter H. Bickford

Warning Shots

on’t you just love the flexibility of the English language? Although annoying to many purists (and often to the sensitivity of our ears) English is always adapting and moving with current times. Even the Oxford English

the liquidator (“rehabilitation” was not part of his vocabulary!). But apparently today’s insurance undertakers want to soften their image and be perceived as problem solvers rather than demolition experts. And who can

Surprisingly, despite this tepid start, and while it may not have been as direct and critical a commentary as it could have been, the FIO Report makes a couple of spot-on observations and recommendations regarding the “resolution” process. Peter H. Bickford

Dictionary has accepted this flexibility by adding current usage into its venerable pages, often the result of modern technology. In 2013, for instance, the OED added “bitcoin,” “phablet” and “selfie” to its pages. In addition to new words, English also has the flexibility of changing the nuance of words and phrases with changing times. We also use the vast English vocabulary in an attempt to alter perception — think of Orwell’s four ministries in “1984” Truth, Love, Plenty and Peace – or to soften what some may consider unpleasant or harsh, such as the euphemisms “downsizing” for firing, “passed” for died or “adult entertainment” for pornography. So it is with some amusement that I have observed a new trend among those involved with the liquidation of insurance companies – receivers and guaranty associations – who now seem intent on referring to their disassembling of insolvent insurers as “resolving” estates. A former head of the NY Liquidation Bureau candidly referred to his job as that of an undertaker disposing of the body of the insolvent company. There was no subtlety to his perception or conduct of the role of the liquidator: aggressively pursue assets and distribute them – eventually – on some pro-rata basis. It was not necessary, in his view, to saccharin-coat the role of

blame them? The insurance insolvency process in the US is disjointed, inconsistent and highly inefficient. Describing their role as problem “resolvers” hides the rough edges of the current process and tries to emphasize the positive aspects of marshalling assets and settling claims. It was initially disappointing, therefore, to see the Federal Insurance Office (FIO), in its long anticipated report on modernizing and improving the system of insurance regulation in the US, mimic this new liquidation process language by calling its section on the insolvency process “Resolution of Insolvent Insurers.” In addition to adopting the receivership community’s “resolution” mantra, the FIO Report also seemed focused on large, internationally important insurers and the international regulatory agenda rather than the flaws in the existing state process. At first blush, by adopting the liquidators’ newspeak and the international regulatory agenda, the FIO seemed to have missed an opportunity to focus attention on one area of state-regulation of insurance ripe for close scrutiny and national attention. Surprisingly, despite this tepid start, and while it may not have been as direct and critical a commentary as it could have been, the FIO Report makes a couple of spot-on observations and recommenda-

tions regarding the “resolution” process. The section on the resolution of insolvent insurers is a very small part of the FIO Modernization and Improvement Report. Industry trade groups, state regulators and others wasted little time issuing commentary that parsed, studied, scrutinized and analyzed almost all corners of the Report, and their conclusions have been extensively recorded and published. The “resolution” process, however, has not received the kind of in-depth analysis as most of the rest of the Report. While not pretending to be “in-depth,” here’s a start to the conversation. The FIO Report makes two recommendations for the receivership process: more uniformity, and transparent financial reporting. On the uniformity side, with all the inconsistencies from state to state on the processing of insurance and other claims, reinsurance collections and distributions, the FIO chooses to focus on the uneven treatment of derivatives and qualified financial contracts. This attention to financial rather than traditional insurance products seems to support the premise that FIO is merely an extension of Treasury’s efforts to impose banking regulations on the insurance business. However, although the FIO could have used a much broader brush in presenting this need, the main premise of inconsistent treatment from state to state is definitely on target. More aptly presented was the second recommendation: the need for greater transparency in the financial reporting by receivers. As correctly noted by the FIO: “The status and cost of a receivership estate are issues in which policyholders and other creditors have a keen interest, but too often there is a lack of sufficient, clear and timely information.” The FIO Report discusses the unsuccessful attempts by the NAIC through its Global Receivership Information Database (GRID) to provide meaningful, consistent information about estates in receivership. It also correctly identifies inconsistencies in reporting methods, scope of disclosures, continued on page 8

6 January 13, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ] the funds. To support this recommendation the Report cites the inconsistencies in the maximum coverage from state to state on the same contract. Furthermore, the FIO Report sets the stage for some serious reconsideration of insurance guaranty fund effectiveness, particularly in the event of the failure of a large insurance group in the US. It cites figures and information provided by the two national associates representing p/c funds (NCIGF) and life and health funds (NOL-

continued from page 6

and of cost of administration, among other issues. Interestingly, this criticism is well focused and drops the newspeak “resolution” wording. The FIO got this one right. On guaranty funds, the Report recommends that States adopt uniform policyholder recovery rules “so that policyholders, irrespective of where they reside, receive the same maximum benefits” from

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It would seem imperative for the receivership and guaranty fund communities across the US to heed these warnings and to clean up the inconsistencies or the Feds will. Good stuff!

HGA) without actually agreeing with the numbers. The FIO conclusion is telling and should send a warning shot across the bow of the state funds and their supporters: “Just as insurers perform stress tests under adverse scenarios, NCIGF and NOLHGA should periodically model the potential adverse impacts of such scenarios on the guaranty fund system for review by the FIO.” The last sentence of the “Resolution of Insolvent Insurers” section of the FIO Report, although not presented as a specific recommendation, expresses unequivocally that if the states fail to achieve uniformity of guaranty fund benefits, “then federal involvement may be necessary to ensure fair treatment of all policyholders.” It would seem imperative for the receivership and guaranty fund communities across the US to heed these warnings and to clean up the inconsistencies or the Feds will. Good stuff! Given the extent to which regulators are focused on the front end of the solvency issue, i.e. the establishment of uniform solvency standards, It is only fitting that the back end of the process – the “resolution” of insolvent insurers – should also be of concern to and receive the attention of insurance regulators. Or is it their prevailing view that if the solvency standards are made high enough there is little need to be concerned with the insolvency side? That would definitely be a dangerous assumption.[IA]

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[ FACE TO FACE ]

By Michael Loguercio

Click on the Dotted Line!

o tell me if this has ever happened to you in your office: you get a telephone call from a prospect, or perhaps it was an email lead that you obtained via your “Get an auto or homeowners quote” button on your agency website or Facebook fan page, and immediately either

and the other to karate lessons. No worries, you tell your prospect that you will mail them the application, they can sign it at their leisure, and mail it back to you with a check. After all, you do have ten days to work with, so you and your prospect agree that this is the way you will secure the cov-

While speaking with the other agency (who represents the exact same carriers as your business), the prospect was told that while he remained on the phone this agency would have him set up immediately!

Michael Loguercio

you and/or a member of your agency staff spring into action! You begin the usual ritual of fact finding, the conducting of a complete financial and asset protection needs analysis, complete discussion of coverage and insurance carriers available, pricing of coverage, and most importantly, what is appropriate for this particular and unique situation. Once this phase of the conversation has been completed, and you come to an agreement on what is the proper amount of coverage and at what price, your prospect then proclaims to you the words that you so love to hear, “Yes, that is precisely what my family and I need, so what is the next step?” Armed with the knowledge that their current policy doesn’t expire until ten days from now, you ask your prospect to come into your office at their convenience to sign the application and make a deposit payment. Well, unfortunately the insured is at work every day, which is not in proximity to your office, so that won’t work. Maybe their spouse is available to process the necessary paperwork? Nope, that’s not an option either, as they also work in a town that is not close to your office, and immediately after work every day they have to pick up the kids when they get off the school bus and take one to dance class 10 January 13, 2014 / INSURANCE ADVOCATE

erage for them. So that afternoon you prepare the ACORD forms that are appropriate for the coverage requested, attach the little yellow “sign here” sticky notes, write a nice cover letter with explicit instructions on precisely what is expected of them, ask them to enclose a check made payable to the carrier, enclose a self-addressed stamped envelope, and you drop in into the outgoing mail. Well, assuming that your agency conducts business similar to most agencies around the country, your business (whether it was you, another producer, or a CSR) spent 20 minutes completing the necessary ACORD applications for the auto, home, and umbrella policy, another five minutes typing up and printing the cover letter, a minute or so more to selfaddress and stamp the return envelope, another five minutes assembling the package to be delivered, a minute or so to weigh it and affix the correct amount of postage, and then drop it in outgoing mail. Not to mention the “water cooler” time that was spent when whomever facilitated all of the above walked over to the postage machine, and stopped to chat with co-workers along the way. In dollars and cents, how much did that time just cost your business? Oh, and let’s not forget the time that was spent

on the phone speaking with the prospect to even get to the point where you were able to do the manual leg work to get the application out. Add in the cost of obtaining the lead, however you received it, and what has this cost you so far? Fifty dollars? A hundred? Maybe more?…and you haven’t even made the sale yet! Back to our story: so after three days, you call your prospect to follow up to see why you have not yet received the check and signed application, and they don’t return your calls, or emails, or texts. You continue to try and reach them, and finally after two more days pass and many more calls, you get an email back stating that on the same day that you originally spoke with them, your prospect decided to contact one more agency that was located even further from him than you are. But there was one difference: While speaking with the other agency (who represents the exact same carriers as your business), the prospect was told that while he remained on the phone this agency would have him set up immediately! How was it done and all while the prospect remained on the telephone? Easy! ...and here’s how: the agency went into his real time comparative rating system, and generated the ACORD forms necessary for the package policy. From there, using an electronic signature program that was inherent to the system, he packaged up the applications, along with a cover letter, and directly from the system he emailed it out to the insured. Immediately, the management system portion of the program notated an activity, and time and date stamped it for errors and omissions protection. Still while conversing on the telephone, the insured received the email and opened the attachment. He reviewed the application on his computer screen (he could have also used his mobile tablet or smart phone), “clicked” on the electronic signature portion of the attachment, and instantly the now “signed” application was returned directly back to the agent…again while they are still on the telephone! The management system portion of continued on page 12

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[ FACE TO FACE ] continued from page 10

the agency system received the signed application, again documenting that it has been received (time and date stamped) and deposits the application in a folder in the client’s file on the management system. Your competitor now has in his possession a signed application and simply asks the insured for his checking account routing number and account number, or debit/credit card number. He electronically passes the application up to the underwriter of the carrier from his management system, and binds the policy from his rating system. The whole process took a fraction of the time, effort, and cost of doing business the “old fashioned” way. Reminds me of the Honeymooners episode where Ralph and Ed use a “new implement” versus an old apple coring utensil…also good for spear fishing! Sounds incredible? Well, it is. If your real time rating system and management system do not provide these types of tools for conducting business in the most effective and efficient manner, please give me a call and I will let you know where you can find a system that does. So the holidays have come and gone once again, and it is my hope and prayer that all of you have had a safe, healthy and blessed year with your families and friends.

Although some of us may have lost a loved one, I say that we are so much more fortunate to have the memories and tears from someone who touched our lives in such a loving way, than to not have had them in our lives at all. As they say, “It is better to have loved and lost, then never to have loved at all.” Happy New Year…and Ciao for now! [IA]

Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as an insurance technology professional and a licensed insurance broker. 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 a “Special Service” award in 2013. In his community, Michael is the immediate Past President (and current

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He electronically passes the application up to the underwriter of the carrier from his management system, and binds the policy from his rating system. The whole process took a fraction of the time, effort, and cost of doing business the “old fashioned” way.

member) of the Longwood Central School District Board of Education on Long Island, NY; is a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of The Middle Island, NY, Rotary Club and Central Brookhaven Lion’s Club. 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.

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[ HISTORY LESSON ] By Dale C. Crawford

Managing General Agency vs. Insurance Company Disputes — Why Does History Continue to Repeat? For the potential arbitrator or consulting expert, the phone call always goes in one of two distinct directions. As soon as the caller identifies him/herself as an attorney, the conversation quickly turns to the business at hand: I represent Honesty Insurance Company. Three years ago, my client entered into an agreement with Reliable Managing General Agency to write business. We have found that Reliable violated the agency agreement in multiple ways, failed to disclose required information, and may have fraudulently withheld funds owed my client. We have filed for arbitration under the terms of the contract for damages and premium funds owed. — or — I represent Reliable Managing General Agency. Two years ago, my client agreed to represent Honesty Insurance Company to produce business. We have carefully followed every term of the contract, made all records available to Honesty, and remitted all premiums as required. Now Honesty cancelled the contract, failed to pay earned commissions and profit sharing, and has filed suit.

he dispute resolution process then follows; and may be a lengthy and expensive conflict for both sides. While litigation is a natural and expected result in the insurance industry, what makes these different is that this is not over benefits from an insurance policy; rather one between two business partners. Additionally, what makes these unique is the frequency and repetition of the same issues-violation of contract terms, lack of disclosure, and misapplication of funds. Anyone involved in this type of dispute resolution and who has been in the business for a significant time has seen the identical scenario repeated for many years. Why is it not infrequent for the term MGA to be inherently associated with downright corruption or fraud and why do these battles continue to develop among experienced industry executives on both sides? ¹ First, a caveat is necessary that cannot be overemphasized. There is a wide and 14 January 13, 2014 / INSURANCE ADVOCATE

The business is usually written through insurers with rate and coverage flexibility. These are a vital part of the industry that are creative, innovative, and fill gaps left by the standard carriers. successful industry of MGA’s that have been in operation for many years, and enjoy lucrative symbiotic relationships with specialty carriers operating in this environment. The business is usually written through insurers with rate and coverage flexibility. These are a vital part of the industry that are creative, innovative, and fill gaps left by the standard carriers. These are an important and necessary part of the property-casualty industry. In contrast to the stable, long-term relationships with specialty carriers are those that are the typical breeding grounds for disputes. Several characteristics are common in these circumstances: 1. A contract that applies only to program business. Instead of broad, across-the-board surplus lines business of general liability, property, and auto, these will have narrow restrictions—typically, some singular line of business. It may be some form of professional liability, contractors of a certain type, or some narrow industry. The focus is a relatively small group of homogenous exposures. 2. A lack of operating history of the program. These are usually a new venture, perhaps with a producer who has access to the prospective group and expectations to expand on what may be a small base of accounts that is anticipated to grow considerably with an insurance program tailored to the coverage objectives of the members. 3. A producer—either retail or MGA— that has relatively little or no experi-

ence in managing a program. The owners of the MGA may have some experience with the business, yet operating without underwriting authority—the business has been previously written in the traditional system of submission and individual acceptance by the insurers. 4. The insurance company joining with the MGA has no previous history with the type of business to be written. A personal experience comes to mind—a large retail jewelry chain owned an insurance subsidiary the sole purpose of which was to provide insurance for merchandise sold and financed. This was low limit, first party coverage that the store required borrowers to carry during the term of finance. A new MGA convinced the insurer to give it authority to write commercial umbrella liability through a complex web including a reinsurance broker and reinsurer that would fully protect it from ultimate loss. The results were predictably disastrous. The reinsurers denied coverage and attempted to rescind. This example was not all that unusual, making a leap from property coverage on financed jewelry to commercial umbrella through MGAs. For added measure, this took place during a highly competitive era in the industry when competition was brutal, where rock-bottom terms and pricing were necessary to write business. Anyone involved in the excess and surplus lines or reinsurance industries has seen these scenarios play out at least since the 1970s. Yet attorneys, arbitrators and consulting experts still see these happening. Since the same issues continue as the core of these disputes, there have to be reasons why history repeats itself time and again. Based on thirty years of observations within the industry and an additional dozen in dispute resolution, here are a few conclusions. continued on page 16

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[ HISTORY LESSON ] continued from page 14

First, from the standpoint of the MGA, these are entrepreneurs out to create a market niche for themselves and build a successful business. Properly managed and if successful, they can be quite rewarding through commission income, contingent bonuses based on underwriting results, and building a business with a substantial value. For an insurer, it can be a potentially attractive enterprise as well-a chance to expand into new lines or classes of business and increase profits. Why then do so many go so wrong? The answers are frequently found in the essential nature of the enterprise itself. For the insurer, this is most often an introduction into a new class of business in which it lacks an experience base. Instead of a building its own internal institutional knowledge, this is delegated outside the organization to the MGA. Thus the insurer does not have and is not acquiring the overall comprehension and subtleties of the business; instead it relies on the MGA while remaining responsible for the results. If properly analyzed, what would induce an insurer to enter into such an arrangement? The answer appears to be opportunity—an insurance executive envisions the chance to enter a new line of business and increase volume with projections of significant profits. The real attraction is that this can be done with virtually no effort or upfront cost to the insurer. The expansion can be accomplished without adding personnel, office space, and processing facilities-the insurer only has to take the premium and the MGA performs all the functions, often also processing claims. This attractiveness tends to mask the real danger—the inherent hazard in transferring underwriting authority outside the building. The prospective insurer is often provided an additional sweetener— the MGA obtains reinsurance to protect the reinsurer from loss. This can be structured as total protection, where all underwriting risk is reinsured, or the issuing carrier retains only a small participation. In the former, the insurer then becomes only a front and receives a fee of a certain percentage of premiums; in the latter, risk is significantly minimized. When these ventures borne of mutual optimism begin to lose luster, it typically results from claims activity. Losses occur 16 January 13, 2014 / INSURANCE ADVOCATE

Since these scenarios have been repeating for at least 40 years, is there any reason to believe that insurers will adopt the necessary vigilance to refrain from granting underwriting authority for classes of business in which they have no experience and that MGAs will universally act with total adherence to all contractual requirements?

that exceed the anticipated levels. Based on the severity and circumstances, the insurer may simply terminate the contract and walk away. Often, however, the problems may escalate dramatically. If there is reinsurance, that protection may prove illusory. In some cases, the reinsurance never existed—the MGA simply did not obtain the protection. In others, the reinsurer denied liability based on fraud or misrepresentation or may have become insolvent. Then the insurer finds that not only are the losses more than projected, the protection it relied upon does not exist. Typically once problems have been identified, the insurer will conduct an underwriting and financial audit. Based on the results, arbitration or a lawsuit may soon follow. When the dispute escalates to outside resolution, the issues are typically complex and focus on numerous aspects—violation of the MGAs authority including underwriting classifications and pricing; failure to report and disclose; and often include misappropriation of funds. An arbitration panel or jury must sort through these and decide whether the MGA was guilty of the allegations or whether it was nothing more than underwriting results worse than anticipated; in other words, simply a business deal gone badly. In numerous observations over the years, there seems to be an element of truth both ways. Some were downright fraudulent, with egregious violations of underwriting authority and absconding

with premiums. Others were more benign, and appear to be little or nothing more than poor underwriting experience. In the latter instance, instead of acknowledging an unsuccessful—albeit costly—business relationship, the executive or management team responsible for the MGA venture may be under pressure; thus the desire to “make the MGA pay” for its transgressions and recover the underwriting losses. Since these scenarios have been repeating for at least 40 years, is there any reason to believe that insurers will adopt the necessary vigilance to refrain from granting underwriting authority for classes of business in which they have no experience and that MGAs will universally act with total adherence to all contractual requirements? The answer is likely no different than the high tech or housing bubbles preventing future financial calamities. Perhaps the most fundamental reason is the inherent foundation for conflict where the MGA is charged with providing the vigilance necessary for successful underwriting while being compensated based on commission. It bears mention here that this has been addressed—the National Association of Insurance Commissioners has adopted the NAIC Model No. 225, known as the Managing General Agents’ Act which sets restrictions on the powers that may be granted to MGAs. Each state has adopted this in some form. ² The extent to which this will eliminate these disputes remains to be seen. Just as on page one describing traditional, long-standing MGA arrangement of writing multiple lines and classes with experienced partners on both sides, there can be legitimate opportunities in new ventures. How can there be potentially successful prospects for both sides, while protecting the insurer and creating a successful business for the MGA? Here are a few basic tenets: Above all else, understand the business. If an insurer has no internal expertise in a certain class or line of business, consider long and hard before making an entry by delegating underwriting authority to an outside entity. If a decision is made to go forward, underwrite the business just as if it were part of the internal underwriting function. continued on page 18

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A Special Thank You

A member of the Insurance Advocate family, Mike Loguercio, recently experienced a tragic personal loss, Godson, Staff Sgt., MP and Ordinance Dog Handler John Mariana, who served in the Middle East conflict with distinction, serving 4 tours in the War on Terror, passed away on November 28, 2013. The Insurance Advocate participates in his familyâ&#x20AC;&#x2122;s sadness and in its pride as we salute Johnny for his service to our country together with the thousands of men and women who stand watch and risk their lives for our benef it and for the ideals of freedom, democracy and world stability. May he rest in peace, unforgotten, with his fallen comrades.Â

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[ HISTORY LESSON ]

[ FORE WORD ]

continued from page 16

continued from page 4

Audit, audit, audit. Both parties benefit by the insurer visiting frequently to review files and financial records. Underwriting audits should include declined submissions to show exactly how the contract provisions are being applied. At the same time, have an open and continuous dialogue between the MGA management and the responsible executives at the insurer. Document, document, document. The importance of documentation cannot be exaggerated. First, the MGA agreement should be a comprehensive road map for all aspects of the operation and should be followed. Additionally, any exceptions or side agreements should be immediately written and communicated to the other side and internally to both organizations. Any discussions resulting from visits should likewise be memorialized. In the event of a dispute, it is to the advantage of both sides to have a complete paper trail of all agreements. Insurance is a microcosm of the increasingly complex global venture of finance, and there will continue to be opportunities for creative entrepreneurs who identify needs, design solutions, and establish long-lasting effective partnerships. These observations are intended to aid those who will have the opportunities and desire to participate. [IA]

Services (DFS), a 9 percent increase over 2011, when 17,121 suspected incidents of fraud were reported. The 2012 incidents included motor vehicle theft; motor vehicle arson; larceny from a vehicle; motor vehicle fraud claims and no-fault insurance claims, all of which were not legitimate. DCJS Executive Deputy Commissioner Michael C. Green, who chairs the Motor Vehicle Theft and Insurance Fraud Prevention Board, said, “Even as we see the numbers of motor vehicle thefts go down, we must remain vigilant in fighting fraud in motor vehicle insurance. That is an effort that requires a collaborative effort among local law enforcement, state, federal and insurance industry partners to track down wrongdoers and find ways to prevent fraud from happening in the first place.” The following 29 agencies will receive grants and use them in a variety of ways to combat fraud, including: funding either all or a portion of the salaries of assistant district attorneys and investigators specifically assigned to handle motor vehicle theft and insurance fraud cases; funding enhanced enforcement and sting operations; and offering specialized training for prosecutors, police officers and investigators. Statewide Training Grants · New York Anti-Car Theft and Fraud Association (NYACT): $57,000, · The New York State Prosecutor’s Training Institute (NYPTI): $31,900; New York City · New York City Police Department: a total of $289,700 to two specialized units, the Auto Crime Division and Fraudulent Accident Investigation Squad;· Fire Department of New York: $104,900;· Bronx County District Attorney’s Office: $302,500;· Kings County District Attorney’s Office: $227,200;· New York County District Attorney’s Office: $275,000;· Queens County District Attorney’s Office: $568,200;· Richmond County District Attorney’s Office: $77,100; Long Island · Nassau County District Attorney’s Office: $169,100; · Nassau County Police Department: $130,000; · Suffolk County District Attorney’s Office: $315,100 · Suffolk County Police Department: $143,200; Hudson Valley · Westchester County District Attorney’s Office: $300,900; · Yonkers Police Department: $139,400; Capital Region · Albany Police

¹ The term Managing General Underwriter is often used synonymously with Managing General Agency. The two will be used together here and referenced as MGA. ² For a complete text of the Act, go to www.naic.org.

Insurance is a microcosm of the increasingly complex global venture of finance, and there will continue to be opportunities for creative entrepreneurs who identify needs, design solutions, and establish long-lasting effective partnerships. 18 January 13, 2014 / INSURANCE ADVOCATE

Department: $36,500; · Albany County District Attorney’s Office: $68,100; Central New York · Syracuse Police Department: $26,000; Western New York· Erie County District Attorney’s Office: $120,700; · Monroe County District Attorney’s Office: $125,000; · Niagara County District Attorney’s Office: $152,100; · Buffalo Police Department: $121,000; · Cheektowaga Police Department: $48,000; · Niagara Falls Police Department: $36,500; · Rochester Police Department: $42,200; Monroe County Sheriff ’s Office: $31,200 · Niagara County Sheriff ’s Office: $21,500. The New York State Division of Criminal Justice Services has a variety of responsibilities, including law enforcement training, collection and analysis of statewide crime data; maintenance of criminal history information and fingerprint files; administrative oversight of the state’s DNA databank, in partnership with the New York State Police; administration of federal and state criminal justice funds; support of criminal justice-related agencies across the state; and administration of the state’s Sex Offender Registry. Let’s hope this grant gets the issue the attention it deserves and really helps combat the crooks that drive all of our costs up... In this issue we highlight MSO, one of the most interesting enterprises in the tri-state area that is uniquely positioned for growth. It is our Enterprise of the Year for 2013 and deserves our applause. Enjoy the Insurance Advocate and have a wonderful and successful New Year. Thank you. Steve Acunto

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com

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AGOSTINO& ASSOCIATES Practice concentrating on federal and state tax controversies Frank Agostino fagostino@agostinolaw.com (201) 488-5400 x 107 Lawrence Brody lbrody@agostinolaw.com (201) 488-5400 x 132

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Jairo Cano jcano@agostinolaw.com (201) 488-5400 x 144

Tara Krieger tkrieger@agostinolaw.com (201) 488-5400 x 118

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Chrystal Loyer cloyer@agostinolaw.com (201) 488-5400 x 116

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John Miscione jmiscione@agostinolaw.com (201) 488-5400 x 139

Christopher Grau* cgrau@agostinolaw.com (201) 488-5400 x 143

Lawrence Sannicandro lsannicandro@agostinolaw.com (201) 488-5400 x 128

Kevin Jost kjost@agostinolaw.com (201) 488-5400 x 120

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WWW.AGOSTINOLAW.COM (201) 488-5400

14 WASHINGTON PLACE, NEW JERSEY 07601

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[ COVER ]

Insurance Advocate’s Ente

MSO Sets Expansion, Member Services Goals 20 January 13, 2014 / INSURANCE ADVOCATE

L D M

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[ COVER ]

nterprise of the Year 2013 “Fresh” is the best word to describe MSO today. Fresh can mean a lot of things, but the Insurance Advocate’s Enterprise of the Year has taken this word to a new level. MSO, Inc., formerly known as Mutual Service Office, started life as a rating bureau for companies who write risks on an individual basis. With more than 35 members at present, the New Jersey based entity has set its sights on national expansion. MSO has expanded their Board with national representation and added numerous products and educational offerings for its members. In short, MSO is repositioning rapidly to better serve the small to medium sized carrier. Under Jan Scites’ leadership working together with a motivated and expert team and a forward looking board, this enterprise is “going national” right before our eyes.

MSO has managed to add products and information strengths that will form the foundation of the future growth of MSO.

L-R: AL SORENSON, KENT JONES, JIM AYERS, DON APPLEGATE, BOB GAGE, RANDY PETERS, MIKE FARON, JEFF KUCERA, AND JAN SCITES

We cannot express how enthusiastic this publication was in interviewing MSO’s brass after hearing numerous accolades about the company’s growth. MSO is our 2013 Enterprise of the Year with good reason. On the matter of expansion: In interviews with the board, the underlying theme was service to members, retention and expansion of the subscriber base, and growth in new geographic areas. Other priorities include continued good relationships with regulators and additional product offerings. MSO is providing education to the industry in the form of webinars, seminars and regularly published articles. Since 2008, MSO has expanded from 9 states to 48. The MSO team, comprised of industry professionals, is expanding to meet the demands of the bureau’s growth, mixing long time employees with new hires. MSO is upgrading its technology platform across the functional areas, to offer web-based access to better serve its members. The first system, released in 2012, was the program management database (forms, endorsements and manuals). In partnership with a managed service provider, MSO moved its IT operations to the cloud, called the “webtop”. This means MSO staff can work continued on page 22

INSURANCE ADVOCATE / January 13, 2014 21

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[ COVER ] continued from page 21

anywhere, any time, on any device. MSO has managed to add products and information strengths that will form the foundation of the future growth of MSO. Further expansion of programs into Ohio and New York are near-term goals that we believe will make this entity an important national player. One of the pathways identified by MSO and pursued by its membership is the matter of gaining great agent loyalty to the carrier members. To accomplish this, MSO has been introducing a series of new niche market products, including 7 BOP programs, to be used by its members for the agency and brokerage community. In fact, on the day of our interview MSO had recently introduced programs for funeral directors, dry cleaners and pet services, and was finalizing a personal care services offering. These programs are well suited to the less urban markets served by MSO member companies and their agents. Agents in those areas may be underserved. Many times, they have limited options for placing business for any lines that are slightly out of the ordinary. “This gives MSO a major advantage in the agent’s mind”, according to Mr. Don Applegate, who is Chairman of MSO. “MSO has worked with several models over the years, but now we have forged our own pathway, drawing from differ-

MSO’S BOARD IS ACTIVE AND COMMITTED. 22 January 13, 2014 / INSURANCE ADVOCATE

ent examples in the field, from the very large service facilities to some that are more boutique oriented.” According to Mr. Applegate, the stability that MSO has enjoyed has given it a great basis for growth. "The strong MSO team, with the addition of new analysts and actuarial support, has been able to build geometrically, using the latest technology and added products, offering a whole new way of seeing MSO." According to Vice Chairman of MSO, Mr. Robert Gage, creating buzz in the marketplace has become a very important activity. Hence, the selection of some of our products: “We are rolling out personal care services programs such as: nail salons, day spas, even tattoo parlors, to begin to identify MSO with products that are in niche demand and that can prove profitable to our agents and brokers. We obviously cannot compete in some cases with giant companies, although the size of our members is increasing as we expand, yet we can hope to become something that promises and delivers exactly what is stated in our literature. This is the MSO formula and, together with a talented team, it will bring us to great success in the future.” Jan Scites, MSO’ s CEO, joined the entity just after its new strategic plan was adopted six years ago. Jan said, “The MSO leadership team has been reaching goals steadily and has given confi-

dence to our Board of Trustees in steering growth for our members and their agents and brokers. We are confident that the formula will work and are delighted to have been named the Insurance Advocate’s “Enterprise of the Year for 2013.”[IA]

PROFILE

Jan Scites, J.D., CLU, ChFC Ms. Scites is currently CEO of MSO, Inc., the New Jersey based Property and Casualty Rating Bureau that provides policy forms, rates, commercial inspections, and state filing services. Prior to MSO, Inc., Ms. Scites held several senior management positions at AT&T, including Vice President, Broadband and Corporate Strategy, and Vice President, Business Customer Care. At Connecticut Mutual, she served as President of Customer Service. Ms. Scites was President of Phoenix Equity Planning Corporation, a broker dealer at Phoenix Mutual Life Insurance Company. She is on the Board of Trustees for MSO, Inc., Overseas Military Sales Corp, the Vermont Food Bank, and the Ohio University Foundation. At the Foundation she is Chair of the Audit Committee and serves on the Executive Committee. She is a Board Advisor to Pendergast Partners LLC., and OhMyGov. She is a member of the American, Connecticut, and New Jersey Bar Associations and is certified as a Chartered Financial Consultant (ChFC) and a Chartered Life Underwriter (CLU). Ms. Scites has a law degree from the University of Connecticut Law School and a B.G.S. Degree with honors from Ohio University.

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tion to split the death benefit between the business and the surviving spouse of the key person(split dollar). This will help to replace the spouseâ&#x20AC;&#x2122;s lost income. Policies that combine a cash value with deferred compensation to the key employee can also be an incentive for the key person to remain with the company. Many insurance agents are very good at providing insurance protection for the visible and tangible assets of their customers â&#x20AC;&#x201C; the building, loss of income, liability and vehicle exposures. Unfortunately, sometimes it is the unseen exposures that can lead to a devastating consequence - the failure of the business. Understanding the need for key person insurance and providing important information to your clients is another value-added service of the professional insurance agent.

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[ COVER ]

The Team at MSO

SUE QUIMBY, DIRECTOR, CLIENT RELATIONS & TRAINING AND SENIOR PRODUCT DEVELOPMENT ANALYST

MEGAN RICHARDS MANAGER, MARKETING & OPERATIONS

LAURA “PEPPER” TREUVEY SENIOR PRODUCT DEVELOPMENT ANALYST & CORPORATE SECRETARY

TRISH RIGGIO, SENIOR PRODUCT DEVELOPMENT ANALYST & STATE COMPLIANCE COORDINATOR

MARIA BLANEY UNDERWRITING REPORT TRANSCRIBER

ANNE BONALES EXECUTIVE ASSISTANT & HR COORDINATOR

JAN KOZLOWSKI, VICE PRESIDENT, INSURANCE PROGRAMS & REGULATORY COMPLIANCE

IAN MCKECHNIE VICE PRESIDENT, ACTUARIAL SERVICES

“The MSO leadership team has been reaching goals steadily and has given confidence to our Board of Trustees in steering growth for our members and their agents and brokers. We are confident that the formula will work and are delighted to have been named the Insurance Advocate’s “Enterprise of the Year for 2013.” - Jan Scites, CEO & President, MSO 24 January 13, 2014 / INSURANCE ADVOCATE

A Complete Team Listing: Jan Scites, J.D., CLU, ChFC CEO & President Jan Kozlowski V.P., Insurance Programs & Regulatory Compliance Ian McKechnie V.P., Actuarial Services Missy Krepps Senior Product Development Analyst Jane McGraw Product Development & Statistical Reporting Analyst Sue Quimby Director, Client Relations & Training; Senior Product Development Analyst Megan Richards Manager, Marketing & Operations Trish Riggio Senior Product Development Analyst & State Compliance Administrator

Pepper Treuvey Senior Product Development Analyst & Corporate Secretary Maria Blaney Underwriting Report Transcriber Anne Bonales Executive Assistant & HR Coordinator Rudy Ewen Graphic Artist / Typesetter Michael McNamara Specific Risk Rater Mary Ellen White Senior Specific Risk Rater FIELD STAFF: Nils Deacon Senior Field Inspector Dina Shotyk Auditor Ed Wynne Senior Field Inspector

INA 1-13-14_INA 1-13-14 1/28/14 9:38 AM Page 25

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[ COVER ]

LEADERSHIP

MSO Board of Trustees Donald Applegate has been a Trustee of MSO since 1997 and Chairman of the Board since January 2013. He is actively involved with the Board in setting strategic direction for MSO. In 1996, Don was named President and CEO of Farmers of Flemington Insurance Company and has been a Director on their Board since 1972. Prior to joining Farmers, Don held various executive positions with the State of New Jersey in the Department of Agriculture and the Agriculture Development Committee. Don is a long time resident of New Jersey. He received his BS degree from Rutgers University and his MS degree from the University of Maryland. Vice Chairman, Robert Gage has been a Trustee of MSO since 1994 and ViceChairman of the Board since January 2013. He is very involved in the strategic planning for the national roll out of MSO Forms, Manuals, and Rates. In 2001, Bob and a business partner formed G&G Underwriters; an MGA writing commercial business in NY, NJ, and PA. Prior to G&G, Bob worked as an executive in the product development, regulatory compliance, and marketing areas for insurance companies and for ISO. At ISO, he worked in Commercial Risk Services and acted as a State Manager for program filings and research. He is recognized for his extensive knowledge in engineering analysis of commercial risks. Bob received his BSFPE in Engineering from the University of Maryland and attended the College of Insurance where he earned his CPCU designation. He is also a past president of the Central Jersey Chapter of the CPCU Society.

• James Ayers, CPCU, President, Franklin Mutual Insurance Company • Michael L. Faron, CPCU, New England Commercial Business Unit Leader, The Norfolk & Dedham Group • Kent Jones, CPCU, CPA, CPIA, AIAF, ARe, President & CEO, Farmers Mutual Fire Insurance Company of Salem County • Jeffrey L. Kucera, FCAS, Independent Actuarial Consultant • Randall S. Peters, CPA, President Allegany Co-op Insurance Company • Jan Scites, J.D., CLU, ChFC, CEO & President, MSO, Inc. • Allen Ray Sorensen, MBA, CPCU, Vice President, Corporate Underwriting, United Fire & Casualty Company MSO Officers • Jan Scites, J.D. CLU, ChFC, CEO & President • Jan Kozlowski, MBA, Vice President of Insurance Programs, Regulatory & Compliance Services • Ian McKechnie, Vice President, Actuarial Services • Laura Treuvey, AU, Corporate Secretary & Senior Product Development Analyst • Kent Jones, CPCU, CPA, CPIA, AIAF, ARe, Treasurer

Congratulations

MSO, Inc. Subscribing Companies Allegany Co-op Insurance Co. Bedford Grange Mutual Insurance Co. Briar Creek Mutual Insurance Co. Cumberland Ins. Co. Cumberland Mutual Fire Ins. Co. Delaware Grange Mutual Insurance Co. Farmers Insurance Company of Flemington Farmers’ & Mechanics’ Mutual Ins. Assoc. of Cecil County Farmers’ Mutual Fire Ins. Co. of Marble, PA Farmers Mutual Fire Ins. Co. of McCandless Twp. Farmers Mutual Fire Ins. Co. of Salem County Farmers Union Mutual Ins. Co. Fidelity Mohawk Insurance Co. Fitchburg Mutual Insurance Co. FMI Insurance Co. Franklin Mutual Insurance Co.. Friends Cove Mutual Ins. Co. G&G Underwriters Grange Mutual Insurance Co. Hanover Fire & Casualty Ins. Co. KnightBrook Insurance Company Lebanon Valley Insurance Co. Loudoun Mutual Insurance Company Mennonite Mutual Insurance Company Mercer Insurance Co. Mercer Insurance Co. of NJ Millville Mutual Insurance Co. Norfold & Dedham Group

se i r p r Ente

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26 January 13, 2014 / INSURANCE ADVOCATE

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[ ON THE LEVEL ]

By Jamie Deapo

Reacting to Change

his started out to be a simple article on independent agents and brokers having a plan in 2014. Every time I wrote a draft it felt wrong. I knew what I was saying as I wrote was accurate and necessary but it wasn’t what I really wanted to

• Unable to overcome the inefficiencies created by representing multiple carriers that refuse to standardize the product delivery system. • Struggling to get our brand value recognized and appreciated by con-

They had very few layers of management and a smaller, more efficient, customer service staff supported by highly effective technology. They spent significant advertising money to convince consumers that insurance was a commodity to be bought solely on price.

Jamie Deapo

say. My words where highlighting the obvious reasons for having a well thought out plan but there was so much more behind what I was writing that needed to be said. The thing that is gnawing at me is a growing concern that the independent agency system is seriously under attack and if it’s members don’t wake up they may find themselves losing an increasing amount of market share. If I am correct at some point the independent agency system will no longer play a viable role in providing insurance protection to consumers. As an industry we have always been slow to react and change. That serves us well when it comes to properly protecting consumers and remaining fiscally sound. It does not help us one bit when it comes to providing our product efficiently and effectively and competing in today’s marketplace. If we don’t focus our immediate attention to changing how we do business we very well may find ourselves continuing to shrink as a provider of insurance protection. Here are the problems and issues I believe need immediate attention and correction: • A workforce and ownership structure dominated by Baby Boomers looking down the road to retirement. • The inability to attract new young talent. 30 January 13, 2014 / INSURANCE ADVOCATE

sumers. • Unwilling to set aside egos and differences and form one organization focused completely on advancing the success of the independent agency system. • Insurance carrier partners who profess to support the independent agency system yet continue to “hedge their bet” by offering coverage directly to consumers. • Carriers’ unwillingness to reduce their internally cost structure to more competitively price their product in the marketplace. • Inefficient and unprofessional agencies that negatively affect consumer’s opinion of the independent agency system. There may be more that I failed to identify but these are the major ones in my mind. In the balance of this article I will attempt to expand on each of these. The first 2 items are interrelated and I will deal with them together. Up until recently working in the insurance business, especially at the agency level, has offered a consistent and comfortable living. For Baby Boomer agency owners the income was very good for many years and has allowed them to enjoy an excellent lifestyle. Their staff has been stable; growing in knowledge,

expertise and experience year after year and experiencing limited turnover. This is borne out by so many people of that generation who jokingly talk about never planning to become a part of the industry but staying for their whole career. There wasn’t any great need or push to bring young talent into the industry. Carrier training schools, responsible for training most of the current workforce slowed dramatically and some actually went out of existence. Competition for business, especially personal insurance, was limited and client retention was excellent. If anything the business rotated between independent agents and brokers and the only real competition was captive agencies and the large brokerages. Then direct response carriers started heavily using technology to effectively sell personal insurance protection directly to consumers. They built an internal salesforce using younger people and focusing their training on how to effectively write large numbers of individuals over the phone or the internet. They had very few layers of management and a smaller, more efficient, customer service staff supported by highly effective technology. They spent significant advertising money to convince consumers that insurance was a commodity to be bought solely on price. It was a well thought out plan that caught the marketplace off guard and was very successful. Flash forward to today and a number of companies have latched on to the direct response method of providing insurance protection including many traditional independent agency companies. It has started to move into the small to medium commercial market as well. Independent agents and brokers struggle to compete against it because their system lacks the technological efficiencies, and their staff is older, higher paid and not as technologically savvy. Some agency owners who are close to retirement question whether it is worth making the investment necessary to compete in this new marketplace. They wonder if it might not make more sense to hold on to as much business as they can and then to sell the agency for a good price and retire. The only independent agents and brokers not being

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[ ON T H E LEVEL ] significantly impacted are those agencies who predominately write larger, more complex commercial clients. Being an independent agent or broker presents additional problems effectively using technology because so many carriers want to hold on to their proprietary systems. They want to make it hard to efficiently move business between carriers. They don’t want to spend the money necessary to update their existing systems. They refuse to compromise and create a system that will allow independent agents and brokers to offer fast, accurate and bindable quotes. Driving the inefficiencies out of the process of writing and servicing business is the only way independent agents and brokers will be able to effectively compete in the marketplace today and in the future. Independent agents and brokers have an identity crisis. Our competition has spent enormous amounts of money convincing consumers that insurance buying should be based on price and they are the company to buy from. They have created highly recognizable spokespersons to carry that message. Consumers have not been even remotely introduced on a national level to the advantages of purchasing coverage from an independent agent or broker. Current consumer recognition comes from the advertising and recognition of local agents and brokers in their communities. There is a great need for expansion of the national brand supported in every sense by independent agents and brokers. We need to educate consumers to the advantages and value of doing business with us. Digital marketing, social media and the internet in general provide us a great forum to do this but requires the buy in and support of as many agencies as possible. We need to eliminate the us vs. them mentality of having more than one association. We don’t need to be in competition with each other. Instead we need to use the combined resources of as many independent agents and brokers acting as one voice to promote our brand value. We are already at a disadvantage financially with our competition we don’t need to make it even worse by spending money to compete with each other. Having one strong, united voice representing everyone would assist us in convincing lawmakers, regulators and carriers to support our efforts. We need better support from our car-

riers. We need to know they believe in our value and are not looking to undermine our efforts. We have been their effective salesforce for years and can continue to do so if only they will work with us. We need them to work with us on becoming more efficient to reduce costs while improving the speed and effectiveness with which we can provide consumers coverage. I don’t believe direct response companies are more knowledgeable or any better equipped to make a profit. Not having to pay agent’s commissions is not the only direct response carrier advantage because they spend way more than that amount in advertising every year. Their key is using technology to its fullest, streamlining the process, reducing overhead and providing as much sales support as possible. Some current independent agencies are part of the problem as well. They have decided to sell based on price and will do anything they can to get a sale. They don’t spend any time or money training their staff and as a result they sometimes provide erroneous or bad advice. Service is extremely poor or non-existent and many times they

promise future service at the point of sale that never ends up occurring. They don’t invest in their business and it is reflected in the quality of the service they provide. Many of them have overstayed their time in the business or just don’t care. They would do all concerned a favor by selling their agency so their clients could receive the high level of knowledge expertise and service that independent agents can offer and they deserve. It’s very possible my observations are much too simplistic and overstated however I don’t think so. The problems aren’t huge they just aren’t being addressed fast enough and without any agenda other than to improve the process. Although insurance coverage may be very complex the process of providing effective and efficient insurance protection and service doesn’t have to be. I’ve been in this business for a long time and I know the demise of the independent agent and broker has been mentioned before and never came to pass. Unfortunately we are in a very different time and place and I really think the threat is real and needs to be taken seriously. [IA]

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[ LETTERS ] Jamie Deapo Insurance Advocate 131 Alta Avenue Yonkers, N.Y. 10705 Dear Mr. Deapo Like to comment on your article for one trade association with my personal opinion. Having been President of NYPIA in the 70’s we were a three state association at that time, now four. I have always felt it allowed better service and representation then a single state operation. At the time I was approached by IIABNY I suggested that they should talk with their sister states. To the best of my knowledge nothing was done. Following office, I spend 12= years on the NYAIP board when the volume insured was 1.2 million vehicles. Lunch several times a year with my NJ & CT counterparts discovered company operations and positions that varied from state to state but were never brought to the attention of the producer members on the respective Plans. Gave us insight as to what was up with the AIP carriers’ and well worth the travel and lunch costs. Used to be a member of both groups, but dropped IIABNY when it took positions totally against their member’s interest on Plan business. Have also felt a three state group gave us better strength when dealing at the federal level which will be a growing problem in the future. I served on several three state groups, such as when non-fault was being considered, and it helped in expanding our view of the entire problem. Personally, I would be opposed to a one state program as weakening not strengthening our operation. Very truly, Erik Nicolaysen, CPCU

January 13, 2014 Erik Nicolaysen, CPCU Nicolaysen Agency, Inc. Erik – Thank you for taking the time to comment on my column. It would appear from the dates you indicated in your letter that you and I have been in this industry for quite a long time. I actually started back in 1972. The world was quite a bit simpler then as was the insurance business. Candidly, I don’t see the benefit of having a multi-state association. New York is such a unique state and the insurance volume in this state is significant. The IIABA, our national association, has active, viable associations in all 50 states that deal specifically with the issues of each state. Our national association is very active in national insurance issues, especially legislation and regulation. The idea of a merger of the PIA and IIABA state affiliates is not a new idea. It has occurred in a number of states and I believe if you asked the members of the new organization they are very satisfied with the new entity that was created. The intent is to utilize the best talent of each organization while eliminating the cost of duplicated services. In a state represented by one association, issues like no-fault and assigned risk plans are discussed with all members and the association’s position is based on the decision of the board made up solely of voting members who represent the overall membership. The world is changing rapidly. The insurance marketplace today is nothing like it was just a few years ago. The independent agency system is under attack in the marketplace and losing market share. That’s why independent agents and brokers need one association with the most professional and knowledgeable staff providing the most cost effective representation possible. I believe if you spoke to agents and brokers across the state, like I do, you would find that the majority of them favor such a change. Respectfully, Jamie Deapo 32 January 13, 2014 / INSURANCE ADVOCATE

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[ COURTSI DE ]

By Betty Flood and Katlin Nash

Herzl Regins v. Hospitals Insurance Company

lbany, N.Y.—New York State Court of Appeals Chief Judge Lippman and Judges Graffeo, Read, Smith, Pigott, Rivera, and Abdus-Salaam decided the case of Herzl Ragins v. Hospitals Insurance Company in favor of the defendants. Plaintiff brought this action for breach of an insurance contract, asserting that defendants Hospitals Insurance Company and Hanys Insurance Company (collectively HIC) must pay interest on a $1,100,000 medical malpractice judgment against plaintiff under an excess professional liability insurance policy issued by HIC because the liquidator of the insolvent primary insurer has already paid the $1,000,000 per occurrence liability limit of plaintiff ’s primary professional liability insurance policy, thus triggering the coverage of the excess policy. By an order dated June 13, 2012, the Appellate Division held that HIC was entitled to dismissal of

plaintiff ’s breach of contract claim and remitted the matter to Supreme Court for the entry of a judgment, declaring that HIC was not obligated to indemnify plaintiff for the remaining amount of unpaid interest incurred in connection with the underlying malpractice action. Plaintiff appeals by the permission of this Court. We conclude that, under the plain language of the primary and excess policies, the liquidator’s payment of the primary policy’s $1,000,000 liability limit triggered HIC’s duty to pay all remaining amounts in connection with the judgment, including interest, and we therefore reverse. The plain language of the primary policy does not obligate the now-bankrupt primary insurer, and by extension its liquidator, to pay interest on any judgment against plaintiff if it has already paid the $1,000,000 liability limit of the primary policy toward the judgment. In particular, the “supplementary payments” section of

the primary policy obligates the primary insurer to pay post-judgment interest only “before” it has “paid that part of the judgment which does not exceed the limit of the company’s liability thereon,” and the primary insurer has no responsibility for interest after paying the $1,000,000 liability limit. Under the excess policy, HIC must cover any professional liabilities, including interest, above the primary policy’s $1,000,000 limit. In that regard, the excess policy states that HIC will pay “all sums” which are in excess of that limit and which plaintiff “shall become legally obligated to pay as damages.” And, although the excess policy does not specifically mention interest as a covered “sum” of “damages,” that is of no moment because the excess policy does not limit the definition of “sums” to any particular category of damages or liability, or otherwise exclude interest from its reach.

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[ COURTS I D E ] Given that the excess policy does not define “sums” as all, that contractual term logically acquires its widely used meaning of “indefinite or specified amount(s) of money.” The plain meaning of the primary and excess policies to the particular medical malpractice judgment against plaintiff at issue here, it is clear that the primary insurer’s liquidator fulfilled its obligations under the primary policy, thereby triggering HIC’s responsibility to pay the interest in excess of the primary policy’s $1,000,000 liability limit. The liquidator paid plaintiff $1,000,000 toward that judgment. At that point, the liquidator was no longer required to pay interest under the “supplementary payments” provision of the primary policy because that further amount accrued only after the liquidator had already satisfied the liability limit of the primary policy in the manner specified by the “supplementary payments” provision. The additional interest on the judgment, as amended, constituted a “sum in excess of the limits of liability of the Underlying Policy,” which is covered by the excess policy. Accordingly, HIC had to pay the additional interest. In the event of the primary insurer’s insolvency, the excess policy expressly relieves HIC from any duty to “drop down” to cover any portion of the judgment that the primary insurer would be required to supply, HIC argues that plaintiff is improperly attempting to bypass that provision and force HIC to pay interest for which the primary insurer would be responsible had it not become insolvent. If the primary insurer had remained solvent and paid the primary policy’s $1,000,000 liability limit, HIC would still bear the responsibility limit, HIC would still bear the responsibility for the remaining interest; that is simply its obligation under the plain language of the excess policy. The policy provision for post-judgment interest in excess of the liability limit was designed to comply with state regulations governing automobile insurance, which required insurers to pay post judgment interest; the insurer paid its $100,000 policy limit toward the principal amount of the judgment, and it also paid postjudgment interest in proportion to its liability limit. The insurer refused to pay

interest on the total amount of the judgment, and after the plaintiff sued the insurer, the trial court granted summary judgment to the insurer. “We affirmed that grant of summary judgment, explaining that the courts’ interpretation of insurance policies containing language similar to the policy acquired by the plaintiff, as well as the relevant state regulations, compelled the insurer to pay interest only in proportion to the policy’s limit of liability and not in relation to the entire judgment,” stated the Court’s unanimous decision. In this case, there are no state regulations mandating that the primary insurer cover additional damages or interest beyond the primary policy’s limit, nor do any regulations exempt HIC from its responsibility to pay all amounts in excess of the primary policy’s limit. The Court of Appeals reversed, with costs, and the case remitted to the Appellate Division, Second Department, for consideration of issues raise but not determined on the appeal to that court, in a memorandum. [IA]

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[ IN THE NEWS ]

Agents, Brokers Weigh In on Interface Priorities Survey Respondents Want More Carriers to Offer Real-Time Capabilities

EARL RIVER, N.Y.—Insurance agency and brokerage professionals say the industry should place its highest priority on “getting additional carriers to offer real-time capabilities,” according to a survey in the United States and Canada. Nearly half (47%) of respondents to the Real Time/Download Campaign’s 2013 Agency Technology survey called it a “Top 3” priority from a field of 13 possible enhancements. A similar number (48%) rated it a “5” on a “1-5” scale; the average rating among all respondents for the item was 4.27. “Bringing more companies to the table will create the critical mass agents and brokers say is important as they seek to operate more efficiently and effectively,” said Joyce Sigler, CISR, CPIW, CPIA, NcAM, V.P. and Corporate Secretary at Jones & Wenner Insurance Agency in Fairlawn, Ohio, and Real Time/Download Campaign co-chair. “However, we encourage agents not to wait to implement Real Time. They can eliminate duplicate key strokes and save significant time today by implementing Real Time with those carriers that offer it. Agent adoption will encourage more carriers to make the investment in this time-saving technology.” Expanded “commercial lines real-time comparative rating” functionality ranked second in the campaign study. Nearly four in 10 (38%) survey respondents described it as a “Top 3” priority. A similar number (37%) assigned it a “5,” with the issue earning an average score of 4 from among all respondents. “Agents and brokers have seen the many benefits of personal lines real-time comparative rating and they’re eager to see similar benefits in the commercial arena,” said Campaign Co-Chair Stuart Durland, AAI, AINS, vice president and co-owner of Seely & Durland Insurance in Warwick, N.Y. “Many carriers now offer commercial lines real-time rating through agency management systems. Agents can avoid considerable duplicate data entry today by using these tools and suggesting to their non-Real Time company partners that they implement this technology as soon as possible.” One-third of survey participants said “consistency in the real-time workflows of38 January 13, 2014 / INSURANCE ADVOCATE

fered across carriers” and “easier password management” were “Top 3” priorities. Each was ranked “5” by 39% of respondents, with the former notching a 4.13 average score and the latter a 3.87. “We have made significant progress increasing implementation and adoption of Real Time and Download,” Durland said. “By sharing best practices information among carriers and by helping to remove password barriers, we expect to see continued growth in the use of these important interface tools.” The Campaign has developed a resource guide, titled “Agency Real-Time ˜Best Practice’ Workflows and Implementation Strategies: Guidance for Carriers and Vendors,” to help drive better, more consistent carrier and vendor real-time implementations. Other potential enhancements ranked by responding agency and brokerage professionals include: • Improved real-time quoting functionality that eliminates or reduces the number of quote requests that error out: Described as a “Top 3” priority by 24%; ranked “5” on a “1-5” scale by 44%; average score of 4.21 of a possible 5. • Faster response time: A “Top 3” priority of 30%; “5” on a 1-5 scale for 34%; average score of 3.95. • Consistent lines of business offered across carriers: A “Top 3” priority of 26%; “5” on a “1-5” scale for 34%; average score of 3.95. • Improved personal lines endorsement processing: A “Top 3” priority of 20%; “5” on a “1-5” scale for 28%; average score of 3.93. • Improved commercial lines endorsement processing: A “Top 3” priority of 15%; “5” on a “1-5” scale for 28%; average score of 3.91. • Greater availability of real-time quote submission functionality for mid-commercial business: A “Top 3” priority of 12%; “5” on a “1-5” scale for 28%; average score of 3.80. • Extension of real-time service capability to clients through agency website portal: A “Top 3” priority of 11%; “5” on a “1-5” scale for 20%; average score of 3.35. • Greater availability of real-time quoting for Excess & Surplus business: A “Top 3” priority of 9%; “5” on a “1-5” scale for 20%;

average score of 3.27. • Greater availability of real-time inquiry and service for Excess & Surplus business: A “Top 3” priority of 5%; “5” on a “1-5” scale for 20%; average score of 3.27. “The survey offered tremendous insight into what users and non-users believe should be improved,” Sigler noted. “We need to work together as an industry to help address these issues and to help drive even broader availability and adoption.” Campaign Survey note: The research gathered insight from more than 2,200 professionals who work in agencies and brokerages in all 50 states as well as in Canada. To help establish interface enhancement priorities, respondents were asked to rate, on a scale of 1 (lowest) to 5, each of 13 possible items. They then were asked to choose from among those items they rated highest and create a list of their “Top 3” recommended improvements. [IA] About the Real Time/Download Campaign: Launched in 2007, the Real Time/Download Campaign (GetReal Time.org) is dedicated to improving the competitiveness of the independent agency distribution channel. The campaign isn’t advocating a specific technology, but a workflow approach that frees up more time for agencies to sell, process and service business. Most agents can leverage tools already contained in their agency management systems or comparative raters. Campaign participants include agents, brokers, carriers, technology providers, user groups, and agent and industry associations. The campaign is led by industry groups and sponsored financially by: ACORD and the ACORD-User Groups Information Exchange (AUGIE); Allied Insurance/Nationwide; Applied Systems/IVANS; Applied Systems Client Network (ASCnet); CNA; EMC Insurance Companies; Grange Insurance; Harleysville; The Hartford; Independent Insurance Agents & Brokers of America (IIABA) and its Agents Council for Technology (ACT); Liberty Mutual Insurance; MetLife Auto & Home; Network of Vertafore Users (NetVU); NxTech, Incorporated; PIA of New York, New Jersey, Connecticut & New Hampshire; Progressive; Travelers; Vertafore; and Westfield Insurance.

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