January 30, 2017 Insurance Advocate

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

Banning “Bad Actors” Cuomo calls it curtains for crooks on financial stage Vol. 128 No. 2 | January 30, 2017

Peter Bickford Looks at the “Bad Actor” Playbill PAGE 13

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[ FOREWORD ]

STEVE ACUNTO

Market Shear uNew York lost another 191,367 residents to other states during the year ending last July 1, and its population declined for the first time in a decade, according to the U.S. Census Bureau’s annual population estimates.

The latest estimated annual “net domestic migration” loss—equivalent to nearly the entire population of Yonkers, New York’s fourth-largest city—is the Empire State’s largest since 2007. It brings New York’s total outflow over the last six years to 846,669 people— more than any other state’s, both in absolute terms and as a share of population as measured by the 2010 census. As of July 1, New York’s estimated population of 19,745,289 was down 1,894 people from a year earlier. While the decrease was slight—just 0.01 percent—201516 marks the first year since 2005-06 in which New York State’s estimated population dropped by any amount. New York also was a national leader in two categories: foreign immigration, which added 118,748 residents, and “natural increase” (births minus deaths), which added 75,794 people. Only California and Florida attracted more foreign immigrants, and only California and Texas had higher natural gains. The new data put New York further behind Florida, which moved ahead into third place in total state population rankings two years ago. While New York’s population dipped, Florida gained another 367,525 residents in 2015-16. Texas led all states with a gain of 432,957 residents in that period. Ranked by percentage growth, Utah, Nevada, Idaho and Florida topped the list.… …NYSAIFA got a sign-off on a new regulation that provides a critical increase in how much a life insurance agent can earn and receive during training. The higher training rates allowed by the Department of Financial Services (DFS) with the new 11 NYCRR 12 (Insurance Regulation 50) go into effect on Wednesday, January 25, 2017. These are the first increases in a long time. The DFS amendments to Regulation 50 increase the maximum subsidy limits by approximately fifteen (15) percent. NAIFA-NYS highlighted the subsidy issue last year during face-to-face meetings with the Life Insurance Bureau, encouraging them to re-evaluate the existing regulation. It worked. In its memo in support, NAIFA-NYS noted that “In order to maintain the highest standards of ethics and professionalism, it is vital that our members are in a position to recruit people of significant ability and the highest ethical standards.” With compensation rates rising in other sectors of the financial services LARRY industry, the NAIFA-NYS letter noted, “We believe the HOLZBERG amendments will help our members and, indeed, all life insurance producers in New York, to offer better services to their clients, and to compete with other sectors of the financial services industry.” The amendments to Insurance Regulation 50 are available on the DFS web site, www.dfs.ny.gov. Further details are available at www.naifanys.org; Larry Holzberg is the Chairman and gets the kudos for quarterbacking this.… …The International Insurance Society has formed the Global Centers of Insurance Excellence (GCIE), a certification program designed to recognize universities and colleges with outstanding Risk Management and Insurance programs and enhance their connections with the insurance industry. The program will recognize universities that play an integral role in promoting insurance knowledge and research, increasing the intellectual capital of the industry. “As an important part of our commitment to the advancement of the industry, befitting our roots in the academic community, the IIS is actively engaged in promoting the industry’s role in understanding and mitigating risk.

By advancing the importance of top quality risk management education, the GCIE CONTINUED ON PAGE 34

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VOLUME 128 NUMBER 2 JANUARY 30, 2017

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Kelly Donahue-Piro Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Director of Operations and Creative Services Gina Marie Balog 914-966-3180, x113 g@cinn.com EDITORIAL ASSISTANT COPYEDITOR & PROOFREADER Maria Vano mariavano9@gmail.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x111 circulation@cinn.com PUBLISHED BY CINN Media, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 613-1595 www.cinn.com | info@cinn.com President and CEO Steve Acunto

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Contents

12 BANNING “BAD ACTORS”

January 30, 2017 | Volume 128 Number 2

16

On the Level: What Keeps Me Up at Night N. Stephen Ruchman, CPIA

18

Face to Face: Paint the Town Red Michael Loguercio

19

In Focus: Is Your Agency’s Reporting Making You Crazy?

Kelly Donahue-Piro

20

Expert Viewpoint: And Now Donald Trump Richard Torrenzano

28

On My Radar: Insurance Companies Have the Right to Limit Coverage in any Manner Desired Barry Zalma

30

Looking Back: August, 1991

32

Courtside: Florida Supreme Court Rules: as Long as Policy Covers Any Cause, Homewoners Insurer Must Cover Loss with Concurrent Causes Lawrence Rogak

33

Classifieds

34

Courtside: Insurer Might Not Have Waived Late Notice Defense Even Though Not Mentioned in Disclaimer Letter

[FEATURES] 4

Foreword: Market Shear Steve Acunto, Publisher

8

Exposures & Coverages: Claims-Made Trap; ISO Filing New Designated Premises Endorsement—Watch Out; FEMA Buying $1 Billion Flood Reinsurance; DFS Rules Against Troublesome Crime Exclusion; Lower A.M. Best Rating Linked to Increased Risk of Impairment Jerome Trupin

13

Feature: Bad Laws/Bad Actors—Part I Peter Bickford

6 January 30, 2017 / INSURANCE ADVOCATE

New York and New Jersey’s Leading Insurance Magazine Since 1889.

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[ EXPOSURES & COVERAGES ]

JEROM E TRUPIN, CPCU

Claims-Made Trap; ISO Filing New Designated Premises Endorsement—Watch Out; FEMA Buying $1 Billion Flood Reinsurance; DFS Rules Against Troublesome Crime Exclusion; Lower A.M. Best Rating Linked to Increased Risk of Impairment Claims-Made Trap Claims-made policies are different animals and they can viciously bite the unwary. An example: a Pittsburgh University claim under a Lexington Insurance Company policy. This claim arose out of a professional liability dispute between University of Pittsburgh and Ballinger and Company, the architects on a building renovation of Salk Hall at the University. Ballinger carried professional liability with Lexington. On the last day of the Lexington policy’s coverage period, January 31, 2012, Ballinger (probably through its broker) submitted an ACORD notice of claim to Lexington describing the occurrence as “Senior management has been advised by University of Pittsburgh that this project (work on Salk Hall at the University) is experiencing problems and delays in its early stages.” The date of the occurrence was listed as January 31, 2012.i Trouble ensued.

Claims-made policies often spell out in great detail the claim information the insured is required to provide. The Lexington policy called for the claim notice to set out: 1. The actual or alleged Breach of Professional Duty or circumstance which is the subject of a potential Claim;

2. A description of the Professional services rendered by the Insured which may result in the Claim; 3. The date(s) of such conduct which may result in the Claim; 4. A description of the injury or damage that has or may result in a Claim; 5. The identities and address of any potential claimant(s); 6. The anticipated location(s) of any such potential Claim; 7. The circumstances by which the Insured first became aware of the potential Claim.

The court neatly summarized the difference between claims-made and occurrence-based policies: “Under Pennsylvania law, ‘failure to comply with the reporting provision of a claims-made policy’ precludes coverage.

Although a harsh consequence, claimsmade policies, and their reporting provisions, are enforceable (citations omitted).

In contrast, notice provisions in occurrence-based insurance policies ‘do not define coverage and should be liberally and practically construed.’ In the claims-made context, when the insured has breached the notice requirement, an insurer need not show prejudice to deny coverage.”

Lexington asked Ballinger to provide additional information, but didn’t receive

Jerome “Jerry” Trupin, CPCU, is a partner in Trupin Insurance Services located in Sleepy Hollow, 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.

any. On March 5, 2012, Lexington declined coverage. It identified four items that were missing from the report submitted by Ballinger: (1) the actual or alleged Breach of Professional Duty or circumstances which is the subject of a potential Claim; (2) a description of the Professional Services rendered which may result in the Claim; CONTINUED ON PAGE 10

i The University of Pittsburgh v Lexington Insurance Company and Axis Insurance Company, US District Court, SD NY13-cv-335 (KBF) 7/21/16

8 January 30, 2017 / INSURANCE ADVOCATE

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[ EXPOSURES & COVERAGES ] CONTINUED FROM PAGE 8

(3) the date(s) of such conduct which may result in the Claim; and (4) a description of the injury or damage that has or may result in a Claim.

Lexington advised Ballinger that the notice was inadequate and that any claim arising from it “will not be deemed to have been made during the policy period.”

The court held that the notice provided on January 31, 2012 was clearly insufficient and therefore no claim payment was called for on the Lexington policy.

Pittsburghii then argued that if the notice did not trigger the Lexington policy, Ballinger’s renewal policy with Axis must provide coverage. The court disposed of that argument, pointing out that neither policy provided coverage.

Practice Point: Be careful when reporting any claim. Be supercareful when reporting a claims-made claim.

ISO is Filing a New Designated Premises Endorsement—Watch Out The designated premises endorsement is close to the top of my Don’t-Want list. It narrows coverage unreasonably.

Nevertheless courts sometimes apply it in the insured’s favor. I’ve written about those casesiii and speculated that ISO would close the gap. Now ISO has, with a resounding slam.

You may think designated premises endorsements are used only on policies placed by producers who aren’t paying attention and that you can get them eliminated in your clients’ policies.

Think again. They’ve become endemic in Risk Purchasing Group policies and your chances of getting changes in an RPG policy are between nil and zero.

The solution to the problem of unintended coverage could have been cleared up by better wording in the application. Instead, ISO has filed a draconian new endorsement slated to be available later this year. The new form is entitled: Limitation Of Coverage To Designated Premises, Project Or Operation, (CG 21 44 04 17).

Only the edition date (the last four digits) is changed in the form number and the only change in the title is the addition of the word “operation.” Seemingly small changes, but there’s a world of difference between the new form and the older ones.

For starters, the previous endorsements ran just five lines of operative language; the new one runs three pages! Instead of just limiting coverage to the ownership, maintenance or use of the scheduled premises or the scheduled project as the case may be, the new form totally replaces the wording of a key section of the Coverage A definition.

The new definition limits coverage to occurrences on the premises shown in the schedule. It does not add the words “and operations necessary or incidental to those premises.” Instead it limits coverage to only the operations shown in the policy schedule. That can be a huge difference. For example, if the operations are described as “retail store,” is there coverage for wholesale operations if the claim occurs away from the premises? Insurers may

say no. An insured might argue that it’s ambiguous, but to win an argument in court is both risky and expensive. Furthermore the description of operations can be vague or out-of-date, generating a blizzard of additional disputes.

Just as insureds’ attorneys found coverage for claims never intended by the “necessary or incidental” wording insurers formerly used, insurers may interpret the new wording as excluding claims in ways that insureds never expected.

FEMA Buying $1 Billion Flood Reinsurance FEMA dipped its toe into the reinsurance market for National Flood coverage last year with the purchase of $2 million of flood reinsurance. This year, it got serious with a $1 billion purchase.iv Nevertheless, the qualms about the coverage that I listed in my previous column remain: I just don’t see the value to the Federal government in buying reinsurance. As a fellow insurance maven remarked, “What’s next, reinsurance of the Federal TRIA exposure?”

NY DFS Rules Out Troublesome Crime Exclusion A key executive at one of your insureds discovers that a top salesperson has been padding his expense account. The executive is convinced that it won’t happen again because she believes the employee is truly repentant and because the firm’s accounting system has been improved to catch such discrepancies. Two years later she finds that while his petty cash accounts are clean, he’s supplementing his income by collecting cash for past due accounts from customers and pocketing the funds. When you submit the claim, it’s declined. Why? Crime insurance coverage for embezzlement and other employee dishonesty excludes theft by any employee known to have committed a theft or other dishonest act. Here’s typical policy wording: Termination As To Any Employee This Insuring Agreement terminates as to any “employee”: (1) As soon as: (a) You; or (b) Any of your partners, members, managers, officers, directors, or trustees not in collusion with the employee; learn of theft or any other dishonest act committed by the employee whether before or after becoming employed by you.

Now, New York is ruling against this exclusion in certain instances because it makes those with criminal records virtually unemployable no matter how spotless their subsequent behavior.

I can understand New York’s position, but I have an additional objection to the provision terminating coverage for a dishonest employee: insureds don’t know about this exclusion and it’s easy for them to be tripped up.

The Department of Financial Services (DFS) regulation will alleviate a part of the problem. Under the new regulation the exclusion can remain, but it can’t be applied to an employee convicted of criminal offenses in any jurisdiction prior to being

ii The University of Pittsburgh was given permission by the court to be substituted as plaintiff. iii For example see: “Designated Premises Exclusion” Insurance Advocate June 15, 2015 iv Many years ago, Senator Everett Dirksen is reputed to have said “A billion here, a billion there and pretty soon you’re talking about real money. That, of course, before the Federal budget was measured it trillions—it’s now over three trillion.

10 January 30, 2017 / INSURANCE ADVOCATE

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[ EXPOSURES & COVERAGES ] employed by the employer if, after learning about an employee’s past conviction, the employer made a determination to hire or retain the employee based on factors set out in NY Correction Law.v Violating the regulation is designated as an unfair method of competition and an unfair or deceptive act and practice in violation of DFS rules. It will apply to New York policies issued, renewed or delivered after July 1, 2017.

It will not be a violation of DFS rules to void coverage where there is no criminal conviction. Thus, the denial of coverage to the employer who continued to employ an employee who padded an expense account would not be a violation if the employee has not been convicted.

ISO is working on an endorsement to the crime policy to deal with this regulation. Other insurers may elect not to amend the policy at all; in that case, the insurer could comply with the regulation by not denying coverage in the circumstances set out in the law even though the policy permits it.

I’ll keep you posted on the ISO endorsement when it’s published.

A.M. Best Study Confirms Insurers with Lower Ratings More Likely to Become Impaired The go-to source for financial ratings of insurers is A.M. Best.

Knowledgeable insureds check the ratings of their insurers. A range of acceptable A.M. Best ratings is usually specified by mortgagee and those requesting certificates of insurance, etc. The question is whether choosing insurers with higher A.M. Best Financial Strength ratings decreases the chance that the selected insurer will become financially impaired.

A.M. Best has just published its latest study of the financial impairment frequency for insurance companies. It covers the 38 years from December 31, 1977 thru December 31, 2015.vi It shows that not only is there a significant difference in eventual financial impairment rates for firms with the highest Financial Strength ratings versus those with the lowest, but that the percentage of companies that are eventually impaired increases steadily as the rating decreases. The study clearly indicates that insurers with better ratings at inception are much less likely to become financially impaired.

A.M. Best takes a conservative approach to evaluating insurer financial strength. It designates an insurer as a Financially Impaired Company as soon as the first official regulatory action is taken by an insurance department. Such state actions include regulatory procedures such as supervision, rehabilitation, receivership, conservatorship, a cease-and-desist order, suspension, license revocation, administrative order, as well as involuntary liquidation because of insolvency. Even though not all financially impaired companies go into liquidation or become insolvent, A.M. Best feels it is best to take a cautious approach.

On the next page, I’ve selected some representative values to illustrate the point that a lower rating portends a higher risk of financial impairment; the full report shows that the trend exists over the entire range.

A.M. Best has provided strong evidence that their rating system identifies companies with superior financial prospects.

A.M. Best Rating in Year One AB+ B-

Percent Financially Impaired After 5 Years 2.08% 4.47% 11.68%

A.M. Best Rating inYear One AB+ B-

Percent Financially Impaired After 10 Years 4.94% 7.68% 16.12%

A.M. Best Rating in Year One AB+ B-

Percent Financially Impaired After 15 Years 7.43% 9.78% 18.59%

It also confirms the wisdom of the consensus that long-range exposures be placed with insurers with higher A.M. Best ratings.

For example, umbrella liability coverage should be placed with companies with high ratings because umbrella claims can remain open for years and years. On the other hand, for property insurance coverage you might use a shorter horizon because almost all property claims are settled within two years and virtually none are still pending after five years, unless they are in suit.

Another factor to consider in evaluating Best ratings is the distribution of ratings. As of the end of 2015, here are the perA.M. Best Rating A++/A+ A/AB++/B+ B/BC++/C+ C/CD

% of all Insurers Receiving the Rating 30% 44% 15% 7% 2% 1% 2%

centages of companies receiving particular ratings: (Percentages add up to 101% due to rounding) Almost three-quarters of the companies had ratings of A- or better; almost 90% had ratings of B+ or better. Requiring a B+ or even A- rating doesn’t eliminate most insurers.

Ratings of A- or B+ are often the cut-off points used by many brokers, consultants, mortgagees, additional insureds, etc. There are exceptions. I recently reviewed specs for a school construction project that required insurers that have at least an A rating and I’ve come across mortgagees that demand A++ ratings, which is definitely overkill.

Put your clients on notice when the proposed insurer has a rating below A-. It’s a way to avoid headaches and E&O claims. [IA]

v NY Correction Law sets out nine broad factors to be considered. See: https://www.omh.ny.gov/omhweb/fingerprint/article23_a.htm vi A.M. Best Special Report: Best’s Impairment Rate and Rating Transition Study – 1977 to 2015 http://www.ambest.com/nrsro/FormNRSRO_Ex1_RatingsImpairment.pdf

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Banning “Bad Actors” Cuomo calls it curtains for crooks on financial stage “New York is the financial center of the world and we have zero tolerance for those who seek to defraud customers and undermine the system. The excesses and systematic abuse at the center of the Wells Fargo scandal is unacceptable and New York, in its role as a regulator, is seeking to take bold steps to crack down on this unacceptable behavior and ensure these bad actors are barred from working in this industry once and for all.”

-Gov. Cuomo

12 January 30, 2017 / INSURANCE ADVOCATE

uGovernor Andrew M. Cuomo has changed a new proposal to further protect consumers from egregious and deceptive behavior in the financial services industry by pushing to empower the state Superintendent of Financial Services to ban certain “bad actors” from the banking and insurance industries for misconduct like that seen in the Wells Fargo scandal.

“New York is the financial center of the world and we have zero tolerance for those who seek to defraud customers and undermine the system,” Governor Cuomo said. “The excesses and systematic abuse at the center of the Wells Fargo scandal is unacceptable and New York, in its role as a regulator, is seeking to take bold steps to crack down on this unacceptable behavior and ensure these bad actors are barred from working in this industry once and for all.”

Financial Services Superintendent Maria T. Vullo said, “DFS has responded to new technologies to protect consumers and encourage innovation through existing laws. This proposal will provide DFS with additional tools to allow responsible state regulation of Fintech companies while combatting predatory practices by bad actors including payday lenders.”

Under Governor Cuomo’s leadership, New York has made great strides in establishing a strong financial regulator and protecting consumers. In 2011, the Governor created the Department of Financial Services by merging the former Banking and Insurance Departments, and since its creation the Department has established itself as a leading

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financial regulator by bringing in billions of dollars through enforcement actions to protect consumers. However, as the financial services industry continues to change, New York’s approach to regulating the banking industry and lending activities must change too.

Now, the Governor is seeking to take the state’s effort a step further by empowering the DFS Superintendent with the ability to ban certain bad actors from the financial services industry for this type of conduct.

Specifically, new legislation will add a section to New York’s Financial Services Law disqualifying certain individuals from the banking or insurance industries if, after a hearing, the Superintendent finds they have done something so severe as to have a direct bearing on their fitness or ability to continue participating in the industry.

This proposal is the latest action New York State is taking to better help prevent situations like the one seen recently at Wells Fargo. The bank was fined for fraudulently setting up accounts and selling products to consumers without their consent or knowledge.

This misconduct was motivated by the bank’s culture of giving bonuses based on volume sales. Following this scandal, DFS issued guidance that incentive compensation will not be tolerated in New York.

“DFS has responded to new technologies to protect consumers and encourage innovation through existing laws. This proposal will provide DFS with additional tools to allow responsible state regulation of Fintech companies while combatting predatory practices by bad actors including payday lenders.”

- Superintendent Maria T. Vullo INSURANCE ADVOCATE / January 30, 2017 13

…new legislation will add a section to New York’s Financial Services Law disqualifying certain individuals from the banking or insurance industries if, after a hearing, the Superintendent finds they have done something so severe as to have a direct bearing on their fitness or ability to continue participating in the industry.

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[ COMMENTARY ]

PETER H. BICKFORD

Bad Laws/Bad Actors PART I uNew York’s new Superintendent of Financial Services, Maria Vullo, was confirmed less than a year ago, but has already put her own mark on the position. She was on the job adding staff and implementing policy even before confirmation—an unprecedented move in the annals of the DFS and its predecessor Insurance Department. She has appeared to be attentive to the insurance industry and its needs, available to speak to industry groups, and has voiced support for the DFS role as industry supporter as well as enforcer. Most importantly—perhaps—she has already shown some flexibility by addressing industry and professional concerns and comments on the DFS proposed cybersecurity regulations, resulting in significant changes to the original proposal.

This is in stark contrast to her predecessor, the “Sheriff of Wall Street” Benjamin Lawsky, who was far more focused on the banking business than the insurance business, shunned insurance industry functions and forums, and zealously embraced enforcement over the regulatory and support functions called for by law.

Considerable skepticism remains, however, on whether Superintendent Vullo’s early actions mark an actual mellowing of the administration’s mandate, and it will take more than a few speeches and one amended proposed regulation to allay this skepticism. The recent “bad actor” edict from Albany will not help.

One of the cornerstones of Governor Cuomo’s 2017 State-of-the-State pronouncements was his proposal to ban “bad actors from the financial services industry for egregious conduct.” Aside from the legal challenges in defining such general concepts as “bad actors” and “egregious conduct,” it is hard to argue against the basic premise that bad people should not be allowed to operate in financial services business, or any business for that matter. Once again, however, the major new administration mandate aimed at the financial services sector echoes the former superintendent’s enforcement-centric bent, not the current super14 January 30, 2017 / INSURANCE ADVOCATE

Considerable skepticism remains, however, on whether Superintendent Vullo’s early actions mark an actual mellowing of the administration’s mandate, and it will take more than a few speeches and one amended proposed regulation to allay this skepticism.

intendent’s more conciliatory words. The press release announcing the bad actor proposal sets the tone by citing as the singular major achievement of the DFS since its 2011 creation as having “established itself as a leading financial regulator by bringing in billions of dollars through enforcement actions to protect consumers.”

Another problem with the new attack on bad actors is that existing law—at least on the insurance side—would already seem to be more than adequate to cleanse the industry of questionable characters.

Anyone who has ever been involved with the statutory and regulatory vetting process for participation in a licensed insurance entity would wonder what more need be added to the Department’s arsenal against weeding out bad actors. The Governor’s proposal specifically cites the Wells Fargo scandal (setting up fraudulent accounts and the selling of products to consumers without their consent) as evidence of the need for greater enforcement authority, and this may well be another example of insurance being swept into unnecessary regulatory attention because of banking industry issues.

But accepting the premise that more needs to be done to rid the insurance industry of bad actors, here’s a challenge for the new superintendent: commit to

Peter Bickford has over four decades of experience in the insurance and reinsurance business, with particular focus on regulatory, solvency, agency, alternative market and dispute resolution issues. In addition to his experience as a practicing attorney, he has been an executive officer of both a life insurance company and of a property/casualty insurance and reinsurance facility. A complete biography for Mr. Bickford may be accessed at www.pbnylaw.com.

establishing and applying the same bad actor standards to entities under your direct management and supervision. If this challenge were to be accepted, a good starting point would be to address the seriously flawed structure and accountability of New York’s insolvency process and its current lynchpin, the Liquidation Bureau.

The Poster Child for bad actors in the insolvency process remains the $2 billion shortfall of Executive Life Insurance Company of New York (ELNY) while under the Liquidation Bureau’s watch, and the herculean effort of the liquidator to ensure there was no investigation into potential wrongdoing or to apply common standards of accountability to the management of the estate. If ELNY—or any licensed insurer—had suffered a $2 billion loss under its own management, management would have had the proverbial book thrown at them, and rightfully so. But despite the evidence of massive mismanagement while in receivership, no effort was made to hold anyone accountable, which led me to pose the following questions to the outgoing superintendent in the May 25, 2015 issue of Insurance Advocate: Why, with all your emphasis on pursuing the wrongdoers in the name of protecting the consumer, didn’t you pursue the wrongdoers under your own roof in connection with the failed stewardship by the Liquidation Bureau of Executive Life Insurance Company?

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[ COMMENTARY ] Why did you fail to protect the most seriously injured Executive Life annuitants whose interests you professed to represent? And when you failed to protect them, why did you go to extreme measures to prevent those same consumers from doing so themselves?

Why don’t your rules of conduct for the industry, so exquisitely spelled out in your annual report, apply to your own house?

Of course, Superintendent Lawsky never answered these questions, nor can we expect Superintendent Vullo to answer for matters that occurred well before her watch. However, Superintendent Vullo has inherited another significant receivership matter that exposes many of the same deficiencies and shortcomings in the insurance insolvency process that allowed the ELNY abuses to go undiscovered for over a decade and ignored when exposed. That current pending matter is the liquidation of Health Republic Insurance Company.

This is not to suggest that Health Republic comes within the same category as ELNY—not even close. ELNY involved mismanagement while in receivership, not before; and the roughly $200 to $250 million owed to Health Republic policyholders or providers pales in comparison to the $2 billion shortfall in ELNY. Health Republic’s financial woes were tied intrinsically to the Affordable Care Act, rate approval processes, Federal funding (or lack thereof), and other political and operational issues unique to the health industry today. However, once it was determined that Health Republic should be placed into the receivership process, all the old bugaboos started coming to the surface again.

The liquidation of Health Republic strongly suggests that we learned nothing from the ELNY fiasco.

Consider a few fun facts about Health Republic leading up to it actually being placed into liquidation: • HR was ordered to stop writing new policies on September 15, 2015, but existing policies were to remain in force until the end of their terms.

• By the end of October 2015, a DFS review of HR’s finances found the company’s financial condition to be “substantially worse than the company previously reported in its filings to NYDFS.” Accordingly, it was determined to terminate all policies by November 30, 2015.

• In early November 2015, the DFS reported that it had “opened an official investigation specifically focused on Health Republic’s inaccurate financial reporting. ...Among other issues, the investigation will examine the causes of the inaccurate representations to NYDFS regarding the company’s financial condition.”

• As of mid-January 2017—14 months later—no investigation report has been issued.

• In October 2015, in apparent recognition of HR’s financial failure, its board of directors unanimously consented to HR’s liquidation. It was six more months, however, before the DFS commenced a liquidation proceeding against HR. • In the press release announcing the liquidation proceeding in April 2016, the DFS stated: “During the Court-supervised liquidation proceeding, the DFS Superintendent, as the Court-appointed Liquidator of Health Republic, will develop and file with the Court a plan of liquidation that maximizes distributions to claimants in accordance with statutory

ELNY involved mismanagement while in receivership, not before; and the roughly $200 to $250 million owed to Health Republic policyholders or providers pales in comparison to the $2 billion shortfall in ELNY.

requirements, while minimizing the duration and cost of the liquidation proceeding, to the extent possible.”

• An order of liquidation appointing the DFS superintendent as liquidator was entered on May 11, 2016. As of midJanuary 2017—eight months later—no plan of liquidation has been filed with the court.

• The last financial statement prepared for HR before liquidation was as of December 31, 2015. The first statement issued by the liquidator—a one-page summary balance sheet with limited details—was as of September 30, 2016.

• The only other financial information publicly provided is a statement of expenses for HR from the day of entry of the order of liquidation (May 11, 2016) through September 30, 2016.

• There is no publicly available financial information covering the eight-month gap period from October 2015 through May 2016.

• During this eight-month gap period HR continued to engage the services of third party providers for operating, claim, web, legal and other services, apparently with DFS approval, despite the ongoing investigation.

When Health Republic’s law firm appeared in the liquidation proceeding representing the Superintendent, it had to make veteran insolvency practitioners wonder, particularly when counsel stated to the court (apparently with a straight face) “our engagement transfers to the superintendent in her capacity as liquidator of Health Republic upon the entry of the liquidation order.”

Because there was no significant opposition to the petition to liquidate, there were no interested parties present with an incentive to challenge the absurdity of counsel’s no-conflict explanation, or of the continuing use of existing service providers in the face of an ongoing investigation. Thus the presiding judge, NY Supreme Court Justice Carol Edmead, was presented with no basis to question or reject the proffered explanation.

Justice Edmead appears to be handling the proceeding as well as can be expected. In fact, she has on her own volition imposed some constructive requirements, like requiring all court documents, transcripts, service contracts and financials to be posted on the Health Republic website. Given the limited tools at her disposal and the systemic obfuscations in her path, however, the odds of her achieving consequential oversight of the Health Republic liquidation are minimal. Yes, she will likely sign orders from time to time approving actions taken on behalf of the Health Republic estate, and may even get the liquidator and her agents to do some things they might not have done if left entirely to their own devices, but those actions will not come close to true oversight.

As will be detailed in Part II, the system simply does not allow it.[IA]

INSURANCE ADVOCATE / January 30, 2017 15

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[ O N T H E L E VE L ]

N. STEPHEN RUCHMAN, CPIA

What Keeps Me Up at Night uOver the years, I’ve written a lot about how independent agents are burdened more and more by business expenses we just didn’t used to have. Some of these costs can be attributed directly to insurance company cost-transferring: things like reductions in commission and profit sharing; front-line underwriting; loss control and even printing policies ourselves, rather than the carrier printing and sending them to the client directly. Others are a result of the technological evolution: purchasing and upgrading agency management systems; digital marketing; online training for our staff…the list goes on and on.

I understand that “progress” dictates that we stay up-to-date and that “efficiencies” have been won with the digital revolution. But, I am not so naïve to think that agents are saving as much as carriers or even our mutual customers as a result of it. And, it seems, with each new advancement, we face another cost and another challenge. It’s tough out here.

This again came to mind for me when I heard about the New York State Department of Financial Services’ proposed cyber regulations, first published in September this past year. “Great, more new expenses,” I thought. And not just the expense that comes from implementing programs and policies to comply, but also the penalties that will come if we don’t.”

The cyber regulations were revised after significant input from PIANY, which has been actively working with the department, conveying the producer community’s grave concerns and affecting some amendments to the proposed regulation.

The association has been providing all agents, not just members and not just agents in New York state, with information, tools and education about this new regulation, because it recognizes their significance to everyone in our industry.

Some noteworthy changes PIANY was able to achieve, working with the business community, its members and the department include: pushing back the effective date three months to March of 2017; and 16 January 30, 2017 / INSURANCE ADVOCATE

Perhaps the most publicized amendment to the regulation announced in December, is a revision that identifies entities that qualify for a “limited exemption”…

obtaining the concession that many of the requirements will now be phased in over a period of one-to-two years. Other changes include defining overly broad terms like “third-party service providers,” and “cyber events” and, importantly, refocusing the regulation on the risks a business is likely to face, which will be determined by a “risk assessment.”

Perhaps the most publicized amendment to the regulation announced in December is a revision that identifies entities that qualify for a “limited exemption”—these now include agencies with fewer than 10 employees, with less than $5 million in gross revenue, or less than $10 million in year-end total assets. While these are changes in the right direction, PIA recognizes this is not a total “win” for any agency: Even if an agency qualifies for the “limited exemption,” it still will be required to comply with new requirements in the regulation, including conducting periodic risk assessments; establishing a cybersecurity program and implementing an internal policy to protect its information systems; limiting and reviewing internal access privileges within the agency and securing data accessible to third-party service providers; establishing procedures to dispose of information and notifying the superintendent when cybersecurity events occur. This is an enormous undertaking for an independent insurance agent—Huge!

What’s frightening is that the subject of cybersecurity makes most of our eyes

N. Stephen Ruchman, CPIA, is a retired independent agent and founder of Ruchman Associates Inc. the agency he started in 1961. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and he has sat on or chaired nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. He can be reached via email at: nsruchman@gmail.com.

I worry that many agencies may be unaware of this new business burden (and its associated costs)

glaze over, until we become victim to a cybercrime; it affects our bottom line; or both. I know I would not be as concerned about this if not for the information and assistance of PIA. I worry that many agencies may be unaware of this new business burden (and its associated costs). And they become concerned only when it could be too late: after their business has fallen victim to a cyber event, and they face the additional injury of penalties and fines from the state for noncompliance with these regulations.

As I mentioned, PIA has been working hard to mitigate what it can of the regulation; inform the industry about the new rules; and provide a turn-key solution that all agencies can access to protect themselves and make sure that they don’t face fines for noncompliance. It’s another way PIA has helped me sleep better at night. [IA]

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To all persons or entities interested in the affairs of AMERICAN MEDICAL AND LIFE INSURANCE COMPANY Notice is Hereby Given: Maria T. Vullo, Superintendent of Financial Services of the State of New York (“Superintendent”), has been appointed by an order (the “Order”) of the Supreme Court of the State of New York, County of New York (“Court”), entered on December 28, 2016, as the liquidator (the “Liquidator”) of American Medical and Life Insurance Company (“AMLI”) and, as such, has been: (i) directed to take possession of AMLI’s property and liquidate AMLI’s business and affairs in accordance with New York Insurance Law (“Insurance Law”) Article 74; and (ii) vested with all powers and authority expressed or implied under Insurance Law Article 74, in addition to the powers and authority set forth in the Order and with title to AMLI’s property, contracts, rights of action, and all of its books and records, wherever located, as of the date of entry of the Order. The Liquidator has, pursuant to Insurance Law Article 74, appointed David Axinn, Special Deputy Superintendent (the “Special Deputy”), as her agent to carry out her duties as Liquidator. The Special Deputy carries out his duties through the New York Liquidation Bureau (“Bureau”), 110 William Street, New York, New York 10038.

The Order provides that: I. The Liquidator is permitted to deal with the property and business of AMLI in AMLI’s name or in the name of the Liquidator; II. All persons and entities are permanently enjoined and restrained from wasting the assets of AMLI, and all persons are permanently enjoined and restrained, except as authorized by the Liquidator, from transacting AMLI’s business or disposing of AMLI’s property; III. All persons and entities are permanently enjoined and restrained from interfering with the Liquidator or the proceeding, obtaining any preferences, judgments, attachments, or other liens, making any levy against AMLI, its assets or any part thereof, and commencing or prosecuting any actions or proceedings against the Liquidator, AMLI, or the New York Liquidation Bureau, or their present or former employees, attorneys or agents, relating to the proceeding or the discharge of their duties under Insurance Law Article 74 in relation thereto; IV. The Liquidator is vested with all rights in AMLI’s contracts and agreements, however described, and the Liquidator is permitted to, in her discretion, reject any executory contracts to which AMLI is a party, in which case all liability under such contracts or agreements shall cease and be fixed as of the date of rejection; V. Any bank, savings and loan association, other financial institution, or any other entity or person, that has on deposit or in its possession, custody, or control any of AMLI’s funds, accounts (including escrow accounts), or assets shall immediately, upon the Liquidator’s request and direction: (a) turn over custody and control of such funds, accounts or assets to the Liquidator; (b) transfer title of such funds, accounts or assets to the Liquidator; (c) change the name of such accounts to the name of the Liquidator; (d) transfer funds from such bank, savings and loan association or other financial institution; and (e) take any other action reasonably necessary for the proper conduct of the liquidation proceeding; VI. All persons or entities having property, papers (including attorney work product and documents held by attorneys) and/or information, including, but not limited to, insurance policies, underwriting data, reinsurance policies, claims files (electronic or paper), software programs and/or bank records owned by, belonging to or relating to AMLI shall preserve such property and/or information and immediately, upon the Liquidator’s request and direction, assign, transfer, turn over and deliver such property and/or information to the Liquidator; VII. The Liquidator is authorized, permitted, and allowed to sell, assign or transfer any and all stocks, bonds, or other securities at the best price reasonably obtainable at such times and upon such terms and conditions as, in her discretion, she deems to be in the best interest of the creditors of AMLI, and is further authorized to take such steps and to make and execute such agree-

ments and other papers as may be necessary to effect and carry out such sales, transfers and assignments, without the further approval of the Court; VIII. All existing insurance policies of AMLI will be cancelled as of 12:01 a.m. local time on the date that is 180 days after the entry of the Order; IX. The date that is nine months after the entry of the Order is established as the bar date by which all claims by any claimant against AMLI or its insureds (other than the Liquidator’s claim or the claims of the Life Insurance Guaranty Corporation of New York, including those described in Insurance Law Section 7713(d), for administrative expenses (collectively, “Administrative Claims”)), and all supporting documentation evidencing such claims, must actually be received by the Liquidator (the “Bar Date”), and all claims and supporting documentation served upon the Liquidator after the Bar Date are time-barred; X. The Liquidator is authorized, in her discretion, to refrain from adjudicating claims of any class other than Administrative Claims or policyholder claims unless and until (a) she reasonably believes that adjudication of such claims would be in the best interests of the estate or (b) it is certain that the AMLI estate will have sufficient assets to pay claims of such class; XI. Immunity is extended to the Superintendent in her capacity as Liquidator of AMLI, her successors in office, the New York Liquidation Bureau, and their agents and employees, for any cause of action of any nature against them, individually or jointly, for any act or omission when acting in good faith, in accordance with the orders of the Court, or in the performance of their duties pursuant to Insurance Law Article 74; XII. AMLI is insolvent within the meaning of Insurance Law § 1309(a); XIII. The Liquidator may at any time make further application to the Court for such further and different relief as she sees fit; XIV. The Court shall retain jurisdiction over this matter for all purposes.

XV. All communications relating to AMLI and to the liquidation proceeding thereof should be addressed to: New York Liquidation Bureau, 110 William Street, 15th Floor, Attention: General Counsel, New York, New York 10038. (212) 341-6400.

A copy of the Order may be viewed at http://www.nylb.org. To the extent there are any discrepancies between this notice and the Order, then the Order controls.

MARIA T. VULLO, Superintendent of Financial Services of the State of New York as Liquidator of American Medical and Life Insurance Company; DAVID AXINN, Special Deputy Superintendent and Agent of the Liquidator.

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[ FAC E TO FAC E ]

MICHAEL LO GUERCIO

Paint the Town Red uFor those of us who write personal lines, and especially automobile insurance, we are all well aware of the fact that there are quite a few factors that contribute to the price of an auto insurance policy. For instance, we have age, gender, marital status, territory, type of vehicle, tickets, accidents, consumer credit, color, and some other factors as well. Wait a minute….did I say “COLOR”?!?!

Think about this for a second: how many times have you had one of your insureds ask you, “Is it more expensive to insure a red car? Do red cars get more tickets? Will I increase my chances of being involved in a car accident if I drive a red car?” Well, we all know that none of those myths that state a correlation between vehicle color and insurance premiums I just mentioned are true or even remotely correct…or are they?

Personal taste typically dictates what color car a person chooses when they purchase a new vehicle. In addition, certain makes and models of vehicles are also a huge determining factor when choosing what color to purchase. For instance, a person buying a sports car may be more likely to choose a bright color—such as red, yellow, or orange—while someone purchasing a full-size sedan luxury car might have a much greater preference for a more subdued color, such as black, white, blue, silver, or gray.

Now here is where the connection between a vehicle’s color and insurance premiums come together, but it may not be the result that you are expecting. We all agree, and it is fact, that the number of accidents that a person has been involved in will directly impact their car insurance costs. A couple of years ago, in 2014, a study by the Insurance Institute for Highway Safety showed that black cars are involved in the most accidents, over 12% more likely to be in a crash than cars of other colors. Now if you factor in time of day, dawn and dusk increases that percentage greatly to 47%.

Grey and silver cars were next, as far as vehicles most likely to be involved in a crash.

What about the car colors that are the least likely to be involved in an accident 18 January 30, 2017 / INSURANCE ADVOCATE

according to the study? Orange, red, and white. So, depending upon the color of the car that you drive, you may be increasing (or decreasing) the chances that you are involved in an auto accident, and we all know that the more accidents you are in, the higher the price your car insurance will be. Therefore, driving a black, grey, or silver car may end up costing you more for insurance.

Now let’s take this color connection a step further. We also will all obviously agree that the number and frequency of claims also has a detrimental effect on the price of an auto policy…especially with respect to comprehensive and collision costs.

While it won’t directly cut your rates, the color of your car may make it more, or less, likely to be stolen. Allow me to explain further: a very bright color, such as yellow, may be more effective than any passive alarm system or tracking device that you can buy, as the brighter the color, the less likely a car thief is going to steal it. So, what is the least likely color car to be stolen? Yup, you guessed it! Red! It is followed by yellow, orange, brown and green colored cars. The reason for this is that it is much easier for a professional thief to resell a popular color, than a not so popular color. According to a 2012 report by CCC Information Services, red doesn’t even register in the top five vehicle colors that are most frequently involved in thefts. Car thieves prefer green, gold, black, and white cars, and their No. 1 pick is silver, as a silver car is stolen nearly 40% more often than any other.

So, if you want to purchase a car and choose the color based on the likelihood of it either being involved in an accident or being stolen, a red car is probably the best choice. The bottom line here is that the next time one of your insureds comes up to you and asks if it will be more money to insure their car because it is the color red, tell them no, as in the long run a red car might actually end up costing them less money to insure!

Well, as the weather cools down, the 2017 insurance convention season is beginning to

Michael Loguercio 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, 2014 and 2015.

In his community, Michael is the Councilman for the 4th District in The Town of Brookhaven, NY; served 12 years on the Longwood Central School District Board of Education on Long Island, NY; served as a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of the Ridge, NY, Volunteer Fire and EMS Department; the Middle Island, NY, Rotary Club; Central Brookhaven Lion’s Club; and he also served two terms on his Church’s vestry. In 2013 he was awarded the SCOPE “Community Service” award for his dedication to the public.

Michael is a regular columnist with the Insurance Advocate magazine since 2008, and may be contacted at 631-345-9359 or MichaelLoguercio@aol.com. You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr.

heat up. Next time we will be talking about the PIA RAP Conference in Manhattan coming up later this month, as once again this will prove to be a very informative and entertaining event…hope to see you there!

Until then, Ciao for now! [IA]

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K E L LY D O N A H U E - P I R O

[ IN FOCUS ]

Is Your Agency’s Reporting Making You Crazy? uHow do you feel about running reports in your agency management system? Does it make you crazy? Or do you just stay away from it altogether because you know it’s inaccurate? Maybe it’s a combination of both. The reality is you cannot manage your agency by your bank account and P&L; you must lead and manage it by accurate reporting.

As the world turns and we grow even more reliant on technology, the accuracy of data in our management system has to be a continuous strategy in our agency.

You can no longer stand for sloppy data as it will have multiple impacts in the future. One untold truth in the insurance space is that part of everyone’s job in the agency is to build a clear, clean and reliable database. We need to build databases of unsold customers, lost customers, and prospects. If we aren’t building a database, then marketing and communicating to customers and prospects becomes not only increasingly costly but also dangerous.

Marketing inaccurately to bad data can make the agency look unprofessional.

Many agencies know their data is not very good so they opt instead to just not use it.

They work around it rather than fix the problem.

Recently, I was at a client’s office and he was so frustrated with data he wanted to go back to manual reporting on paper.

Now my heart broke a bit since manual reporting may be slightly more accurate but not enough to account for the extra time. Not to mention pulling averages, stats and more is impossible. I challenged him and said, you are solving 10% of the problem by manual reporting. He challenged me back by asking me how he can run a business without accurate data. He was 100% right, you can’t run a business without accurate data. But the problem is that the data is living and breathing inaccurately inside your management system.

A speaker I recently saw commented, “Garbage in, garbage grows.” The goal should be to hold the team accountable to following the right processes and proce-

Sometimes we miss a rule like excluding endorsements, making sure the date range is accurate, determining if you are counting new business by effective date or binder date.

dures to obtain the right data for the rest of the time.

When you have accurate data you can do a whole slew of things that improve your business. You can lead and manage better, find opportunities for training, make smart business decisions, conduct precision marketing when your data is accurate. Using your management system as a lookup tool and a repository for notes means you aren’t even scratching the surface and you are paying far too much for a system.

When we work with clients to improve data integrity we always comment that there are only three places to look if the data is not on point: 1. Inaccurate reporting rules: Sometimes we miss a rule like excluding endorsements, making sure the date range is accurate, determining if you are counting new business by effective date or binder date. Either way, go back through the rules and check them. Then document the exact rule you are using. When you use the same measuring stick each time you will quickly see if there is an error!

2. Problem with the downloads: Every now and again a carrier downloads incorrectly. A download gets hung up or we just aren’t processing them correctly. Even with

Kelly Donahue-Piro, founder and president of Agency Performance Partners, is a no-nonsense effectiveness expert who has helped hundreds of insurance agencies identify and capitalize on sustainable improvement opportunities. Her specialties include agency culture assessment and change; management and supervisory coaching and benchmarking; customer retention strategy development; digital marketing strategy, planning and implementation; and sales planning, management and skillbuilding.

In 2014, she created Agency Performance Partners with a mission to “partner with insurance entrepreneurs who dream to take their business to the next level and beyond, by relentlessly pursuing excellence in worldclass service and sales strategies.”

The centerpiece of the organization’s transformational work is its Agency Performance AssessmentTM, a comprehensive survey tool Kelly created to zero in on organization-wide improvement opportunities and provide the foundation for a customized agency action plan.

Mrs. Donahue-Piro is an engaging speaker who is available to conduct in-person and online agency success presentations that complement her firm’s one-on-one on-site and virtual consulting practice. Connect with her on social platforms, via email at kelly@agencyperformancepartners, or by phone at 401-415-6205.

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INSURANCE ADVOCATE / January 30, 2017 19

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[ EXP ERT VI E WP O I N T ]

And Now Donald Trump.

The views of an expert on leadership and corporate governance

By Richard Torrenzano, edited by the Insurance Advocate

Let me share with you, first hand, what is happening in America...and try to explain a presidential election that I know baffles many of you.

In short: What happened?...How did it happen?…Why did it happen?...

What does it mean for America, Britain and the world?...

While preparing for these remarks today, I took care to scan my library...and found book after book that paired presidents and prime ministers...

Franklin Roosevelt and Winston Churchill...Clement Atlee and Harry Truman...Dwight Eisenhower and Winston Churchill again...

And, of course, Margaret Thatcher and Ronald Reagan...the only prime minister and US president to dance together, which was during Reagan’s second Inaugural at the White House.

Britannia and America have a truly special relationship. But first let’s review how it began.

Most would think it began with the first meeting of Churchill and Roosevelt in Newfoundland to draft the Atlantic Charter in August, 1941—before the US even entered the war.

I believe it began months earlier on a chilly and rainy evening in January, 1941, in the Station Hotel in Glasgow, Scotland.

The late, great historian Sir Martin Gilbert tells us that Churchill had dinner with Harry Hopkins, the closest confidant to President Roosevelt. At that time, Britain stood alone and looked anxiously to America and Roosevelt for a lifeline. A very tense time in our shared history.

That night at dinner Hopkins raised a glass and gave a toast, saying: “Mr. Churchill, I suppose you wish to know what I am going to say to President Roosevelt on my return. Well, I will quote you one verse from that Book of Books, in the truth that my own Scottish mother was brought up in: “‘Whither thou goest, I will go...and where thou lodgest...I will lodge...thy people shall be my people...and thy God my God.’” Then he leaned over to Churchill and very quietly added: “Even to the end.” Observers who were present saw Winston Churchill in tears. Churchill knew exactly what Hopkins meant. Even when I think about it, I get choked up a bit as well.

That is how I think the special relationship between Britain and America began.

This special relationship, which means so much to men and women of my generation, seems a bit wobbly of late.

20 January 30, 2017 / INSURANCE ADVOCATE

Richard Torrenzano is a leading thinker and expert on crisis, brands, reputation, and social media who speaks at industry, board and management events worldwide.

He is chief executive of The Torrenzano Group, a strategic communications and high-stakes issues management firm specializing in building and protecting corporate reputations, enhancing shareholder value and assisting clients in growing their businesses.

The Torrenzano Group helps organizations take control of how they are perceived™.

Richard also co-authored with Mark Davis, the bestselling, award-winning book Digital Assassination: Protecting Your Reputation, Brand or Business Against Online Attacks, St. Martin's Press. It reveals how the Internet is used to destroy brands, reputations, even lives. It exposes strategies digital assassins deploy and defines ways to turn the tables on their deception. It offers a roadmap to what is happening on the Internet, why it is happening and what you can do about it.

He coordinated White House-related activities for the NYSE CEO in his capacity as chairman of President Reagan’s Board of Advisors on Private Sector Initiatives, and for several years served on the Private Sector Advisory Committee, USIA at the State Department.

INA 1-30-17.qxp_INA 1-30-17 2/1/17 10:32 AM Page 21

[ E XP E R T V IE WPOI NT ] It is not true that Barack Obama returned the bust of Sir Winston Churchill to the British Embassy in Washington. It is lodged somewhere in the White House, gathering dust.

There are now signs of renewed interest in the special relationship.

It began in Massachusetts with the battles of Lexington and Concord with what is called the “shot heard ‘round the world.’”

Perhaps that wasn’t in your Key Stage 4 textbooks, but it was in mine...

The word is that the Churchill bust will be making a spectacular return to the Oval Office within days. And Prime Minister Theresa May recently told Sky News that the relationship is “something that’s optimistic and positive for the UK.”

Well, Brexit is Great Britain’s “shot heard ‘round the world.’”

The question this hour is: What does the election of the most disruptive and unusual candidate who will tomorrow inhabit the White House mean for America, Britain and the world?

And they may be heard across Europe as well.

For all the talk of disruption, I believe Britain and America have and continue to have a long-standing tradition.

Let’s look at British and American politicians. They tend to dovetail because there is long-lasting symmetry between them.

The election of Donald Trump was indeed another...and the echo effects of both these populist revolts will reverberate for many years.

Look to the populist wave that swept Italy, the conservative tide in Norway, rising populism in Denmark and the potential for an upset in France in April. And, Chancellor Merkel is facing populist indignation for her immigration decisions that allowed so many undocumented refugees into Germany.

Many shots are being heard around the world. But, who fired the first shots?

Truman and Atlee brought a leftward movement to their economies.

Ronald Reagan wanted it to be “Morning Again in America,” while Margaret Thatcher sought to put “the Great back into Great Britain”...

In our countries, it is working Brits and Americans who are sick and tired of global, corporate and political speak...of elites who speak Davos but not Derby or Dayton...who always think first of global development and treat local economic needs as a distraction from what they perceive as their global duties.

Tony Blair created “New Labour” just after Bill Clinton created the “New Democrat.”

This attitude was clearly on display during the Hillary Clinton campaign.

Now you have a prime minister who is the product of the Brexit vote, which Lord Bell so ably championed...and a US president who is the product of a very similar groundswell of populist discontent about immigration, trade, the economy...the non-impact of his predecessor’s $814 billion “stimulus”…and the loss of American jobs to globalism.

She did not deign to spend much time in Wisconsin and Michigan and several other states critical for Trump’s election.

In both our recent elections, the elites, pollsters, and media assured us that the establishment would win...and in both cases, on election night, elites, pollsters and media were utterly wrong and had a three-egg omelet on their faces and tongues the next morning.

The Obama-Clinton progressive message instead centered on transgendered bathrooms...climate change...abortion on demand...and other issues of vital interest to cosmopolitan elites.

Churchill and Eisenhower brought stability and growth.

In both elections, elites, pollsters and media were left in shock and tears, while those in power were left with the chore of preparing for a distinctive change in direction.

Let me point out (three) facts: —this year in the UK, despite all the talk of doom and gloom and an expected dip...the British economy stands strong as your government prepares to exit the EU. —on April 15, despite all this change, as an American citizen, I will still need to file my US taxes.

Neither of our countries’ history is without peaceful and not-sopeaceful revolutions. You might recall America started by staring down your redcoats.

And she had no credible economic message for residents of states who suffered severe job losses, shrinking incomes and the sticker shock of health care premiums.

Whatever your opinions on these issues...I think you will agree that putting them front and center in an election when people are in economic pain was stunningly irrelevant and stupid.

The Clintons were once exquisitely attuned to the needs of working men and women. That is how Bill Clinton beat George HW Bush, who became distracted by global diplomacy...and lost touch with working folk.

And for Hillary, decades of paid speeches by Goldman Sachs and other corporations...the long-standing sense of entitlement that led her to flout rules regarding classified material...followed by her deletion of 30,000 emails as well as the attitude she expressed when caught...all the time spent in Davos and “Renaissance retreats”...all of this showed the Clintons had changed.

CONTINUED ON PAGE 22

INSURANCE ADVOCATE / January 30, 2017 21

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[ EXP ERT V I E W POI N T ] CONTINUED FROM PAGE 21

And so, it became their turn to play the role of tone-deaf globalists...even ending the last night of their campaign with a concert including Lady Gaga, Bon Jovi and Beyoncé, among other elites who have little sway in an election.

Obamacare, which promised to reduce premiums, has proven a disaster...raising rates to astronomical levels for many Americans.

Let me tell you...nothing appeals to unemployed steelworkers in Michigan like a Lady Gaga concert...

Worse, the Clinton campaign had no credible economic message.

Only a promise to extend Obama’s policies, an administration that had presided over the most sluggish economic recovery in modern American history.

Here is a quote about the Democratic Party from the late Nicholas von Hoffman, author, Washington Post writer and a devout liberal.

He wrote: “To its committed members [the Democratic Party] was still the party of heart, humanity and justice...but to those removed a few paces it looked like Captain Hook’s crew: Ambulance-chasing lawyers...rapacious public-policy grant persons...civil rights gamesmen...ditzy-brained movie stars...fat-bottomed civil-servant desk squatters...a grotesque line-up of ill-mannered, self-pitying, caterwauling freeloaders banging their tin cups on the pavement demanding handouts.”

The Democratic Party had not noticed...what was first noticed by Wisconsin Governor Scott Walker and then by Donald Trump...that many traditional Democrats were beginning to see their party the way Nicholas von Hoffman described it.

was akin to promising in Edinburgh to put distillery workers out of their jobs...in Glasgow.

And yet, even these gaping holes in the Clinton campaign were not enough to defeat her. Hillary Clinton also lost because Donald Trump had a shrewd and strategic grasp of what it takes to win the presidency...and bringing a shocking and devastating end to the ambitions of Hillary Clinton and her unhappy band.

While Clinton overreached by trying to win unwinnable Republican states like Arizona and Georgia...Donald Trump focused on swing states like Michigan and Wisconsin...Pennsylvania and Ohio...which put him over the top for an electoral college majority.

The electoral college had made the difference four times in American history...three times in the nineteenth century. And, of course, at the beginning of this century, George W. Bush had famously won without the popular vote...winning the electoral college through a few hundred votes in Florida.

Even to Americans, the electoral college is a strange institution.

Many Democrats would now like to scrap it. I can imagine to British ears, it is as mysterious as the inner workings of the College of Cardinals...only without the puff of white smoke.

The unions who made up the backbone of the party were split...on one side were public-employee unions, made up of government office workers.

I would argue that the electoral college is not a vestige of antique politics...but a useful instrument that serves my country well.

…On the other side of the Democratic Party, were members of the blue-collar unions...welders, pipe-fitters, steelworkers, truckers and others who do things with their hands.

In the US, each state sends several electors who are proportional to the state’s population in the nation...to vote for the candidate who won the most votes in that state.

Democrats should have been cautious as blue-collar workers had crossed over before for Reagan. So, what did the Democratic Party offer them in 2016?

Forty-eight states have a winner-take-all rule...the two exceptions being Nebraska and Maine.

This system has three virtues.

Environmental and economic policies...that kill oil pipelines...policies that halt construction and mining projects...policies that reduce demand for concrete, steel, oil and gas.

The Obama-Clinton strategy of putting climate change and other non-economic issues at center-stage was just fine with the public employee unions...the Democrats had somehow failed to notice how unpopular or just irrelevant these liberal issues were with the working man and woman across the country, particularly outside the major urban areas.

Their tone-deafness was so complete that as a candidate, Hillary Clinton in Ohio bragged she would put coal miners out of work; saying this within miles of West Virginia and Pennsylvania. This 22 January 30, 2017 / INSURANCE ADVOCATE

First, it brings clarity. Here in the UK, your first-past-the-post rule produces strong majorities...which keeps your parliament from dissolving into the coalition chaos that seems like a chronic disease in Italy and Israel.

The US electoral college produces a clear and uncontested winner when the ballot count is close.

For example, in 1912 Woodrow Wilson had won only 41 percent of the vote, but received more than 80 percent of the electoral votes...and with that mandate, he enacted a powerful agenda that gave America the Federal Reserve system and stronger antitrust laws.

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[ E XP E R T V IE WPOI NT ] Donald Trump won the election by about 100,000 votes in several swing states, but he received a commanding majority of 306 pledged electoral votes over Clinton’s 232...which is how he legitimately claims a mandate.

Second, without our electoral college, the top ten US cities in a few states would sweep the election every time...leaving out other states, smaller cities, towns and farming country that deserve a voice in the election.

In short, Trump comes to Washington with a commanding majority somewhat like what Tony Blair enjoyed at his beginning as Prime Minister.

The Democrats, however, will try to stop Republicans with a Senate procedural roadblock called the filibuster...but they themselves provided the Senate procedure to override the filibuster when they passed Obamacare with only a slender Senate majority.

What will Trump & Co. do with their powerful majority?

Third, the electoral college maintains the US federal system in which the states have important roles to play. We call this federalism.

American states, from little Rhode Island and Delaware...to New York, Texas and California...are distinct societies with their own versions of American culture. The electoral college respects these distinctions and protects them.

Donald Trump appreciated this role of the electoral college...and saw opportunity.

As a businessman, he reduced the challenge of winning the presidency to its essentials.

As a marketer, he micro-targeted demographics he needed to win the electoral college.

And whether you love or hate Donald Trump, you must admit that there is genius to what he achieved, especially as someone whose first experience in politics was to run for president.

Tomorrow at 5 pm London time, we enter the Trump era. So, what will this new era entail?

Let me begin with US domestic policy.

Few in elite circles expected Donald Trump to be elected. But no one—not even the Republicans—expected to keep majority in the US Senate, in which they had an unusually large number of candidates up for re-election...

Let me emphasize the depth of the Republican’s landslide.

Republicans kept their majorities in the US Senate 52-48, as well as the US House of Representatives, 241-194 out of a total of 435...and added two more governors to control 33 states...and both chambers of the state legislatures in 32 states...governing more than 60 percent of the US population locally.

This is important since governors and state legislatures draw voting maps that determine US House of Representatives districts...to ensure likely control of the House by Republicans for years to come.

In addition, the Senate will allow Republicans to control the confirmation of Supreme Court justices and federal court judges. So, this election gives Republicans control of the third branch of our system, the judiciary...with Trump appointing at least one and perhaps three US Supreme court justices, as well as hundreds of regional federal judges during his term.

They will repeal Obamacare, a top-down, federal imposed healthcare system that has neither the simplicity of your national healthcare system...nor the dynamism of the old US healthcare based on competition.

Obamacare, which promised to reduce premiums, has proven a disaster...raising rates to astronomical levels for many Americans.

They will debate and enact a replacement that will be market-driven, while retaining popular features of the program...such as preventing people from being denied insurance for pre-existing conditions.

Trump and the Republicans will also strip out much of the complexity of a tax code whose rules run 76,000 pages long...They will flatten rates and reduce the politics of deductions.

They will lower the US corporate tax rate, now at 35 percent, for years the highest in the developed world.

They will eliminate the unique provision that double taxes US corporations on what is earned abroad. This will encourage American companies to repatriate an estimated $2-to-$3 trillion now held abroad, at a far lower tax rate. After repatriation, this will ignite spending and hiring in America.

They will reverse Barack Obama’s executive orders—which he used to get around Congress to mandate policy.

Trump and the Republicans will strip down a regulatory code that has grown by more than 20,000 rules during the Obama administration...the top 200 costing the economy more than $100 billion a year.

They will strip out much of the Dodd-Frank legislation that uses 850 pages to regulate every aspect of the banking system.

They may keep some of the requirements for banks to maintain capital levels...but, they will eliminate all the cost-imposing rules that keep smaller competitors from competing.

If President Trump and the Republicans do these things...what can go right?

You will see a bull market like you’ve never seen before...with growth in profits...growth in employment. Barring an unexpected and tragic event…2017 will be a spectacular year for the US economy...with strong ripple effects in the UK. CONTINUED ON PAGE 24

INSURANCE ADVOCATE / January 30, 2017 23

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[ EXP ERT VI E WP O I N T ] CONTINUED FROM PAGE 23

President-elects are supposed to be like brides just before the ceremony, unseen until the music starts. Trump has arguably done more for jobs in America as president-elect...than Barack Obama organized in eight years as president.

Trump persuaded United Technologies to keep more than 1,000 Carrier company jobs in America...and Boeing and Lockheed to lower prices on defense contracts.

Also, Sprint is bringing back 5,000 jobs to America...and after a Trump tweet, Ford canceled its proposed $1.6 billion plant in Mexico…adding $700 million in investments and 700 new jobs in America. It said it was doing so because of the new Trump probusiness environment.

Then Fiat-Chrysler and Toyota announced multi-billion investments in US jobs. Jack Ma of Alibaba came out of Trump Tower promising one million American jobs...exaggeration perhaps, but still encouraging. …With a good cycle of infrastructure spending... …Millions more Americans having money to spend after getting back to work...

In foreign policy, Obama had speeches instead of policies...platitudes instead of alliances...appeals instead of allies...reducing Secretary of State John Kerry to wander the earth like a mendicant scarecrow...begging the Russians, the Chinese and the Iranians to please...please...play nice.

The George W. Bush presidency had the opposite vice. He aspired to do far too much...to bring democracy to Mesopotamia...to contain Putin and push him toward democracy...to contain China...to deter Iran...to fix the whole Middle East.

Trump may sometimes ask naïve questions...but he brings fresh thinking.

He realizes that we must follow a middle-path between disengagement...and supremacy. We in the West cannot oppose Russia, China, Iran, North Korea and Islamic extremists all at the same time...and expect to succeed.

With the counsel of Henry Kissinger and other wise men by his side, Trump will try to reach an accommodation with Russia...a partner who is also interested in killing ISIS...and who should realize that a nuclear Iran or North Korea is not in Russia’s interest.

Trump is cutting our losses so he can focus on maintaining the free-flow of goods in the South China Sea...and perhaps balancing China’s aggressiveness by encouraging a nuclear Japan.

…Irrational regulations being taken off the backs of business...

What could go right with such a strategy?

Americans are feeling something is building...from the C-Suites to the union halls...the US economy will roar in 2017.

It would stabilize Europe while allowing us to attend to the crisis in the Middle East and counter China’s provocations.

That’s the upside, and it is huge.

What could go wrong? In one word, inflation.

Under Obama, US debt rose from 76 percent of US GDP to more than 100 percent of our annual GDP. We haven’t been this much in debt since the end of World War Two...and have no victory to show for all this spending.

President-elect Trump promises to lavish spending on infrastructure and refuses to consider changes to the Social Security and Medicare entitlement programs that make up more than half the budget. With this posture, it will be very difficult to slice the budget deficit.

On the social side, I believe Donald Trump will be much more of a healer than people realize.

Americans believed that the election of an African-American president would be racially healing. But Obama’s poor economy and polarizing approach brought back a term—“race relations”—that I never expected to hear again.

Racial tension is a sign of a shrinking pie, and I predict that President Trump will bring growth and jobs to all Americans— including Hispanics and Black Americans—and the growing pie will put us back on track.

24 January 30, 2017 / INSURANCE ADVOCATE

Yes, Donald Trump will continue to pressure NATO countries to meet the two percent GDP commitment to NATO, that Britain, Poland and the United States exceed.

But if you look at his appointments...of so many generals to high office...there should be no doubt of Trump’s baseline commitment to NATO. What could go wrong with a Trump foreign policy?

One thing that can go wrong—regardless of who is president—is North Korea.

The United States will not allow North Korea to develop nucleartipped ICBMs, which it is currently preparing to do.

And because North Korea is a nuclear power with a long history of reckless behavior...if conflict breaks out...we could see a pre-emptive strike by the United States.

The outreach to Russia will go seriously wrong if President Trump bases his new relationship with Putin on personality rather than hard-nosed transactions.

CONTINUED ON PAGE 26

INA 1-30-17.qxp_INA 1-30-17 2/1/17 10:32 AM Page 25

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INA 1-30-17.qxp_INA 1-30-17 2/1/17 10:32 AM Page 26

[ EXP ERT VI E WP O I N T ] CONTINUED FROM PAGE 24

The list of those who tried to charm Putin is long...George W. Bush and his father had Putin to a BBQ in Maine, that did not work...Hillary had her ridiculous “reset” button, that did not work...Merkel tried to make Putin a friend, and that did not work.

Putin’s Russia will never be a true friend...But Trump might be able to forge a working relationship that serves both powers well.

Leaders of business and public concerns will need to be skilled in the use of social media...develop armies of followers. And, as automobile manufacturers have learned—to be ready to respond almost instantly.

Seen in this light, Trump’s flattery of Putin is part of a strategy to begin that process of engagement of the Russian dictator.

Trump’s tweets have also proven to be powerful. No president-elect has ever had an enacted agenda like Trump.

This may be difficult for some to understand because they don’t realize Trump is always staking out a negotiating position. He overdoes it by flattering Putin. He overdoes it in his denunciations of China. And along the way, he moves the center of the deal toward himself.

He used Twitter to pressure thousands of new jobs out of Carrier, Fiat-Chrysler, and Toyota.

In trade, we will see a correction from the globalist viewpoint...putting the interests of America first.

US participation in the Trans-Pacific Partnership is as dead as Britain’s future in the EU. We will see a long pause in further efforts to expand trade on a vast global basis.

But I do predict we will see room in Trump’s agenda for smaller, more targeted efforts, one of which might be a US-UK free trade agreement.

Let me finally turn to how Trump will communicate...which will be the most disruptive change in American presidential history.

Most notably, Trump is using Twitter to communicate with Russian President Putin and Israeli Prime Minister Netanyahu in front of the world, a contrast with the lackluster diplomacy of his predecessor.

Donald Trump has more than 46 million followers in social media...that is more than three times as many who watch the evening news shows each night in America.

With Trump, Twitter will remain a powerful tool he will use to work outside the formal political system to pressure politicians and business leaders.

To be fair, many of Trump’s tweets are poorly composed...and hard to decipher.

So, why does he do this?

Consider how Donald Trump neutralized efforts by a sketchy, partisan opposition research group—highlighted by some media—to portray him as the victim of Russian blackmail...of an unsubstantiated lurid moment in a Moscow hotel room. …Speaking in this great hall today...I can only wonder what the ghost of Prime Minister William Ewart Gladstone would make of some of these topics.

Donald Trump is the first world leader to publicly think aloud...You cannot transform his tweets into policy...but you can use them to see the direction he is thinking about and moving towards...

When he tweets that North Korean ICBMs “won’t happen”...you can be sure it won’t happen.

Another president-elect might never have recovered. Not Trump.

When he attacked China in his tweets, it was the first time in our post-Mao relationship that a US leader has put China on the defensive, and he did it in 140 characters!

Over the course of a two-hour news conference, according to Michael Goodwin of The New York Post, Trump “had managed to turn the spotlight away from himself and on to the lack of integrity in both the media and government agencies.”

Trump loves to disrupt his opponents...to get under their skin...to uproot them in ways they don’t expect.

Little comments Trump dropped in the news conference had powerful consequences. When he suggested that US pharmaceutical companies were “getting away with murder” regarding their US prices, the top pharmaceutical companies saw $25 billion in share value temporarily vanish.

Trump also deftly suggested that while Putin was no angel, they would get along because “Russia will have much greater respect for our country when I am leading it.”

26 January 30, 2017 / INSURANCE ADVOCATE

A Trump tweet is also a first, rough draft...an impulse...toward a given direction.

For many, this is very uncomfortable.

Twitter gives us direct access to the unconscious mind of Donald Trump.

In the past, presidential statements were drafted by speechwriters who craft every word for a precise impact...in Washington...in London...in Moscow and throughout the world.

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[ E XP E R T V IE WPOI NT ] The British and American press have driven themselves crazy overanalyzing each of Trump’s tweets—and every character. Politicians, business, foreign governments, as well as media must now make a mental adjustment.

If you want to understand Trump and where he is moving...a Trump tweet or remark, unless it is specifically directed at a target...should be taken only as a tea leaf...not as a statement of policy.

A Trump tweet...or public aside...is not policy...it is a thought...a direction.

If you want to understand Trump, it is better to follow what he does, more than what he says or tweets...

The old forms of communication—through trade or governmental associations—through white papers or opinion-editorials...are giving way to a digital media that is...instantaneous...global...and eternal. beyond the drama to enact legislation that transforms a broken government.

If he can do that this year...Donald Trump will match or exceed the energetic start of the Franklin Roosevelt administration.

As an example, he lashed out at the intelligence community in a tweet...but the next day appointed Dan Coats, former senator and well respected in the intelligence community, as the new head of Department of National Intelligence.

I predict he will not let his eyes off the main events. Already, Trump is prepared to transform the judiciary by naming a new Supreme Court justice within his first two weeks.

Trump is assembling a master class of business and military leaders...who live and die by results in the form of profits and losses or battles won or lost.

A second observation, Donald Trump represents the triumph of social media. He will continue to use digital media as a cudgel to move people, companies and other leaders.

This is in far contrast to appointing lifelong politicians who are only comfortable explaining failure.

Whether or not you do business in the United States, these practices are sure to reshape governmental and business communications in London and throughout the world.

Rex Tillerson is a masterful choice for Secretary of State...he has more negotiating experience than almost any conceivable candidate.

And far more successful with the Russians than the very ineffective John Kerry.

General James Mattis will bring the discipline of a soldier-scholar as Secretary of Defense.

Wilbur Ross, a genius of restructuring businesses, will head Commerce, with a focus of bringing jobs back to America.

In all these ways, expect a Trump Administration to do things differently, quickly and more directly than we were used to.

There is a new sheriff in town...the American people elected Donald Trump because they realized we couldn’t continue down the path we were on.

The old forms of communication—through trade or governmental associations—through white papers or opinion-editorials...are giving way to a digital media that is...instantaneous...global...and eternal.

Leaders of business and public concerns will need to be skilled in the use of social media...develop armies of followers. And, as automobile manufacturers have learned—to be ready to respond almost instantly.

This requires companies and governments to think through in advance areas where they might be attacked. It will require a total inventory of issues and responses. I doubt Boeing realized it would be attacked by the President-elect on its contract costs for the new Air Force One.

What are our takeaways?

And it will require your organization or government to develop responses in advance...teams to engage in scenario role-playing...so you will have the muscle memory to respond to a disruptive tweet.

First, a new lens is needed to watch and understand the Trump Administration. We will need to keep our attention on what he does over the surface drama of what he says.

…Whether from an activist group making an outlandish charge …Or a competitor making false comparisons

If you become upset reading Trump’s tweets and remarks, you are in for years of discomfort and agita.

…Or even the President of the United States

If you stay focused on executive orders, legislation and appointments, you will have your eye on what matters.

…You must be prepared, drilled and skilled for this advanced new digital global environment.

Great presidencies are not built on besting one’s detractors, though Trump cannot resist trying to do that. I believe Trump will get

Thank you for this honor of speaking to you today.[IA] INSURANCE ADVOCATE / January 30, 2017 27

INA 1-30-17.qxp_INA 1-30-17 2/1/17 10:32 AM Page 28

[ O N M Y R A DA R ]

BA R RY Z A L M A

Insurance Companies Have the Right to Limit Coverage in any Manner Desired Duty to Defend Limited to Time on Risk in Louisiana uWhen a defendant is uninsured for a particular risk and plaintiffs sue for injuries and illness allegedly incurred in periods of time when the defendant was uninsured and some where it was insured, insured sought defense for the entire period while insurer claimed it was only obligated to pay its pro rata share of defense and indemnity costs, the Supreme Court of Louisiana was called upon to resolve the dispute in Daniel Arceneaux, Louis Daverede, Jr v. Amstar Corp., Amstar Sugar Corp., Tate And Lyle North American Sugars, Inc., And Domino Sugar Company, Et Al.,…, Supreme Court of Louisiana, — So.3d —, 2016 WL 4699163 (09/07/2016).

FACTS In the underlying suit, plaintiffs allege that they suffered hearing loss from exposure to unreasonably loud noise in the course of their work at American Sugar’s refinery in Arabi, Louisiana.

The plaintiffs, approximately 100 in number, allege that they worked at the refinery during various years ranging from 1941 to 2006. Continental issued eight general liability policies in effect from March 1, 1963 to March 1, 1978. Each of the policies contained exclusions for bodily injury to employees of the insured arising out of the course and scope of employment. However, in the last policy, the exclusion was deleted by special endorsement effective December 31, 1975. Thus, there was coverage for bodily injury that occurred from December 31, 1975 through March 1, 1978, a period of twenty-six months.

The policy defines bodily injury as “bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom.” (Emphasis added.)

American Sugar brought a third party demand against Continental alleging that 28 January 30, 2017 / INSURANCE ADVOCATE

Without offering reasons, the trial court granted American Sugar’s request for a complete defense going forward, but denied its summary judgment motion in all other respects, including the request for past defense costs.

Continental had issued policies that provide coverage for the underlying claims.

Furthermore, American Sugar alleged that Continental had been put on notice of the litigation in June 2006 and that Continental breached its policy provisions by failing to provide a defense. American Sugar sought past defense costs, a complete defense going forward, and penalties and attorney fees.

Without offering reasons, the trial court granted American Sugar’s request for a complete defense going forward, but denied its summary judgment motion in all other respects, including the request for past defense costs. The Fourth Circuit affirmed the trial court’s ruling holding that an insurer’s duty to defend is not subject to proration.

LAW AND ANALYSIS At the outset, we must note that an insurer’s duty to defend is distinct from its duty to indemnify. Generally, an insurer’s obligation to defend suits filed against an insured is broader than its obligation to provide coverage for damage claims. The insurer’s duty to defend is determined by the allegations of the plaintiff ’s petition, and the insurer is obligated to furnish a defense unless the petition unambiguously

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http:// shop.americanbar.org/eBus/Store/Pro ductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Legal Disclaimer: The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

INA 1-30-17.qxp_INA 1-30-17 2/1/17 10:32 AM Page 29

[ ON MY RADAR ] excludes coverage. If, assuming all allegations of the petition to be true, there would be both coverage under the policy and liability of the insured to the plaintiff, the insurer must defend regardless of the outcome of the suit. In short, the duty to defend arises whenever the pleadings against the insured disclose even a possibility of liability under the policy.

As to an insurer’s duty to indemnify, liability is to be prorated among insurance carriers that were on the risk during periods of exposure to injurious conditions.

That indemnification is allocated pro rata is based in large part on Louisiana’s adoption of the exposure theory in long latency disease cases. Long latency occupational disease cases are sui generis, not like anything else, in that a distinct body of jurisprudential law has been developed which applies solely to them.

Further, in cases when claims arise out of occurrences that take place during a period in which no insurer is on the risk, a liable entity is assigned a pro rata share for purposes of indemnification.

Nationwide, two general approaches to allocation of defense costs in long latency disease cases have emerged: the pro rata allocation method and the joint and several allocation method. Under pro rata allocation, insurance carriers of triggered policies are responsible for a share of defense costs based at least in part on the period of time they are on the risk. Defense costs are divided among insurers, and if the insured has periods of non-coverage, the insured is responsible for its pro rata share. The most significant difference between joint and several allocation and pro rata allocation is the treatment of uninsured time periods.

A leading decision in applying joint and several allocation is Keene Corp. v.

Insurance Co. of North America. 667 F.2d 1034 (D.C. Cir. 1981), cert denied, 455 U.S. 1007 (1982). In this case, manufacturer Keene Corporation sought declaratory judgment of the rights and obligations of insurers under comprehensive general liability policies, specifically to what extent each policy covered Keene’s liability for asbestos-related diseases. The applicable insurance policies in Keene are substantially similar to the Continental policy at issue in this case. The appellate court in Keene adopted the continuous trigger theory in long latency disease cases, holding that each insurer on the risk between expo-

sure to asbestos and manifestation of injury was liable to the insured, Keene Corporation.

Next, the court determined the extent of coverage for which each insurer was liable. The court noted that the policies provided that the insurer will pay on behalf of the insured “all sums” that the insured becomes legally obligated to pay as damages because of bodily injury during the policy period. The court reasoned that the policies issued to the insured relieved it of the risk of liability for latent injury of which the insured could not be aware when it purchased insurance.

As to allocation of liability, the court reasoned that in asbestos-related disease suits, it is likely that the coverage of more than one insurer will be triggered.

Other jurisdictions have concluded differently, although dealing with essentially the same policy language. The seminal case applying the pro rata allocation method is Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified on reh’g, 657 F.2d 814 (6th Cir. 1981).

In Forty-Eight Insulations, the insurer sought a declaratory judgment to establish that the insured was responsible for a portion of its defense costs and liability for an asbestos action brought against it because it had been self-insured for a period of time. The court reasoned that when there is no reasonable means of prorating defense costs between covered and noncovered claims, the insurer must bear the entire cost of defense. The court noted this scenario typically arises in suits brought as the result of a single accident, when only some of the damages sought are covered under a policy.

However, in the context of asbestos exposure cases and other long latency disease claims when coverage was triggered under the exposure theory, defense costs can be “readily apportioned.” The duty to defend arises solely under contract. An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period.

The Louisiana Supreme Court, therefore, was persuaded by the reasoning presented in Forty-Eight Insulations and its progeny to adopt the pro rata allocation method for defense costs in the case before

us based on the policy language. The duty to defend arises solely under contract.

According to those rules, it is the responsibility of the judiciary to determine the common intent of the parties. In this case, the words of the insurance contract at issue are clear and unambiguous.

Applying the pro rata method of allocation here does not violate the reasonable expectations of the insurer or the insured.

Based on the policy language, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.

Subject to the rules on insurance contract interpretation, insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy. The policy language in this case supports a pro rata allocation of defense costs.

Additionally, as recognized by FortyEight Insulations and its progeny, the pro rata allocation scheme is an equitable system that can be readily used in long latency disease claims in Louisiana. Because the duty to defend in Louisiana is determined by consulting the allegations within the petition and the terms of the insurance policy, the pro rata amounts can be determined from the pleadings.

American Sugar will be required to pay for its defense during years in which it did not acquire an insurance policy that would be triggered by the instant litigation.

Continental is only liable, therefore, for its pro rata share of defense costs based on its policy periods as its pro rata share.

ZALMA OPINION The Supreme Court of Louisiana did Equity—Fairness—by deciding that the insurer in long latency disease claims is only required to pay its pro rata share based on time on risk and that the insured—for the period it was uninsured— must pay its share of defense costs for the period it was uninsured. The insurer limited its liability and defense obligation to the period its policy was in effect and it would be unfair to make it pay for defense in periods it did not insure. [IA]

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[ COURTSIDE ]

L AW R E N C E R O G A K

Florida Supreme Court Rules: as Long as Policy Covers Any Cause, Homeowners Insurer Must Cover Loss with Concurrent Causes

Lawrence N. ("Larry") Rogak has been practicing insurance law since 1981.

He has defended over 23,000 lawsuits and arbitrations and has represented over 75 different insurance companies and self-insured corporations.

Lawrence N. Rogak LLC is listed in Best's Recommended Insurance Attorneys, a distinction that requires written recommendations from at least 12 insurance carriers.

A 1981 graduate of Brooklyn Law School, Mr. Rogak has published more books and articles on insurance law than any other New York attorney in the field.

American Home Assurance Co. v Sebo, Case number 2D11-4063 uThe Florida Supreme Court ruled on 12/01/2016 that insurance companies should not deny coverage for property damage just because it had more than one concurrent cause, as long as the policy covers one of the causes.

John Sebo sued AHAC after it denied his claim for damage to his luxury home caused by rain and Hurricane Wilma, based

J U S T

on the policy’s exclusion for faulty, inadequate or defective planning. Sebo’s homeowners insurance company, American Home Assurance Co. Inc., denied coverage for most of his claimed property damage in 2005. Sebo’s home in Naples, FL sustained water damage during summer rainstorms because of undisputed design and construction defects, and a few months later,

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[ COURTSIDE ] Hurricane Wilma struck an additional blow.

A Florida state jury ruled in favor of Sebo and awarded him $8 million.

In September 2013, though, Florida’s Second District Court of Appeal spurned precedent and reversed the award to Sebo, rejecting the concurrent cause doctrine detailed by the Third District Court of Appeal in its 1988 decision in the case of Wallach v. Rosenberg. That doctrine states that when there are multiple causes of loss and at least one is covered, the entire loss is covered.

American Home Assurance Co. argued that since Sebo’s all-risk policy specifically excluded damage caused by defective planning, the damage caused by a combination of defects, rain and wind was not covered under the policy. Florida’s Second District Court of Appeal agreed, using the “efficient proximate cause” doctrine that the Florida Supreme Court has previously applied to cases where one peril causes another, such as a fire caused by an explosion. The theory says the insurer can deny coverage if the primary, or “efficient,” cause is excluded under the policy.

The 1988 decision in Wallach v.

Rosenberg issued by the Third District Court of Appeal relies on the competing “concurrent cause” doctrine, which says coverage may exist if an insured risk is one of the causes of the damage, even if it is not the primary cause. The Supreme Court adopted the Third DCA’s logic.

“There is no reasonable way to distinguish the proximate cause of Sebo’s property loss—the rain and construction defects acted in concert to create the destruction of Sebo’s home,” the Court wrote. “As such, it would not be feasible to apply the EPC doctrine because no efficient cause can be determined.”

The decision was called “extremely significant” by the homeowner’s attorney for any homeowner or business with an allrisk policy, because concurrent causes are so common in Florida. For instance, he said, both wind and water caused damage to homes in North Florida this year during Hurricane Matthew.

The Florida Supreme Court noted that Sebo’s insurance company did not explicitly avoid applying the concurrent cause doctrine in case of negligent design, whereas other parts of the policy did specify that the doctrine could not apply.

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[ COURTSIDE ] CONTINUED FROM PAGE 33

Insurance companies could react to the decision by including anti-concurrentcause language in their policies, as many already do. But they might be disinclined to do so by the need to compete with other insurers for customers. [IA]

tified question answered in the negative.

Analyzing the circumstances under the common-law waiver standard, which requires an examination of all factors, defendants cannot be said to have waived their right to assert the late-notice defense as a matter of law by failing to specifically identify late notice in their disclaimer letters. Defendants identified the late-notice

Insurer Might Not Have Waived Late Notice Defense Even Though Not Mentioned in Disclaimer Letter Estee Lauder Inc. v OneBeacon Ins. Group, LLC uIn a brief decision with a minimum of details, the Court of Appeals holds that an insurance company’s disclaimer which did not cite late notice as a defense, did not automatically waive that defense, because late notice had been cited by the insurer in earlier communications with the insured.

As a result, the insurer was permitted to amend its Answer to assert the late notice defense. The significance of this decision is that a defense to coverage might be preserved even if not mentioned in the disclaimer.—LNR The order of the Appellate Division should be reversed, with costs, the order of Supreme Court reinstated, and the cer-

FOREWORD CONTINUED FROM PAGE 4

program will encourage more faculty and student talent in the field,” said Mike Morrissey, IIS President & CEO. The GCIE designation will be awarded to universities that meet the stringent criteria focused on course offerings, graduate and industry employment rates and professional involvement. The University must also demonstrate that students are learning primarily from designated full-time faculty with appropriate academic qualifications and research expertise. The IIS GCIE Evaluation Committee assesses applications for the designation and is represented 34 January 30, 2017 / INSURANCE ADVOCATE

defense in early communications with plaintiff before relying on a reservation of rights in two disclaimer letters. “Under common-law principles, triable issues of fact exist whether defendants clearly manifested an intent to abandon their latenotice defense” (Keyspan Gas E. Corp. v Munich Reins. Am., Inc., 23 NY3d 583, 591 [2014]). Accordingly, Supreme Court properly granted defendants’ motion for leave to amend their answer to reassert the affirmative defense of late notice.[IA] 2016 NY Slip Op 06012 Decided on September 15, 2016 Court of Appeals

“…By advancing the importance of top quality risk management education, the GCIE program will encourage more faculty and student talent in the field.”

by members of the academic community from insurance and risk management academic centers representing Europe, North America and Asia, as well as senior executives of global insurers. Further details about the GCIE: www.internationalinsur ance.org/GCIE.[IA]

IN FOCUS CONTINUED FROM PAGE <NONE>

downloads, cleanup still needs to happen. For example, in rewrites, carriers download a cancellation and new business. The cancellation should have a status of rewrite and the new business should just be active or renewed. But we need a strong process that the team follows to make it work.

2. Inaccurate entry/process following by your team: Without a strong process manual everyone can do what they like. In addition to bad data it can often lead to inefficiency because there is no synergy in how people are working together. Finding documents, notes and more becomes more of a scavenger hunt than a seamless system. This also can negatively impact your client experience. Most people want more structure but getting everyone to adopt it takes time. You have to exert as much as you can on auditing and adopting new procedures.

Holding your team accountable to data is a bit of an obstacle course. We tell clients to expect and prevail over the datatude they may get. No one likes stepping on the scale just like no one likes seeing how much business was lost, but you have to do it. When the team can see their numbers accurately six months from now and see how they personally can improve, it all comes together. In the beginning you can expect frustration, a few arguments and people not believing the data. If there is a difference in opinion on reports, give people 48 hours to review it and clean it up in your system. But don’t give up, because your database is a very valuable tool. When we ignore it and work around sloppy data it just breeds. Take this year as the year of data integrity and by 2018 you will be elated you did![IA]

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