February 8, 2016 Insurance Advocate by C Acunto

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Serving New York, New Jersey, Connec cut, Eastern Pennsylvania and Washington, DC

TAKING COVER Vol. 127 No. 3 | February 8, 2016

How an Insurance Shor all Leaves the Energy Sector Exposed

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Contents [COVER STORY]

On the Level: A Tale of Two Businesses Jamie Deapo

On My Radar: How to Lose an Insurance Coverage Case Barry Zalma

Looking Back: February, 1991

Courtside: Plaintiff Who Raises Issue as to Whether He Slipped on “Old Ice” Can Defeat Summary Judgment Motion Lawrence N. Rogak, Esq.

Classiﬁeds

Guest Opinion: “Repeal and Replace”? No Thanks G. Keith Smith, M.D.

Taking Cover How an Insurance Shortfall Leaves the Energy Sector Exposed

[FEATURES] 6

Foreword: Service Steve Acunto, Publisher

Face to Face: Off to Market Michael Loguercio

In the Associations: The Tri-County IIAA Donates $10,000 to the Ronald McDonald House

The Social Notebook: Providing an Outstanding Customer Experience Chris Paradiso

February 8, 2016 | Volume 127 Number 3

[AD FEATURES] 23

MSO: To Share or Not to Share

Guest Viewpoint: Meet the Met Martin Carus

info@insurance-advocate.com www.insurance-advocate.com INSURANCE ADVOCATE / February 8, 2016 3

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[ FOREWORD ]

STEVE ACUNTO

Service

VOLUME 127, NUMBER 3 FEBRUARY 8, 2016

uIn Governor Cuomo’s State of the State Address and Executive Budget, the Independent Insurance Agents and Brokers of New York (IIABNY) found “there were no clear surprises in his proposed spending plan for 2016-2017” and noted that several insurance-related issues found their way into the rather lengthy document, notably a proposal that would expand the use of “wrap-up” programs long opposed by the “Big I” and other associations. The expansion seems linked to the many infrastructure projects proposed by the Governor. According to the Association’s Memo to members, there are workers’ compensation insurance proposals that include provisions dealing with assessments on self-insured employers. Insurance agencies will be affected by plans for small business tax cuts and requirements for employers to provide paid family leave. IIABNY is conducting an in-depth review of the very lengthy budget proposal. …The Professional Insurance Agents of New York (PIANY) is calling for nominations for its 2016 Distinction of Professionalism Awards “to honor insurance professionals who exemplify the qualities and actions that serve as a model of excellence in the insurance industry and for the independent agency system.” This aspect of agency life has always been a hallmark of service and image making and PIANY is right to honor leaders in this area. Awards, due July 15th, include nominations for: • Professional Agent of the Year: PIANY presents this award to an agent who demonstrates excellence and achievement in insurance marketing and service; exhibits a personal commitment to professionalism; and contributes to their association and the local community. • Distinguished Insurance Service: This award is presented to an individual who has established a history of service to the American agency system and/or PIA. • Community Service Award: This distinction is bestowed upon the agent who took on a leadership role in a significant activity for the betterment of the community and its individuals. 6 February 8, 2016 / INSURANCE ADVOCATE

This aspect of agency life has always been a hallmark of service and image making and PIANY is right to honor leaders in this area.

If you know a deserving candidate, download a nomination form by going to www.pia.org/NY/. ...Speaking of exponents of industry care and leadership, we lost a friend to the industry recently. Kurt Bingeman, 66, past president of the National Association of Professional Surplus Lines Offices Ltd., died recently at his home in Buffalo. Kurt was a majority owner and chairman and CEO of Buffalo, New York-based wholesaler Russell Bond & Co. Inc. with whom he began his career in 1972. He purchased the firm in 1983. He was also a partner in Chevy Chase, Maryland-based Access Funding L.L.C., which offers insurance premium financing through insurance brokers. Kurt was a fixture at agent and broker events for many years and was a proud sponsor and contributor to the many Associations and agents he collaborated with. “Kurt’s commitment to our industry and NAPSLO was invaluable, and he will be greatly missed as a dedicated professional and exceptional volunteer to the NAPSLO’s efforts for many, many years,” NAPSLO Executive Director Brady Kelley said. Memorial donations may be made in Mr. Bingeman’s name to Canisius College, in care of Russell Bond & Co. Inc., 866 Ellicott Square Building, 295 Main St., Buffalo, NY 14203.[IA]

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 Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com 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) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN MEDIA, INC.

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 20 times a year, and once a month in July, August, September and December by CINN ESR, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing ofﬁces. POSTMASTER Send address changes to Insurance Advocate®, P.O. Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN ESR, Inc. and is copyrighted 2015. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

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[ FACE TO FACE ]

MICHAEL LO GUERCIO

Off to Market uAs an agency owner, at what point do you decide that your firm is large enough to use technology to attract new business, and therefore you consider choosing to engage in the services of an internet marketing firm? Is it when you reach a certain premium volume? Or perhaps when you achieve a pre-determined number of staff? Or perchance it is when you realize that unless you do something different from a marketing perspective, your business will not grow at the rate you anticipate or envision it to. For example, when I speak with an agency owner, one of the typical questions that I always tend to ask them is, “What is your rate of retention?” The usual response that I receive back is, “Oh! It’s wonderful! We are at 90%!” My next question is always, “So how do you obtain new business?” That question is usually greeted with a huge grin, with the response of, “Our service is so good, that it is all word of mouth! We have no need to advertise and spend money.” Well that is all well and good, but what many folks in our business fail to see is that even with a rate of retention of 90%, your business must still bring in 10% of additional new business, just to remain even with the year before in client count. If your business relies heavily on commercial business written, and you are constantly negotiating with your carriers for a more competitive rate on your renewals, chances are not only is your PIF (policies in force) rate dwindling at a rate of 10% per year, but also your premiums, and ergo your commissions, at an even faster rate of decline. Now, extrapolate that out over a five- or ten-year period, where you had a “wonderful” rate of retention of 90%, how much harder are you and your staff working this year, than years gone by? Therefore, most agencies tend to realize after this dialogue that they need to act on a marketing plan, and in most instances, and especially in today’s day and age, internet marketing is the method of choice, and is what makes most sense. According to a joint study conducted in mid-2015 by Velocify and Insurance

Technologies Corporation, larger agencies that are usually more successful are typically greater users of a marketing technology product. This is in direct contrast to the smaller agency with diminishing revenues, which tends to use less insurance technology for marketing. In addition, it

Well that is all well and good, but what many folks in our business fail to see is that even with a rate of retention of 90%, your business must still bring in 10% of additional new business, just to remain even with the year before in client count.

was also found by the study that agencies that are taking advantage of these types of marketing plans, are still not using them to their fullest capacity. Per the report from the above-mentioned study, from one thousand agencies surveyed the following was discovered: Revenue and Productivity Gains • Agencies that rely heavily on sales and marketing technology tend to have greater revenue growth and sell more insurance policies per producer (up to 43 percent more) and per household (up to 13 percent more). • Heavy users of technology are two times more likely than non-users to have better sales processes.

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.

Widening Technology Gap • Agencies with signiﬁcant revenue growth were 34 percent more likely to report plans to increase technology investments than were agencies with declining revenues. CONTINUED ON PAGE 10

8 February 8, 2016 / INSURANCE ADVOCATE

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[ FACE TO FACE ] CONTINUED FROM PAGE 8

• Twenty-six percent more direct-toconsumer agency independents report plans to increase their technology investments. • Agencies with 100 or more employees are 93 percent more likely, on average, than those with 10 or fewer employees to use each technology. In addition, the study showed a huge connection between agencies that were heavy in the use of technology, and an

increase in revenue and productivity in the following categories: 1. Automated dialers 2. Marketing automation 3. Lead management software 4. CRM software Per the study report: • Agencies that used lead management software sold 43 percent more insurance policies per producer and 13 percent more per household. • Agencies that used automated dialers sold 43 percent more policies

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per producer, and seven percent more per household. • Agencies using CRM software saw a smaller uptick of 15 percent in policies sold per producer, but sold 11 percent more policies per household, second only to lead management software. • Similar to CRM software, marketing automation had a greater impact on policies sold per household – driving a 10 percent increase. However, it was further established by the study that the use of the above-mentioned means of technology was comparatively low with respect to all size agencies. For instance, with direct writing carriers, independent agency carriers, and those companies using captive agents, over 70% did not use direct dialers. With respect to agencies with more than 100 employees, approximately only 70% of them used lead management software. This usage was greater than the smaller agency cohort, however it is still considered low in this category. Thank you to Velocify and Insurance Technologies Corporation for releasing the results of their study. It is important to thoroughly review your agency’s marketing plan, and always keep a keen eye out for means to improve ways of obtaining new business. However and with that said, there are a few areas that you need to be aware of, and not make these very common five Internet marketing mistakes, according to Property Casualty 360: 1. Wasting time and money on bad SEO campaigns “Black hat” SEO agencies dangle juicy traffic and lead carrots in front of insurance agents, luring them into ill-conceived, cookie-cutter SEO campaigns. They never work. SEO can be a very productive option for agents, provided they have a solid strategy. Generally, a successful lead generation SEO campaign for insurance agencies will have a strong local SEO component, focus on “long-tail” keywords in strategic niches with a very high potential for conversion, and use an aggressive off-site strategy involving the creation of content to acquire high-quality backlinks. 2. Dabbling in social media Using social media to generate sales leads is a dubious proposition for most businesses, and in insurance, because of CONTINUED ON PAGE 12

10 February 8, 2016 / INSURANCE ADVOCATE

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[ FACE TO FACE ] CONTINUED FROM PAGE 10

the skepticism mentioned earlier, is particularly challenging for agents. Basically, people don’t want to talk about insurance on social media, and don’t want to be sold to. Social media can be effective for building relationships with existing clients and establishing credibility, but building an engaged social media community takes a lot of time and effort — time and effort that can be spent more productively in other marketing activities. 3. Poor website strategies If an agent is part of a corporate website structure, setting up a second, personal website will not pay off. First, it will confuse prospects and search engines as to which website is the correct one to use for inquiries. Even a little seed of doubt will produce precipitous declines in website visits and leads. Independent agents must make their websites solid, in terms of SEO, usability and conversion optimization (i.e., structuring the website to induce visitors to inquire further and make it easy for them to do so). Winning agency websites have unique, valuable content, structured to enable visitors to find what they need quickly. Also critically important: having a mobile-friendly website. More people now use mobile devices than desktops to access the Internet. A mobileunfriendly site says, “shop elsewhere” to the majority of prospects.

4. Under investing in/mishandling e-mail marketing E-mail is a terrific option for insurance agencies, if it is done properly. E-mail can kill several marketing birds with one stone,

Independent agents must make their websites solid, in terms of SEO, usability and conversion optimization (i.e., structuring the website to induce visitors to inquire further and make it easy for them to do so).

including lead generation, credibility building and relationship building. Specific problems to avoid, include: • Using purchased lists. This is never effective. Build a house list as relevant and up to date as possible. It will pay off in the long run, no matter how long it takes. • Starting and stopping. Consistency is the key to effective e-mail marketing. It can take subscribers months to catch on and engage.

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• Coming on too strong. Remember that skepticism! E-mails providing useful information put prospects and clients at ease, and generate meaningful inquiries in the end. • Coming on too weak. Selling is part of the equation. An e-mail providing subscribers with no way at all to interact or inquire is only doing half the job. • Not using an e-mail management platform. This is ineffective and amateurish. Many solid, reasonably priced online platforms are available to give emails a professional look, and make distribution and analysis easy. 5. Failing to track and measure Agencies perpetuate bad online marketing campaigns when they fail to capture the right data and/or fail to review it regularly. In terms of data capture, agencies must be able to tell which marketing campaigns are generating leads, and how many leads are being generated. Here are a few extremely important gaps to fill: • Phone leads are often ignored in online marketing campaign tracking. Make sure you can trace any phone inquiry back to the source; basically this is done through assigning unique phone numbers to each campaign, e.g., a unique phone number for the website, a unique number for emails. • Phone and form leads (i.e., forms submitted through the website, advertising landing page) must be separated from non-leads. Standard tracking systems usually count conversions — which include leads, spam, personal calls, etc. Failing to separate actual leads from conversions can make agencies overestimate the results of their campaigns. The next time we meet, we will be talking about a few different events, including the IIAA Tri-County event, PIA Metro RAP, and perhaps some others. It may even be time for pitchers and catchers to report for spring training, and we all know what that means: that it’s the beginning of convention season in this thing of ours! So until then, Ciao for now![IA]

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[ IN THE ASSOCIATIONS ]

The TriCounty IIAA Donates $10,000 to the Ronald McDonald House uALBERTSON, N.Y.—Members of the TriCounty Board of Directors presented a check for $10,000 to the Ronald McDonald House of Long Island on January 21, 2016. The check represented proceeds from the TriCounty ‘Cabaret’ post-holiday party held on January 11th at K-Pacho Restaurant in New Hyde Park, New York. Peter Phillips, President of TriCounty said: “We were so impressed with the work of this fine organization, we wanted to contribute as best we could.... $10,000 was our goal and, with the help of the dedicated volunteers at Ronald McDonald House,

Twenty-two companies sponsored this gala event which drew close to 200 guests. our sponsors and guests on January 11, we reached it!” Twenty-two companies sponsored this gala event which drew close to 200 guests. “Sponsorships, along with proceeds from the 50/50 drawing made the size of the donation possible, and we thank everyone for their generosity,” said James Bastian, TriCounty’s treasurer.[IA]

The TriCounty Independent Insurance Agents Association is comprised of more than 300 independent insurance member agencies and brokerages doing business in the counties of Nassau, Queens, Kings and Richmond. The Ronald McDonald House of Long Island is located in New Hyde Park, and accommodates families in a warm and supportive environment. For 30 years, the House has been a homeaway-from-home for over 21,000 families in the United States and more than 80 countries around the world who are dealing with the pain of having a child undergoing medical treatment at nearby hospitals.

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[ THE SOCIAL NOTEBOOK ]

C H R I S PA R A D I S O

Providing an Outstanding Customer Experience uIn today’s complex marketing age, “customer service” no longer exists. Yes, you heard me right. Customer service is out the window. There’s a good reason for that. It’s because the “customer experience” has now fully taken over the playing field. Companies used to compete to see who had the best customer service, but there’s so much more to taking care of your customers than just providing them inperson service. Now it’s about the full experience and the one key element that brings it all together is trust. Trust takes hard work to earn over time and it requires a high level of care and consistency to build and maintain. How can you earn your customers’ trust in such a way that you generate more word-of-mouth referrals, retain clients longer, and give customers the experience they deserve? Several ideas come to mind. Email & Social Media Marketing Email and social media make it very easy to connect with current and potential customers. Did you know your customers actually want to connect with you via social media? Data tells me they do. For example, from 2012 to 2014, the percentage of people following companies via social media went from 16% to 33%. That number continues to rise. Communicating via social media and email are great ways to demonstrate your company’s service and product offerings, highlight your staff, and show the world your brand. Plus, it’s a personable way to connect. Remember, people truly enjoy social media, and as I mentioned, your customers want to stay connected with you. You just have to give them a good reason to do so, by incorporating eye-friendly visuals and sharing messages that people will want to engage with. We use social media and email to extend holiday wishes to our customers, congratulate them on their accomplishments, share blogs that pertain to their interests, and more. The possibilities are endless. Importantly, these forms of marketing will remind your customers that your insurance agency is full of real people who 16 February 8, 2016 / INSURANCE ADVOCATE

want to help them with their insurance experience. It’s all about delivery, so make sure you deliver your message in a way that you’d want to read about yourself.

Now it’s about the full experience and the one key element that brings it all together is trust.

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

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[ THE SOCIAL NOTEBOOK ] There are many, many social media platforms you can incorporate into your digital marketing strategy and plan. The five crucial networks our company focuses on are Facebook, Twitter, Pinterest, Instagram and Google+. Each social network has its own special features and strengths. Let’s take a basic look at each. • Facebook is great for connecting with people on both an individual and corporate basis. This platform is excellent for promoting your website in your posts and sharing visuals, videos, and written messages. It’s essentially the “all-in-one” social network. Facebook is your one-stop solution to sharing multiple types of content, whether written or visual. • Pinterest and Instagram both focus on visuals and image sharing. They are powerful because you can list your location–and insurance agency phone number, address and website URL–on both. With Pinterest, you can upload your own original content or search for other members’ pictures or graphics. What’s especially great about Pinterest is you can “re-pin” content from others’ profiles that is relevant to your brand’s message and the insurance services or products you offer. • Instagram is more often used by the younger generation, including millennials. It can still be a powerful marketing resource if you upload visuals that correspond with your brand and include well thought-out #hashtags. Instagram is great for connecting with your audience on a more personable level and is the ideal place to display branded visuals, pictures of your staff, and photos of other happy customers who are satisfied with your service. • Google+ is a social network that isn’t used often. It really should be, because there is a huge user count on Google+ since they own a lot of space online. The great thing about Google+ is that it has communities designed around specific interests. For example, if I’d like to connect with people who love classic cars (since I write classic car insurance), I can just search for “classic car lovers” and join and post to the relevant communities I find. • Twitter is your one-stop network for

If you don’t already have an app in place at your agency, get one and use it to earn your customers’ trust more effectively. Again, if you need help getting started, just reach out to me and I’ll gladly point you in the right direction.

frequent updates. Your tweets may only survive seconds, so posting frequently on Twitter is crucial. Twitter is a great place for displaying your content in a rapid-fire environment. A tweet only lives for seconds or minutes, so it makes perfect sense to post multiple times a day, sharing content with your customers and prospects that is relevant to their needs. Stand out on Twitter and have your tweets found more easily by using creative and thoughtful hashtags. “Traditional” Marketing Besides digital marketing, there are also some more traditional methods to connect with customers and prospects to work on building their trust. I use the term “traditional” loosely, because as we enter 2016, digital marketing has become the staple for connecting in today’s digital age and should, itself, be considered a traditional form of marketing. Right now, let’s focus on some oldfashioned forms of marketing that we still practice regularly at our agency. One thing we do is send post cards, using our branded visuals, staff photos and info, and friendly messages as features to focus on. You can send other forms of print, such as thank you or holiday cards as well. If you have a professionally designed piece of mail delivered to your customers’ mailboxes, you provide a tangible and attractive reminder that you care. They will certainly remember it. Agency App So what about those customers who won’t trust you unless you deliver an immediate service? These are the folks

who were ready for the digital age before it ever hit and they will trust you if you’re there for them 24/7. The good news is it’s totally possible to do this. By creating and integrating into our social marketing strategy an agency app, we’ve been there for our customers around the clock. Our app can help clients pay bills, file claims, keep a home inventory, obtain digital ID cards, and even get immediate help in case of an emergency. There’s so much power behind our app that it’s ridiculous. We can even send all of our app users a push notification. Would you believe they have a 100% open rate? Believe it. If you don’t already have an app in place at your agency, get one and use it to earn your customers’ trust more effectively. Again, if you need help getting started, just reach out to me and I’ll gladly point you in the right direction. In conclusion, you need to go beyond service and earn your customers’ trust in whatever way possible. That’s truly what the customer experience boils down to. Of course, you still must provide excellent in-person service. Go beyond that and connect with them in the digital world and even tap into some “traditional” forms of marketing when you get the chance. No matter what you decide, keep it personable, and remind them that you’re there to help.[IA]

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com INSURANCE ADVOCATE / February 8, 2016 17

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TAKING COVER

Today’s energy companies face higher risks than ever, and many of today’s insurers have more

How an Insurance Shortfall Leaves the Energy Sector Exposed

capacity than ever and a hunger for new business. So why do so many energy companies still find it hard to get the cover they need in key areas of their operations? This article examines the risk challenges faced by energy companies, and suggests some ways forward to help deliver the protection

By Nick Dussuyer, Global Head of Natural Resources Industry, Willis Towers Watson Reprinted with the permission of Willis Towers Watson - http://www.willis.com/Documents/Publications/Industr ies/Energy/Taking_Cover_whitepaper.pdf

18 February 8, 2016 / INSURANCE ADVOCATE

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uEnergy companies today face increased and increasingly complex risks, be it from the crash in oil prices that has disrupted business models, the move toward drilling in more remote and environmentally sensitive areas, or attacks from cyber criminals. With budgets under pressure as a result of the collapse in oil prices, companies are also likely to be addressing the risk management challenge with fewer resources. How should they respond? And is the insurance industry doing enough to assist them? Our experience suggests that in some key areas where energy companies are exposed, the insurance products on offer fail to provide the protection they need. Five features of the energy industry’s current situation will dominate its approach to managing risk. First, business models need to be adapted to changing conditions, largely because of the collapse in oil prices. Companies worldwide are reducing costs wherever they can by, for example, reviewing their strategies, slashing capital expenditure, and mothballing stranded assets in order to protect future earnings. Mergers and acquisitions are also taking place with the aim of developing synergies and cost savings. Transferring risk against this backdrop needs to be done in the most efficient way possible, not least because risk management budgets are also under pressure. Second, the industry increasingly operates in a globalized environment. The past ten years have seen companies expand from their regional comfort zones into unfamiliar areas of the world with unfamiliar regulatory regimes. This expanded global footprint requires companies to understand an evergrowing list of responsibilities under contract. And it also carries heightened supply chain risk. The Japanese earthquake of 2011, for example, showed the damage that disruption to the supply chain can inflict. And it is not just physical loss or damage at the supplier’s site that causes disruption. Supplier insolvency, power outages, political unrest, IT failures, labor disputes, transportation problems, pandemics – all pose risk in a world where companies are searching the globe for lower cost supplies and operating “just-in-time” procurement strategies to keep inventory costs low and stocks at minimum levels. The third feature of the risk landscape is the need to manage human capital. The oil price collapse has led to the loss of thousands of jobs in the industry. But if a company loses its most experienced workers – and they might be among the first to go because they are closer to retirement or the

most expensive – it can be left short of the skills and knowledge needed to sustain current business and then build it when the economic cycle turns. Retention of talent as profits fall, or at least measures to ensure that accumulated knowledge is passed down to younger employees, is thus a priority. Mindful that the legal and regulatory duty of care bar has risen in recent years, companies must also ensure that their

Supplier insolvency, power outages, political unrest, IT failures, labor disputes, transportation problems, pandemics – all pose risk in a world where companies are searching the globe for lower cost supplies and operating “just-in-time” procurement strategies to keep inventory costs low and stocks at minimum levels.

employees operate in as safe an environment as possible. Political unrest, the remoteness of locations, infectious diseases, and workplace accidents are among the risks they need to counter. The loss of life when terrorists occupied the Armenas gas facility in Algeria in 2013 is a reminder of how hard this can be. Fourth up is climate change and care of the environment, particularly at a time when energy companies are venturing into environmentally sensitive areas such as the Arctic in search of resources. Failure to comply with legal and regulatory environmental requirements for clean energy and lower hydrocarbon emissions can hit a company’s balance sheet, share price, and reputation hard, as witnessed by car manufacturer Volkswagen’s emissions scandal. Sales of its cars in the United Kingdom alone have fallen by 20 percent as a result. The consequences of an environmental catastrophe are seemingly limitless. To date, the cost to BP of the Deepwater Horizon blowout and explosion stands at more than $50 billion, enough to ruin oil companies not in the super-major league. The fifth feature is the impact of new technology. Access to big data from the internet along with advanced analytics helps companies make better decisions. And the Internet of Things, which embeds electronics, software, sensors, and network connectivity within all manner of machines and infrastructure, can improve operational efficiency while lowering costs. But the Internet brings with it risks. Indeed, the risk of a major incident caused by a cyber attack constantly increases. Globally, it is estimated that cyber attacks against oil and gas infrastructure will cost companies $1.9 billion by 2018. With industrial control systems used by the energy industry now routinely connected to the Internet, it is possible to visualize a cyber attack causing an energy disaster on the scale of Piper Alpha, Phillips Pasadena, Exxon Valdez or Deepwater Horizon. CONTINUED ON PAGE 20

INSURANCE ADVOCATE / February 8, 2016 19

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CONTINUED FROM PAGE 19

Further risks arise from the development of new technology within the industry. Fracking for shale oil and gas, for example, raises the environmental legal liability risk because the process requires a continual supply of water to be injected into wells. And the more sophisticated the technology in the control rooms that operate the drilling, the more potential is created for technology failure.

How Energy Companies Can Respond

The five main challenges facing energy companies and some of the risk management requirements that ensue are highlighted in Exhibit 1 (above). Perhaps most noteworthy is how few items on the list relate to insurance products. Insurance remains a vital tool for risk managers and a host of insurance products are available, from Property Damage to Control of Well and Liabilities, Product Recall, and Executive Risk. But insurance products alone have never been the entire solution to managing risk and purchasing yet more cover when on reduced budgets might not be feasible. So perhaps the focus should be first on risk mitigation. Professional contractual and engineering risk reviews are two of the most important tools available to energy industry risk managers, particularly when companies remain prone to expanding their operations into unfamiliar domains, unaware of the enhanced risks to which they become exposed. In addition, at a time when energy companies need to make operational savings, it is vital that they decide when it makes sense to retain risk and when to transfer it â&#x20AC;&#x201C; a decision that increasingly powerful modelling and analytic tools can help them make. But how can the insurance market help? We believe energy companies are under-served in four key areas: supply chain risk, cyber risk, Gulf of Mexico windstorm risk and drilling risk. 20 February 8, 2016 / INSURANCE ADVOCATE

Supply Chain Risk The Japanese earthquake highlighted how poorly protected companies are when a natural catastrophe disrupts supply chains, and the situation is little improved. Today, disruption to the supply chain of an energy company operating in Asia could conceivably cost in the region of $1 billion. However, it is unlikely that more than $150 million is available in the insurance markets for this peril at a commercially viable price. The disconnection between supply and demand is explained by a shortage of information: general downstream insurers, who

Insurance remains a vital tool for risk managers and a host of insurance products are available, from Property Damage to Control of Well and Liabilities, Product Recall, and Executive Risk. But insurance products alone have never been the entire solution to managing risk and purchasing yet more cover when on reduced budgets might not be feasible.

would ideally offer this type of exposure, are reluctant to offer more than basic cover without extensive detail concerning what might be thousands of links in a supply chain. A fledgling standalone supply chain insurance market is now offering wider cover, but this is relatively expensive and requires similarly detailed information. CONTINUED ON PAGE 22

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Risk managers are thus on the horns of a dilemma. They are particularly concerned about this type of risk since the Japanese earthquake, and their managements expect them to do everything possible to mitigate it. But they lack the appetite to spend two years or more assessing their supply chains in the way the insurance market demands as they do not have the resources to do so. Brokers and other risk intermediaries are beginning to bridge this gap by helping companies determine whether or not they have a serious problem in their supply chain, and by developing Business Continuity plans that recommend risk mitigation measures to reduce an energy company’s supply chain risk, be it by revising storage strategies or using a wider range of suppliers, for instance. To date, though, there seems little prospect of the insurance market delivering a truly effective risk management solution.

Cyber Risk Despite a high level of cyber risk, neither the upstream nor downstream energy insurance markets provide cover. For the past ten years, almost all policies issued by these markets have contained a cyber exclusion, reflecting underwriters’ inability to assess and quantify cyber risk given their lack of expertise in the area. Instead they leave it to cyber specialists who offer standalone cyber products, but generally only with limited cover as the market remains small. Hence, despite some recent developments in the London market to improve matters, the vast majority of energy companies remain inadequately protected.

Gulf of Mexico Windstorm Risk Hurricane Ike gained notoriety in 2008 as the third most expensive event in insurance history. Since then, energy companies operating in the Gulf of Mexico have struggled to buy protection for the hurricane season, even though climate change threatens to increase the risk of severe weather events. That is because losses caused by Ike, particularly those suffered by upstream operators, far exceeded insurers’ estimates and there followed an immediate concentration of capacity, a massive increase in rates, and a virtual tripling of insurance retentions. Capacity for this type of exposure in the market is thought to be about $750 million, compared to a potential overall windstorm exposure of more than $20 billion. Yet despite the limited coverage and the hike in rates, most energy companies have no choice but to buy whatever cover is available. That leaves the insurance market in a seemingly enviable situation, certain there will be sufficient demand no matter how expensive and restricted the product might be.

Drilling Risk The standard methodology for assessing drilling risk – essentially the risk of a blowout – has not changed in almost 30 years since it was first used for drilling in the Gulf of Mexico. It gives a rate for each foot drilled on the presumption that the deeper you drill, the greater the risks and the more expensive any remedial action. But the methodology does not take into account the very different conditions that exist today in different drilling environ22 February 8, 2016 / INSURANCE ADVOCATE

ments – in shale gas fields or the Arctic, for example. Drilling in the Arctic ice shelf is quite shallow, but the remoteness of the location brings its own challenges when responding to problems. The alternative methodology – a simple rate based on the value of the well – is inadequate too, as some wells will be expensive for different reasons. Current rating models are therefore good in parts, but the energy industry really needs an entirely fresh product if it is to accurately assess the drilling risks different energy companies face in different environments, and charge premiums accordingly.

Future Developments For energy companies to have any realistic prospect of being able to transfer risk in the four areas to the extent they would like, three imperatives will need to be addressed. Make better use of data. Big data and powerful analytics can help insurers better understand and assess the risks each energy company faces. Algorithms now exist, for example, that help insurers assess the likelihood and severity of an oil spill more accurately, as well as the cleanup costs. Better use of big data will surely facilitate the wider, fuller provision of cover against cyber attack and supply chain disruptions. Collaborate more. Energy companies are spending considerable resources assessing their vulnerability to cyber attack. But they are reluctant to share their knowledge, or to admit to any vulnerability or indeed that they have been subject to an attack unless they have to. And few are willing to share their risk mitigation plans for fear of helping would-be attackers. Yet greater sharing of information with their insurers could help them get the cover they need. The same goes for drilling risk. It is surely not wishful thinking to imagine that energy companies could work more closely with insurers to help them better assess the particular drilling risks each faces. But insurers need to collaborate among themselves too. Again, take cyber risk. Rather than working in silos, underwriters of energy, cyber, and political violence could conceivably pool their industry knowledge, expertise, and market clout to develop an integrated product that helps clients cover the mounting risks they face from a cyber attack. Innovate to compete. There is an irony in current market dynamics: insurers might be reluctant to offer much needed cover in energy companies’ key areas of risk, but at the same time, their premium base is under attack and prices are falling as a result. Hence they are hungry for more business. This competitive dynamic will, we believe, be the most important catalyst for change, prompting insurers to develop innovative, keenly-priced products that make better use of data and collaboration. Pressure on prices comes from several directions. Reduced risk management budgets are one factor. Recently, a major integrated oil company based in North America elected to cut its insurance program by half. Other companies are also deciding to retain more of their own risk as actuarial analyses point to risk retention as a way of lowering the overall cost of risk. CONTINUED ON PAGE 25

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ADVERTORIAL

To Share or Not to Share TODAY’S INTERCONNECTED WORLD has brought an explosion of opportunities to share products and services. Bulletin boards and newspaper ads have been replaced by mobile apps and online postings. Sharing Network Companies (SNC) are able to match service providers and users with real-time accessibility. While at first glance this seems like a great idea, there are some exposures and risks to consider. Helping clients navigate the pitfalls of the sharing economy is another valueadded service of the professional insurance agent. In 2011, Time Magazine named “sharing economy” one of ten ideas that will change the world. However, the concept behind the sharing economy is not new. Since the beginning of civilization, people have swapped services and products. Good examples are an old-fashioned barn raising or swapping babysitting service. What IS new is that advances in technology have allowed “collaborative consumption” or “peer-to-peer sharing” to take on a whole new identity. Research shows that 51% of Internet users, millennials in particular, tried the sharing economy in 2015, up 14% from 2014 (www.emarketer.com). Companies such as Amazon and eBay paved the way for consumers to portant to check with them prior to enterfeel safe buying from and selling to perfect Research shows ing into a short-term rental arrangement. strangers. Numerous online auction and addition, local regulations must be folthat 51% of internet In “freecycling” sites can be found in many lowed. In some municipalities, including states as well. The sharing economy revNew York City, short-term rentals are prousers, millennials enues from just five sectors – car sharing, hibited. peer-to-peer lending and crowdfunding, onin particular, For damage to property, if the renter’s line staffing, peer-to-peer accommodations, personal property is lost or damaged, their tried the sharing and music and video streaming – were estipersonal homeowners or tenants policy mated to be $13 billion in 2013, and are proeconomy in 2015, should provide coverage. For the homejected to mushroom to $335 billion by 2025 coverage may or may not be availup 14% from 2014. owner, (www.pwc.co.uk). able. Airbnb provides a $1 million policy Insurance exposures include damage to to protect homeowners from damage property (of the homeowner and the renter), injuries to caused to their property by renters. guests and workers, and liability for damage or injuries. DeWith ridesharing operations such as UBER, LYFT and pending on the degree of control the business has over the peer-to-peer car sharing, where individuals offer their perduties of the worker or driver, the workers may be considered sonal automobiles for short-term rentals, a standard personal employees, and workers’ compensation coverage is needed. auto policy excludes coverage while the car is being used to In 2015, a labor commissioner in California determined that transport passengers for a fee. A gray area may exist when UBER drivers were in fact employees (www.newyorker.com). the ridesharing app is open, and the driver is looking for a For ride sharers, the standard automobile bodily injury, propfare. Insurers in twelve states offer automobile insurance polierty damage and medical payments exposures exist. Another cies for people who drive for ridesharing companies. UBER area of concern for insurers that may not be readily apparent and LYFT offer liability coverage, but damage to the owner’s is umbrella or excess liability coverage. With or without incar is not provided (www.forbes.com). surance, or liability, lawsuits are always a concern. Sharing goods and services can be a money-saving and People often rent their homes for special events, such as pro environmentally friendly choice, but it is important to be pregolf tournaments or the Olympics. During the 2016 New York pared if something goes wrong. Helping clients understand City blizzard, someone in Queens built an igloo and listed it and address the exposures of the sharing economy is another on Airbnb! Rental of the home, or part of the home, that you sign of the true insurance professional. usually live in to others on an occasional basis for use as a residence is a covered exposure under many homeowners poli139 Harristown Road cies. However, short-term rentals on a regular basis may be Glen Rock, NJ 07452 | Suite 100 considered a business and need separate coverage, since a stan(800) 935-6900 dard homeowners policy does not provide coverage if the www.msonet.com home is used for business. Insurers’ appetites vary, so it is imINSURANCE ADVOCATE / February 8, 2016 23

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[ GUEST VIEWPOINT ]

MARTIN CARUS

Meet the Met uOn January 12, 2016, MetLife issued a press release describing a proposed break-up of the company into two distinct parts: (i) US “retail business” (for the most part and excluding business in force) and (ii) other business. The former is what is to be embedded into a new company. Note that this is a brief description of the proposal because it is not the proposal itself that generates the subject of this article. To get the complete flavor of MetLife’s proposal, the entire press release should be reviewed. The press release includes several comments that should generate interest and discussion. The CEO of MetLife (Mr. Kandarian) states in the release the following: “At MetLife our goal is to create longterm value for our shareholders and deliver exceptional customer experiences. As a result of our Accelerating Value strategic initiative, MetLife has been evaluating opportunities to increase sustainable cash generation and is directing capital to businesses where we can achieve a clear competitive advantage and deliver a differentiated value proposition for customers. This analysis considers the regulatory and economic environment in each market where we do business.” A laudable goal, from the perspective of shareholders. However, as I interpret that statement, MetLife obviously believes that its current structure hinders the achievement of increasing “sustainable cash generation and deliver a differentiated value proposition for customers” in order to obtain the goal of creating “long-term value for our shareholders and deliver exceptional customer experiences.” Therefore, the division must mean that in MetLife management’s opinion, the to-be spun off business is the hindrance. Considering what that business is poses an interesting analytical dynamic. While MetLife will keep in force US retail life insurance, it will not continue that operation in terms of writing new business. Essentially, by some measures the largest US retail life insurer decides that continuing that business doesn’t align with its goal. The press release further notes: “MetLife has been evaluating opportunities 24 February 8, 2016 / INSURANCE ADVOCATE

to increase sustainable cash generation and is directing capital to businesses where we can achieve a clear competitive advantage and deliver a differentiated value proposition for customers. This analysis considers the regulatory and economic environment in each market where we do business. We have concluded that an independent new company would be able to compete more

…the effort to impose capital standards on US companies based on international principles has underlying dangers and hasn’t been put forth based on evidence of a need for such a paradigm (noting MetLife has been around since the mid-19th century).

effectively and generate stronger returns for shareholders. Currently, U.S. Retail is part of a Systemically Important Financial Institution (SIFI) and risks higher capital requirements that could put it at a signiﬁcant competitive disadvantage” (emphasis and italics added). Thus, one can conclude that it is not entirely the nature of the business itself but the fact that the totality of MetLife’s current structure has been deemed to fall within a certain regulatory paradigm, that causes the line of thought MetLife has now evinced. It is that paradigm that sets forth the author’s interest. As I have indicated in previous articles included in prior editions of this publication, the effort to impose capital standards on US companies based on international principles has underlying dangers and hasn’t been put forth based on evidence of a need for such a paradigm

Martin F. Carus is President of Martin Carus Consulting, LLC and has spent 50 years in the insurance industry as one of New York’s acknowledged top regulatory thinkers and protagonists. From 1965 through 1999, he was a member of the New York Insurance Department (now the Department of Financial Services), rising to Chief Examiner. From 1999-2014, he was Senior State Relations Officer for the American International Group, Inc. where he acted as AIG’s Observer to the International Association of Insurance Supervisors.

(noting MetLife has been around since the mid-19th century). This is so because what we have here is the first overt instance of a spillover effect of that developing proposed regulatory regime, i.e., what I call the socialization of the industry. The international and US regulators have set in motion a direction that has now suggested (or “dictated”) to a major insurer to alter its modus operandi apparently as a Plan B to back up its efforts to challenge its SIFI designation. Without that regime, would MetLife consider the proposal laid out in the press release? Maybe or maybe not. However, there is more to consider. The reason why shareholder-owned commercial establishments (including insurers) exist can be described in three words, or perhaps even just two: “To Make Money” or plain old “Make Money”! Capital providers invest in companies for gains, either through dividends, which emanate from earnings, or increases in share value, which reflect positive performance. That’s what generates return on investment. Thus, what generates earnings and positive performance? Simply put: net income. In the insurance industry how is net income

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[ VIEW POINT ] derived? Simply put: underwriting performance, investment performance and fees for service. Relative to underwriting, the state of the US market is that it is highly competitive especially in the most common lines of business, e.g., life insurance, auto insurance, homeowners insurance, etc. Every day you probably receive at least one notice (by mail, email or otherwise) that you can save hundreds of dollars by shifting your auto insurance to a specified insurer. I got one the other day that quoted a $637 possibility. Even living in a high auto insurance rate state, if I change two or three times, the last company will be paying me premium! The ads on television are clever, entertaining and also numerous. It is hard to imagine that there really is the chance for significant underwriting gains in such a competitive marketplace notwithstanding that some consumerists might think the companies are colluding. Similar circumstances exist within the homeowners insurance realm as well as with life insurance. As comparison shopping becomes easier through the web and as more websavvy consumers continue their upwards climb in the marketplace, it appears this will increasingly be so. The ability of the investment function to provide the gains necessary to better support dividends (and increases therein) and increasingly better performance measurements, the two elements shareholders and capital providers desire is impaired by virtue of today’s market conditions. This does not bode well for insurers. For extended periods, we’ve had two long spates of zero, near zero (or perhaps even below zero) risk-free interest rates, a prospect that was not considered when rates, particularly life insurance rates, were calculated and charged in the 1980s or 1990s. Moreover, the spreads for risk (in terms of credit risk and time horizon) have narrowed significantly. That means bond investments are increasingly unlikely to produce the desired gains and/or increased performance measurement. Turning to the equities, considering current events there hasn’t been much to be positive about either. Notwithstanding that the market has more than doubled from its low point in early 2009, the basic indices are approximately where they were in mid-2008, only just a few percentage points above that level. The state of the economy doesn’t seem to indicate a signif-

icant increase in equity markets especially over the near term. Overall, things seem in such a state that the Fed, having scantily raised the risk-free rate and indicating there will be further regular increases, now appears ready to forestall such increases

While MetLife will keep in force US retail life insurance, it will not continue that operation in terms of writing new business.

perhaps in order to prop up the equity markets. (Note: of the 298,000 job gain reported for December, 281,000 of that number were “seasonal adjustments” or birth/death model adjustments.) Thus, the probability of the industry producing increasing underwriting and/or investment income results are problematic at the least. So now the question arises as to where the efforts to require so-called high loss absorbency capital go. They seem to be on a path that assumes that capital availability is elastic and will ever be obtainable by an industry that has poor prospects for better earnings and performance. The evidence is that capital is not elastic and in fact over the first three weeks of January decreased by almost $2 trillion as the markets have tanked. Forbes now reports that several billionaires have lost that status, some precipitously! So has the Fed, the NAIC, the IAIS, the EU, etc. really thought their efforts through? You be the judge![IA]

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CONTINUED FROM PAGE 22

Meanwhile, supply continues to expand. Insurers are awash with capital owing to a relatively benign claims environment in the past three or four years and higher capitalization requirements. Also, with interest rates and risk-free returns so low in alternative assets, there is growing investor interest in the insurance sector. Capacity for upstream energy insurance has almost doubled in five years, from just under $4 billion in 2010 to more than $7 billion in 2015. Oversupply is starting to affect both the reinsurance and primary markets. But it is clear that competing on price alone will not provide a long-term solution to the market’s predicament. Rather, insurers need to build stronger, more highly valued relationships with their clients. In some instances – such as windstorm cover – that might mean lowering premiums where they cannot be justified for what has become a captive audience. But often it will mean finding innovative ways to ensure energy companies get the cover they need, adding value to their clients’ operations and generating premium income for themselves as a result. Looked at another way, insurers’ failure to provide cover in today’s super-competitive market exposes not only energy companies’ business to risk, but their own business too.[IA] About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 territories. We design and deliver solutions that manage risk, optimize beneﬁts, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

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[ ON THE LEVEL ]

JAMIE DEAPO

A Tale of Two Businesses uWhen I was very young many, many years ago there was a cartoon called the Rocky and Bullwinkle Show about a flying squirrel and a moose. There was a segment on the show called Aesop & Son patterned after Aesop’s Fables, which were fictional stories that had a truth built into them and ended with the moral of the story. Let me tell you the story about two homebuilders. Sam is a master craftsman with many years of experience building quality homes. He takes pride in his work and stands behind every home he builds. His employees are all extremely adept and professional in handling the work they do in the completion of the home. They are master plumbers, electricians, craftsmen and painters. They’re supported by a crew of conscientious workers who all take their job seriously and are committed to Sam’s focus on quality construction. Sam doesn’t build several different models of home with the intention of selling one of the pre-designed models to his clients. No, Sam sits with every client finding out their personal tastes, their likes and dislikes and designs a home that is specifically for them. His price may be a little higher than other home builders but the price reflects the personalized design and the quality of the product. Sam can also design and build a home with quality that fits a more modest budget but still meets the needs of the particular family. Sam is able to do this because he deals with a number of different building material suppliers and he selects them based on the design and budget of the house he is building. The one drawback to having so many suppliers is that each supplier wants the opportunity to offer a price on all the materials and that takes time and money, slowing down the sales process and sometimes driving buyers to John who can give them a firm price right away. John is a home builder who likes to build four or five basic models of home using average materials, some of which are at the low end of the quality spectrum. He offers several different upgrade packages and likes to advertise that his clients buy from him because they can choose the 26 February 8, 2016 / INSURANCE ADVOCATE

materials and price they want from the packages he offers. He doesn’t spend his money on quality workers; instead, he has a team of aggressive salespeople who get paid on the volume of homes they sell. The turnover of his salespeople is significant and because of this his salespeople are mainly concerned with closing the sale and not the protection and satisfaction of the customer. He buys his supplies in bulk from one supplier who gives him a very competitive price. His supplier can do this because he buys average quality materials that are at best made to look expensive. Sometimes he buys materials from outside the US that are highly questionable and in some cases unsafe (i.e., Chinese drywall). John’s supplier makes it very easy to order and receive the supplies he needs rapidly and as needed. That allows John’s salespeople to sell homes quickly knowing the exact cost of the supplies that will be needed and that they will be delivered immediately and the house can be started. John bids out all his work, selecting the lowest bidder for each job function without regard to their experience or commitment to quality. Some of the low bidders realize after they have secured the job that they can’t make any money so they rush to complete the job, cutting corners wherever they can. What his potential clients don’t understand is the poor quality of the materials he uses, the design flaws that exist in many of his homes and the shoddy labor all lead to an unhappy homeowner and poor resale value. Unfortunately, they are attracted by the idea of getting their first home or a larger home at a really attractive price. Sam has found competing with John getting increasingly harder. More and more clients are being lured away by John’s heavy advertising focused on price and the ease of doing business. Sam is still able to find buyers who want personalized design and a quality product but their numbers are dwindling. The younger buyers just coming into the market, as well as young families buying up are attracted to the low price and the speed John offers. They don’t

Jamie Deapo is AVP of Membership & Member Programs for IIABNY and is an approved CE instructor in New York. Prior to being with IIABNY, he was an independent agent in the Syracuse area for 15 years. Jamie started his career in 1972 working for insurance carriers, and he has held various underwriting and marketing positions with several national as well as regional companies. He is a past president of the Independent Insurance Agents of Central New York and served on the board of directors of IIABNY.

realize the error in their decision sometimes until it’s too late. To further add insult to injury, Sam’s suppliers see how much product John is buying from his supplier. They feel their current relationship with Sam is limiting their growth and they believe John’s supplier is gaining market share that would be coming to them if it weren’t for their having to share Sam’s business with other suppliers. Several of them have toyed with the idea of cutting Sam out and going direct to consumers by creating their own home building division that uses their materials and deals directly with the home buyer. The fallacy in that is that the suppliers don’t really understand how Sam provides the quality of home he does on the slim margins he has to work with. Those that have tried have been unsuccessful and ultimately realize their value is in providing the building materials but not in designing and building the customized house. The reason John and his supplier are successful is they work as one unit, they are committed to selling price over value CONTINUED ON PAGE 33

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[ ON MY RADAR ]

BA R RY Z A L M A

Coverage for Consequential Property Losses Claim for Coverage for Consequential Property Losses The original version of the California Code of Regulations, Section 2695.9. Additional Standards Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage provided: (a) When a loss requires repair or replacement of an item or part, (b) any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss…. (d) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance; (e) This is the “line of sight” rule. It has been replaced with the following: (a) When a residential or commercial property insurance policy provides for the adjustment and settlement of first party losses based on replacement cost, the following standards apply: (1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible. (2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance. By taking out the “line of sight” wording, the state of California made the requirement broader by using language that requires the insurer to “conform to a reasonably uniform appearance” which is subjective and will require the insurer to be more generous in its payments. Most states apply the “line of sight rule” or the require28 February 8, 2016 / INSURANCE ADVOCATE

ment that settlement provides a reasonably uniform appearance. With or without the Regulation like that imposed by the state of California, litigation often results. Such was the case in Great American Insurance Company of New York v. The Towers of Quayside No. 4 Condominium Association, Slip Copy, 2015 WL 6773870 (S.D.Fla., 11/05/2015) where the District Court for the Southern District of Florida was called upon to deal with damage to a 25-story condominium building who wanted replacement of both damaged and undamaged portions of the building to allow all 25 floors to be aesthetically the same. Great American moved for Summary Judgment. BACKGROUND Great American issued Quayside a property insurance policy that provided first-party property insurance coverage for the premises located at 4000 Towerside Terrace, Miami, Florida 33038, which includes a condominium building that is the subject of this action. A release of water from a broken valve on an air conditioning unit in the building caused water damage to the drywall, carpeting, baseboards, insulation, and wallpaper in the east hallways of the eleventh floor and the floors below. Floors three through twenty-five of the building have a uniform appearance by design with respect to the carpet, wallpaper, and woodwork in the common area hallways. The carpeted east hallways of the building are separated from the carpeted west hallways by a tiled elevator landing on each floor. Quayside submitted a claim to Great American for loss and/or damage to the building arising from the release of water, including loss and/or damage to drywall, carpeting, baseboards, insulation, and wallpaper of the east hallways of the eleventh floor and floors below. Great American paid Quayside a total of $170,291.84 for the damage to the east hallways of the eleventh floor and the floors below. Quayside asserts that this amount does not fully compensate it for the direct physical loss caused by the water damage.

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.

Quayside sought coverage to repair or replace undamaged carpeting, wallpaper, baseboards, and woodwork in 1) the west hallways and elevator landings of the eleventh floor and floors below and 2) floors twelve through twenty-five. Quayside con-

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tends it is entitled to repair or replacement of these undamaged components because 1) it will otherwise not be possible to achieve aesthetic uniformity between the new carpeting, wallpaper, baseboards, and woodwork installed in the area that suffered water damage and the rest of the building and 2) the loss of aesthetic uniformity devalues the building and constitutes a loss to the building. Great American disputes this position, and informed Quayside that no coverage is available for repair or replacement of building components that were not physically damaged. THE POLICY The policy’s Difference in Conditions (DIC) Coverage Form provides: “We will pay for your ‘loss’ to Covered Property from a Covered Cause of Loss.” The DIC Declarations form provides: “DIC Direct Physical ‘Loss’ The most we will pay for direct physical ‘loss’ from a Covered Cause of Loss … is … [the limits of insurance set forth in the policy.]” As amended by an endorsement, the policy defines “Covered Cause of Loss” as “direct physical loss” to Covered Property, except those causes of “loss” listed in the exclusions. Through its Specified Cause of Loss

Form, the policy specifically excludes coverage for consequential loss, which it defines as “Delay, loss of use, loss of market, or any other consequential loss.” DISCUSSION The policy plainly only provides coverage for “direct physical loss,” specifically excludes coverage for consequential loss, and makes no mention of “matching” or “aesthetic uniformity” at all. While the Court concluded that coverage for matching, for the purpose of achieving aesthetic uniformity, is appropriate where repairs concern “any continuous run of an item or adjoining area” for materials such as wallpaper, baseboards, woodwork, and carpeting, it is plain that matching is not otherwise required under the policy. To hold otherwise would do violence to either the parties’ mutual duties of good faith or the plain terms of the policy. Accordingly, the Court concluded that Great American is entitled to a declaration that it has no obligation to provide coverage to replace: 1) undamaged components on floors twelve through twenty-five or 2) undamaged carpeting in the west hallways of floors three through eleven.

However, as it is unclear whether the wallpaper, baseboards, and woodwork on floors three through eleven form a continuous run from one end of the building to the other, or whether these components are separated from each other in the same manner the carpeting in the east and west hallways is separated by the central elevator lobby on each floor, Great American has failed to establish it is entitled to summary judgment with respect to whether it must provide “matching” coverage for these components. That determination is left to the presentation of further evidence. ZALMA OPINION First party property insurance is designed to indemnify the insured for losses incurred. It is not a means of remodeling and making new a 25-story condominium structure. Although the lack of a complete match of materials throughout the structure might not be aesthetically perfect, the contract did not promise to pay for both direct and consequential losses. The District Court refused, therefore, to rewrite the policy. It followed the “line of sight rule” or the need to provide a reasonably uniform appearance codified by California.[IA]

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[ COURTSIDE ]

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

Can Slip and Fall on Alleged “Old Ice” Defeat Summary Judgment Motion?

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.

Burniston v Ranric Enters. Corp. uIn an action to recover damages for personal injuries, etc., the defendant appeals from an order of the Supreme Court, Putnam County (Lubell, J.), dated September 16, 2014, which denied its motion for summary judgment dismissing the complaint. ORDERED that the order is affirmed, with costs. The plaintiff Thomas Burniston alleged that on January 7, 2009, at approximately 7:30 a.m., he slipped and fell due to an accumulation of snow and ice in a parking lot owned by the defendant. “A property owner will be held liable for a slip-and-fall accident involving snow and ice on its property only when it created the dangerous condition which caused the

The “Storm In Progress” rule holds that a property owner may not be liable for a slip and fall accident when rain, snow or ice is falling at the time of the accident, or that not enough time elapsed between the end of the storm and the accident in order for the defendant to have cleared the sidewalk. But where a plaintiff can demonstrate that the ice he slipped on was from a previous storm, he may defeat a summary judgment motion. — LNR

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[ COURTSIDE ] accident or had actual or constructive notice of its existence” (Haberman v Meyer, 120 AD3d 1301, 1301, quoting Cuillo v Fairﬁeld Prop. Servs., L.P., 112 AD3d 777, 778; see Anderson v Landmark at Eastview, Inc., 121 AD3d 751; Cruz v Rampersad, 110 AD3d 669, 669; Olivieri v GM Realty Co., LLC, 37 AD3d 569). “Under the socalled ‘storm in progress’ rule, a property owner will not be held responsible for accidents occurring as a result of the accumulation of snow and/or ice on its premises until an adequate period of time has passed following the cessation of the storm to allow the owner an opportunity to ameliorate the hazards caused by the storm” (Marchese v Skenderi, 51 AD3d 642, 642; see Solazzo v New York City Tr. Auth., 6 NY3d 734; Anderson v Landmark at Eastview, Inc., 129 AD3d 751; McCurdy v KYMA Holdings, LLC., 109 AD3d 799; Smith v Christ’s First Presbyt. Church of Hempstead, 93 AD3d 839, 840). The evidence submitted by the defendant in support of its motion for summary judgment, including certified climatological data, a report from the plaintiffs’ own expert meteorologist, and the transcripts of the deposition testimony of the parties, demonstrated, prima facie, that a storm was in progress at the time of the subject accident (see Talamas v Metropolitan Transp. Auth., 120 AD3d 1333; Meyers v Big Six Towers, Inc., 85 AD3d 877; Alers v La Bonne Vie Org., 54 AD3d 698; Skouras v New York City Tr. Auth., 48 AD3d 547). The plaintiffs do not contend otherwise. Accordingly, the burden shifted to the plaintiffs to raise a triable issue of fact as to whether the injured plaintiff ’s fall was caused by something other than precipitation from the storm in progress (see Meyers v Big Six Towers, Inc., 85 AD3d at 877878; Alers v La Bonne Vie Org., 54 AD3d at 698). In order to do so, the plaintiffs were “required to raise a triable issue of fact as to whether the accident was caused by a slippery condition at the location where the injured plaintiff fell that existed prior to the storm, as opposed to precipitation from the storm in progress, and that the defendant had actual or constructive notice of the preexisting condition” (Meyers v Big Six Towers, Inc., 85 AD3d at 878). The plaintiffs raised a triable issue of fact in this regard. The evidence relied upon by the plaintiffs in opposition to the defendant’s motion, which included the report of their expert meteorologist, certified climatolog-

ical data, and the affidavits of the injured plaintiff and two nonparty witnesses, raised a triable issue of fact as to whether the injured plaintiff slipped and fell on old snow and ice that was the product of a prior storm, as opposed to precipitation from the storm in progress, and as to whether the defendant had constructive notice of the preexisting condition (cf. Talamas v Metropolitan Transp. Auth., 120 AD3d at 1333; Jenkins v Rising Dev.-BPS, LLC, 105 AD3d 568; Meyers v Big Six Towers, Inc., 85 AD3d at 877; Alers v La Bonne Vie Org., 54 AD3d at 699). Accordingly, the Supreme Court properly denied the defendant’s motion for summary judgment.[IA] 2015 NY Slip Op 09395 Decided on December 23, 2015 Appellate Division, Second Department

ON THE LEVEL

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and they will risk their customer’s security by offering a poorly built product disguised as quality. The truth of the matter is that if Sam’s suppliers would quit creating roadblocks to Sam’s easy and immediate access to pricing and delivery he could cut costs, close more deals and increase sales for all the suppliers offering a competitively priced quality product. With that cooperation from his suppliers, Sam would invest more in advertising and education directed at exposing the hidden problems consumers will experience by being fooled into choosing price over quality and value. His employees are all very skilled at highlighting the long term value and security their product offers. With the support of their suppliers to offer immediate pricing and instant product delivery, Sam and his staff can increase their market penetration which will result in increased growth and profit for their suppliers. The moral of the story is that being committed to providing quality and value in the product you offer is most important. When business partners work together to help each other, they both grow and profit. Greed coupled with bad advice and sales tactics put many people at risk. Consumers will always choose quality and value provided by a business that cares when they are aware of all the facts.[IA]

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[ GUEST OPINION ]

G . K E I T H SM I T H , M . D.

“Repeal and Replace”? No Thanks uRepublicans are being urged to “repeal and replace” Obamacare (the socalled Affordable Care Act). No thanks. If you think O’Connellcare will be better than Obamacare, I would ask you to think again. If we are unlucky enough to experience the Republican version of Obamacare, I predict we’ll soon be longing for these last dying days of Obamacare, a time during which hope for a break from D.C. central health planning seemed realistic. If you reside on the left end of the political spectrum, you would be wrong to think I am a fan of the Unaffordable (Unavailable) Care Act. If you are on the right end, you would be correct to think I believe the Republicans are no better than Democrats at planning people’s lives for them. Central planning, donning whatever stripes, never works as advertised. How about “repeal and repeal”? And keep on repealing. Expecting great things from O’Connellcare is akin to expecting a different outcome when offering gin rather than vodka to an alcoholic. Perhaps it is time to just admit that we all have a problem, always being naively drawn to the next political messiah who promises a new program to deliver us from the disaster created by the last government program. Now before you dismiss me for condemning a Republican replacement for Obamacare even before it is written, consider that every major intervention by the federal government in the economy has resulted in wild and unbelievable taxpayer-funded profits for the corporate crony insiders. While many cheer the regulators that are going to bring the evil corporations to their knees, I would argue that these regulations (that only the industry giants can afford) are designed and implemented to crush the underdogs and upstarts and are invariably written by the beneficiaries of this game. This leads to the predictable industry consolidation that ratchets up the cronies’ market share. When will we finally acknowledge the revolving career door, through which head regulators of countless federal agencies walk to rule the corporate giants they had been regulating just the day before? 34 February 8, 2016 / INSURANCE ADVOCATE

I don’t need to see O’Connellcare to know that it is more of the same and will be designed with the same results and goals in mind. Facing the possibility of losing their new and direct access to taxpayer loot,

How many insurance companies were there prior to Obamacare? How many are there now?

the cronies will predictably pay (and Republican legislators will happily accept) a ransom to maintain the current scam during the coming O’Connellcare shakedown. Think I am too cynical? How many insurance companies were there prior to Obamacare? How many are there now? How do the stock prices of those remaining compare to the time prior to Obamacare’s passage? After all, how would you like to sell a product or service, the purchase of which was mandatory? Think you would make money? Let’s not limit our focus to the insurance companies. Look at the shrinking number of publicly traded hospital stocks or gains of the health information technology company stocks. Think the Republican replacement will attack these strongholds? How about replacing Obamacare with freedom? The good news is that free from any influence or input from D.C., freemarket and price-transparent solutions are proliferating all over the U.S., a phenomenon that has “good guy” industry insiders as excited about the future of medicine as they have ever been. These market-based alternatives are predictably bringing higher quality and lower prices to patients, exactly what you would expect from an industry that is beginning to embrace the same market discipline every other industry must endure. Skeptics may claim that the free market has failed in medicine. Other than the alternatives mentioned above (and Lasik

G. Keith Smith, M.D. is a board certified anesthesiologist in private practice since 1990. In 1997, he co-founded The Surgery Center of Oklahoma, an outpatient surgery center in Oklahoma City, Oklahoma, owned by 40 of the top physicians and surgeons in central Oklahoma. Dr. Smith serves as the medical director, CEO and managing partner while maintaining an active anesthesia practice. He is a co-founder of The Free Market Medical Association. In 2009, Dr. Smith launched a website displaying all-inclusive pricing for various surgical procedures, a move that has gained him and the facility national and even international attention. Many Canadians and uninsured Americans have been treated at his facility, taking advantage of the low and transparent pricing available. Operation of this free market medical practice, arguably the only one of its kind in the U.S., has gained the endorsement of policymakers and legislators nationally. More and more self-funded insurance plans are taking advantage of Dr. Smith’s pricing model, resulting in significant savings to their employee health plans. His hope is for as many facilities as possible to adopt a transparent pricing model, a move he believes will lower costs for all and improve quality of care.

and plastic surgery), the free market has been absent in the medical marketplace, thwarted at every turn and opportunity by those who have profited from the cartellike arrangement that so accurately characterizes the government-enabled U.S. “healthcare delivery system.” Healthcare cronyism has few industry equivalents, and the predictable disruption of the entire medical market for the benefit of a few has been a deadly and bankrupting experience for many individuals. Individual health and freedom will always remain far too important to trust to the countless intrigues of the federal government and its latest program.[IA]

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