February 24, 2014 by C Acunto

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VOLUME 125, NUMBER 4 / February 24, 2014

Serving: New York, New Jersey, Connecticut, Pennsylvania and

A CINN Group, Inc. Publication

Washington D.C.

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Contents

February 24, 2014 | volume 125 number 4

[COVER STORY ]

[ AD FEATURES]

MSO: The Danger of Carbon Monoxide Exposure

LICONY: The Life Insurance Industry: A Longstanding Employer, A Noble Business

American Transit

SPILLOVER: The Affordable Care Act and Property and Casualty Insurance

[FEATURES] 4

Foreword: Consolidating Producer Associations: One or Two or What? Steve Acunto, Publisher

Insight: Show Us the Numbers! Peter H. Bickford

In the Associations: Big “I” Testiﬁes Before Congress on Modernizing Insurance Regulation

M&A Update: Brown & Brown, Inc. to Acquire Uniondale Based Wright Insurance Group, LLC

On the Level: New Threats in the 21st Century N. Stephen Ruchman, CPA

On My Radar: Policy Must Be Read as A Whole Barry Zalma

Courtside: New York Court of Appeals Rejects Insurance Company’s Use of Limitations Period “That Renders Coverage Valueless” Barry Zalma

Classiﬁeds

Looking Back: February 1989

8 www.insurance-advocate.com

26 Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / February 24, 2014 3

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[ EDITORIAL ]

Steve Acunto

Consolidating Producer Associations: One or Two… or What?

VOLUME 125, NUMBER 3 FEBRUARY 24, 2014

or as long as I can remember, agents and brokers have disagreed over whether or not the two major producer associations in New York (IIABNY and PIANY) should merge or consolidate – you pick the combination wording du jour. In recent issues, one of our columnists, Jamie Deapo created a good give and take on the topic. In the past there have been other such discourses. There are many opinions on this on both sides of the question and there are good reasons, pro and con, addressing the establishment of one association or the sustaining of two. There are some substantial structural issues that could interrupt a plan of consolidation; there are two distinct histories and, some say, two different “corporate cultures.” There are some simple answers and some difficult ones. Among the easy ones, it is obvious that there is an economy of scale in one association versus two which might result in agents having to pay less for some services and possibly for dues; the counter, of course, is that there would be no real competition for agents’ dues, E & O dollars and all the rest if the associations were consolidated. There is the question of whether or not agents would do better to present one coherent voice to the legislature on key issues or multiple points of view. The pro and con here is not difficult to outline: the obvious argument is that with two associations there will be differences and seeming disharmony, letting legislators have their pick or simply stop short of any decision; the counter is that the differences may be helpful since more than one point of view is expressed; thus, the two, combined in some fashion would hammer out differences in an internal caucus, then present a plan to legislators. A corollary advantage ascribed to consolidation is presented as “strength in numbers” in the face of any regulatory or legislative appeal; the counter to this is, with two associations, there is a perception that, since there is more than one group to be appeased, unanimity among the two is a strong argument. And the list goes on and on. There is a larger question left out that I will present later, below. For some time, I held the opinion that a consolidation of the two associations would be a worthwhile thing for agents and brokers and lauded the CIBGNY’s affiliation with PIANY and the other combinations affecting both associations. In these pages, an argument pro consolidation was presented in the late 1990’s. Since then, I have tempered my personal view, believing that the matter of diminishing independent agent population will decide it eventually. Yet, today I believe that it is good to have two agents associations for the same reason that, parallel to what an independent agent would argue to prospective clients, having a choice offered by the ability to shop for coverage through a more-than-onecompany agent is preferable to no choice. Further, there are identifiable differences in geographic concentrations, activities agendas, approaches to governance, products, sub groups, and, of course, in legislative strengths in Albany and Washington. There are two sets of officers and directors, several corporations, probably differences in holdings and overall wealth, two sets of very capable staffs some of whom would sadly be attritional to effect an economy of scale, continued on page 6

4 February 24, 2014 / INSURANCE ADVOCATE

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Raﬁ Michael Loguercio Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x126 circulation@cinn.com PUBLISHED BY CINN Group, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN G R O U P, I N C .

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 21 times a year, and once a month in July, August and December by CINN Worldwide, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing ofﬁces. POSTMASTER Send address changes to Insurance Advocate®, PO Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN Worldwide, Inc. and is copyrighted 2013. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

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[ FORE WORD ] continued from page 4

there are competing loyalties down deep in many agents whose past service and friendships tie them to one or the other and so on and on. There is merit in the two-association structure, in my view, and yet an inevitability of one, possibly when the next round of consolidations reduces the number of buyers and the time they will give to volunteering. All that said, however, I do believe strongly that there are areas of common cooperation now that would potentially serve agents and brokers well, if efforts were consolidated. These areas of cooperation are educational programming, market structures that could be shared by the associations such as healthcare exchanges, some joint advertising to consumers (“Buy from Your Local Independent, Professional Agent”), an employment effort to find and train employees for the agency system, and there are other such cooperative endeavors or joint ventures that might between the two. The leaders of each get there by being good at business and at communicating, so this agenda might be far brighter than what I have suggested. Most important, I do believe that disparities on the two associations’ legislative positions should be argued in private and presented in public with unanimity. There are many association precedents in other fields where turf is out and tough is in. Some believe that there is the possibility that associations underline differences so that they justify separation. I do not agree with this, as we see even last year in the legislative views of the two, where differences were quite real. I believe that the two associations do well for the agent by remaining separate, but would do even better by consolidating certain areas almost fully. But there is one joint effort that is worth immediate research and attack. It is the larger question to which I

There is merit in the two-association structure, in my view, and yet an inevitability of one, possibly when the next round of consolidations reduces the number of buyers and the time they will give to volunteering. All that said, however, I do believe strongly that there are areas of common cooperation now that would potentially serve agents and brokers well, if efforts were consolidated.

referred above. The agency system itself is doomed unless those who represent it grow it organically, as M & A continues to work its reducing power. There is another group of brokers in the mix: the emerging ethnic, inner city broker in the five boroughs of New York and in other large municipalities who is underserved by both associations, despite their efforts to attract and sustain these brokers. Many of them were born abroad and come here with English as their second language. They are an underserved minority who might wind up as a third agents group as the CIBGNY did after World War II and as the CAIA has become today. The numbers are startling. New York is home to the only Indian owned insurer in the US, for example, whose clients and introducing producers are part of a large ethnic presence in Brooklyn, Queens, New Jersey and Philadelphia. In Northern New Jersey, Queens and parts of Nassau County you will find a sub set of licensed brokers of Korean background. There are non-native licensees from better than, at least, 60 countries in New York. Look at a map and count them. The list goes on and on of ethnic groups who make it in the City and move to the suburbs and become the powerhouse agencies of the next 100 years. Perhaps a joint task force to save a place for the independent agent in the economy of the future would

begin by focusing on this growing set of brokers for starters and do a long term service for the industry and for each of the two associations. Involving new entrants would also provide a talent and expansion pool for members of both. Oh, and they open new client markets, for sure. This signed editorial is more of a personal expression than I am typically use in editorials per se, as contrasted to my column, which is kind of a “Page Six” approach to this serious business. This is a personal expression of opinion from a student of this topic for many years, but may be full of holes, so I invite you wholeheartedly to grace our pages with your views, which we will surely seek to print. SA

There is another group of brokers in the mix: the emerging ethnic, inner city broker in the five boroughs of New York and in other large municipalities who is underserved by both associations, despite their efforts to attract and sustain these brokers.

6 February 24, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ]

By Peter H. Bickford

Show Us the Numbers!

h, Spring! The long, torturous winter with its seemingly endless cold and snow is behind us and we can look forward to warmer days, greening trees, blooming flowers and the beginning of Derek Jeter’s retirement tour. Spring is also reporting season for the insurance industry. Just about everyone

risks in a timely and meaningful manner. Until a new class was added in 2011, there were two classes of risks that could be written in the Free Trade Zone: risks with an annual premium in excess of $100,000, and those “special” or hard-toplace risks listed by regulation. According to the 2010 Annual Report of the

We do not know why the DFS pursued eliminating the onerous certificate condition, or why it did not go further in improving the utility of the law and regulation. We do know, however, that the DFS routinely collects data that would show the volume and scope of writings in the Free Trade Zone including the new class. Peter H. Bickford

in the industry is engaged in preparing and issuing their annual reports and other regulatory filings: everyone, that is, except for our overseers at the NY Department of Financial Services. The DFS reporting season does not occur until the “dog days” of summer when, of course, the information is mostly stale and — because of the DFS’s incredible shrinking reports — of limited value. To appreciate the significance of the DFS’s failure to provide complete and timely information as a matter of course, let’s take a look at one small part of our business: special risk insurance. Since 1978 New York insurance consumers and domestic companies have benefited from a great little article of the insurance law, Article 63, with the sterile moniker “Special Risks; Filing Exemption” but more commonly referred to as the “Free Trade Zone.” Under Article 63, domestic NY insurers that purchase an annual special risk license for a nominal fee can insure certain hard to place or other risks that would normally be written by non-admitted insurers in the surplus lines markets. The key is the exemption from prior rate and form filing requirements that would otherwise prevent a domestic insurer from responding to these “special” 8 February 24, 2014 / INSURANCE ADVOCATE

Insurance Department – the last time such information was publicly available — the premiums written in the Free Trade Zone for the year 2009 was about $1.8 billion, roughly the same as the premiums on New York risks written in the surplus lines market. In response to the passage in 2010 of the Non Admitted and Reinsurance Reform Act (part of the Federal DoddFrank legislation), a third class of risks was added to the Free Trade Zone: “large commercial insureds” employing or retaining a professional risk manager and with a modest $25,000 premium threshold. The legislation and the subsequent regulations, however, included some conditions that seemed counter-intuitive to the flexibility intended by the law. For instance, the law required an insurer of a risk under the new class to file a certificate of insurance “evidencing the existence and terms of the policy within one business day of binding the insurance coverage,” and to file any policy form “for informational purposes” within three business days of first use, or not later than 60 days after inception. Conditions like these raised the concern of whether the new class would actually be a beneficial addition for insurance buyers and writers.

Possibly in recognition of the stifling effect of these conditions, the legislation was amended last year to eliminate the most onerous one: the requirement for filing a certificate within 24-hours of binding. The legislation and the regulation implementing this change were not accompanied by any press releases or fanfare. In fact, the amended regulation was considered by the DFS to be “a consensus rulemaking” exempt from filing a Regulatory Impact Statement and other normally required studies, and became effective upon publication in the State Register in December 2013. We do not know why the DFS pursued eliminating the onerous certificate condition, or why it did not go further in improving the utility of the law and regulation. We do know, however, that the DFS routinely collects data that would show the volume and scope of writings in the Free Trade Zone including the new class. Every year the DFS (and the Insurance Department before it) requires all licensed insurers to complete an insurance availability survey, a detailed Excel-based form designed specifically to collect data “to determine the state of markets for difficult-to-place or complex insurance coverages.” As stated in the December 2013 cover letter to licensees for the 2013 survey: “We rely on insurers’ responses to the annual survey to obtain meaningful and timely information on insurance market conditions and trends.” The survey includes specific schedules on each class of Free Trade Zone business and the lines of business within each class. Because the survey is in electronic format, the DFS clearly has the ability to determine from the survey results whether or not the new class is expanding availability for New York insureds. Confirming that the DFS actually does so, however, is a different matter! For some inexplicable reason — the DFS’s “observations of an ever changing marketplace” based on the data collected from these annual surveys are not publicly available. The logical place to make such information available would be through a special Free Trade Zone report or through

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[ INSIGHT ] What is the purpose of collecting – in electronic format – the detailed information on the writings by class and by line of business if it is not going to be consolidated into a summary schedule? How else is the DFS to achieve the stated purpose of the annual surveys to “obtain meaningful and timely information on insurance market conditions and trends”?

the DFS annual report. Over the past two years, however, the annual report has been so diminished and its due date pushed back to the point of becoming largely irrelevant as a meaningful resource. In these last two DFS annual reports (for the years 2011 and 2012) there is no mention of the Free Trade Zone at all. Likewise, based on unsuccessful Freedom of Information Law (FOIL) requests, it does not appear that a summary report has even been prepared from the annual insurance availability surveys. In response to my latest attempt at obtaining a summary of special risk placements by class and by line of business, while not denied, I was advised that: “The information that you request is contained in many different - and a voluminous number of - electronic records. It will take several weeks, if not months, to pull the information you seek into a usable record.” But why is such a summary not being prepared as a matter of course? What is the purpose of collecting – in electronic format – the detailed information on the writings by class and by line of business if it is not going to be consolidated into a summary schedule? How else is the DFS to achieve the stated purpose of the annual surveys to “obtain meaningful and timely information on insurance market conditions and trends”? What was the basis for determining that the Free Trade Zone regulation needed amending? What kind of volume has been written in the new class? Will the change in the regulation be enough to make the new class a meaningful addition to the law? And if this information is already available to the DFS, why not share it with the industry? What is there to hide? Why not show us the Numbers? [IA]

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[ IN THE ASSOCIATIONS ]

Big “I” Testifies Before Congress on Modernizing Insurance Regulation Government Affairs Committee chair represents association before House Financial Services Committee.

ASHINGTON, D.C. The Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) testified before the U.S. House of Representatives Committee on Financial Services Subcommittee on Housing and Insurance at a hearing titled, “The Federal Insurance Office’s Report on Modernizing Insurance Regulation.” Jon Jensen, chairman of the Big “I” government affairs committee, represented the association which was the only group with a witness giving the perspective of the main street insurance agent, according to the Big I. Jensen is president of Correll Insurance Group, an independent insurance agency headquartered in Spartanburg, S.C. In late December, the Federal Insurance Office (FIO) released the long-overdue report on “Ways to Modernize and Improve the System of Insurance Regulation in the United States.” The report, originally due in January 2012, was mandated by the DoddFrank Wall Street Reform Act of 2010

“The recommendations offered in this report are, for the most part, modest in scope and suggest that the insurance regulatory system is functioning at a high level and does not require a significant overhaul or restructuring.” - Jon Jensen, Chairman, Big “I” Government Affairs Committee

(Dodd-Frank) which created FIO. The report’s findings were discussed by two witness panels during the hearing. The first was a government panel that included Michael McRaith, Federal Insurance Office director, and Thomas Leonardi, Connecticut Insurance Department commissioner. The second panel included the

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Big “I” and other industry representatives. “The recommendations offered in this report are, for the most part, modest in scope and suggest that the insurance regulatory system is functioning at a high level and does not require a significant overhaul or restructuring,” said Jensen. “IIABA agrees strongly with several of these recommendations (including FIO’s call for the adoption of the much-discussed NARAB II producer licensing reform legislation) and is skeptical about others.” Jensen presented the association’s position in agreement with the FIO report that insurance regulation could be improved and modernized in certain areas, but that any federal action should be targeted and limited with day-to-day regulation left in the in the hands of state officials. “The report recommends the use of targeted and limited federal intervention to address problems that the states are unable to resolve on their own,” continued Jensen. “The report notes that federal action of this kind should be limited to those instances where demonstrated deficiencies exist, where there is a national interest in addressing a particular problem, and where state officials are unable – as a result of practical hurdles or collective action challenges – to resolve the challenges themselves.” The FIO report endorsed the need for Congress to enact the National Association of Registered Agents and Brokers (NARAB II) legislation. The association has lobbied for the bill for several years and is pleased that it was recently passed by the Senate. Jensen said, “Perhaps most notably, FIO proposes a specific solution to the challenges and problems that persist in the licensing arena – the enactment of the National Association of Registered Agents and Brokers Reform Act (or “NARAB II”)..…The NARAB II proposal is a textbook example of how targeted action at the federal level can enhance and improve state insurance regulation.”[IA]

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[ M&A UPDATE ]

Brown & Brown, Inc. to Acquire Uniondale Based Wright Insurance Group, LLC

AYTONA BEACH, FL and TAMPA, FL—J. Powell Brown, Chief Executive Officer and President of Brown & Brown, Inc. (NYSE: BRO), announced that Brown & Brown, Inc. has entered into a merger agreement to acquire The Wright Insurance Group, LLC (“Wright”). This transaction brings to Brown & Brown a substantial presence in the national flood insurance program (NFIP) and a premier service provider for governmentsponsored insurance programs and proprietary national and regional programs (collectively, the “Programs Business”) with 2013 net adjusted revenues of $114 million (adjusted for certain divestitures to occur prior to closing). The merger allows for growth initiatives that will concentrate on leveraging Wright’s market expertise, tenured client relationships and infrastructure and joins in one organization two highly compatible sales and service cultures. As part of this transaction Wright’s current operational leadership team will remain in place and will continue to operate from offices in Uniondale, Albany, New York and St. Petersburg, Florida. Wright’s public entity/program services/specialty operations in New York will report to Tony Grippa (Regional Vice President) and Wright’s flood program operations will report to Chris Walker (Regional Executive Vice President). All of Wright’s operations will become part of Brown & Brown’s National Programs Division. According to the Company, pro-forma projected net revenues of $121 million and projected EBITDA of $58.8 million for the first twelve months of operation of the Wright companies after closing.

The merger allows for growth initiatives that will concentrate on leveraging Wright’s market expertise, tenured client relationships and infrastructure and joins in one organization two highly compatible sales and service cultures. Estimated earnings per share growth of $.09 to $.10 is expected in the next fiscal year. Powell Brown stated, “Wright Insurance Group has an enviable history of solid growth and impeccable client service. With the support of its lead equity partner, Aquiline Capital Partners, Wright added a unique asset with a national position in the Wright WYO flood program. We look forward to the opportunities ahead combining the skills and expertise of our new Brown & Brown teammates from Wright with the Brown & Brown platform to continue to serve Wright’s valued client base.” Jeff Greenberg, Chief Executive of Aquiline said, “We have enjoyed working with Brown & Brown on this transaction and admire the firm and its leadership. They are an ideal owner of Wright and share our positive outlook for the business and appreciation for the quality of the existing management team. We are pleased the employees and clients of Wright will be in such capable hands.” The total net consideration to be paid for the ownership interests of Wright is $602.5 million. This amount is comprised of cash payments of $587.5 million for the

Programs Business, $7.5 million for Wright National Flood Insurance Company (“WNFIC”) and $7.5 million for WNFIC statutory surplus. Brown & Brown anticipates the transaction will yield future tax benefits in the amount of $108 million. In addition, contingent consideration of up to $37.5 million may be payable if Wright completes certain agreed upon acquisitions prior to closing. The transaction is expected to close in April of 2014 and is subject to customary closing conditions, including Hart-Scott-Rondino approval and related regulatory approvals. The transaction will be a cash acquisition (utilizing free cash and existing debt sources) and is not subject to financing conditions. The total consideration does not reflect any one-time transaction expenses. Brown & Brown, Inc., through its subsidiaries, offers a broad range of insurance and reinsurance products and related services. Additionally, certain Brown & Brown subsidiaries offer a variety of risk management, third-party administration, and other services. Serving business, public entity, individual, trade and professional association clients nationwide, Brown & Brown is ranked by Business Insurance magazine as the United States’ seventh largest independent insurance intermediary. The Wright Insurance Group is a feebased specialty insurance services company that underwrites and administers complex property and casualty risks through three distinct segments: (i) Wright Flood, (ii) program services servicing reciprocals and selfinsured groups and (iii) managing general agent services. Brown & Brown’s web address is www.bbinsurance.com. Wright’s current operations can be reviewed at Wright’s web address located at www.wrightinsurance.com/companies.[IA]

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[ ON TH E LEVEL ]

By N. Stephen Ruchman, CPA

New Threats in the 21st Century

t was dramatic to watch the chief executives of Target and Neiman Marcus testify this month in front of the Senate Judiciary Committee about recent data hackings at their stores during the holiday season. But as I caught parts of the hearings, I wondered if the size of these problems and the companies involved kept agents from

machines have memory chips, and I wonder who could access all of the client information, such as dates of birth and Social Security numbers and policy information we copy or scan into our systems if they were to fall into the wrong hands. How many times have we used our copier machines to copy our own personal infor-

I looked at him with disbelief, and told him he was endangering himself and his customers. Amazingly, my friend was unaware of shredding services that can come to his office to take care of this disposal in a secure way. being able to envision their own agency being hacked. N. Stephen Ruchman We all take things for granted. I remember several years ago, when a major insurance carrier, in its esteemed wisdom, decided to use insureds’ Social Security numbers as their policy numbers. I was among the agents who objected to this practice, but it fell on deaf ears. Our insureds felt uncomfortable and insisted that we move their policies to other companies because they didn’t want their information exposed. Perhaps other agents did what I did, because after a period of time, the carrier changed its policy and changed the way it identifies insureds. That was one of the worst violations of privacy I’ve ever seen in our industry and I’ve often wondered if any agents had legal problems as a result of it. Our world is becoming a minefield of data security dangers. And, agents should take a look at their own office, and their own insurance coverage, to make sure they and their customers’ information is protected. It’s not difficult to find unprotected data in your office—just look around. For example, we all have copiers and fax machines and as the time goes by, we purchase new equipment. Do we wonder what happens to these old machines? When I was leasing a copy machine, I asked the rep. what the company does with them and he told me they are either shipped overseas or simply reused. They are rarely destroyed. These 14 February 24, 2014 / INSURANCE ADVOCATE

mation such as taxes, mortgage information and stock certificates? If this machine were to be refurbished overseas, where we have seen high hacker activity, an agent could be faced with serious problems. Even bigger, if the agency’s customers’ information were breached. A couple of months ago, I stopped at a fellow agent and friend’s office. When I walked into his building (which he owns) I happened to see boxes of files sitting at the curb. I asked what they were doing there and he said they were old files he was throwing away. I looked at him with disbelief, and told him he was endangering himself and his customers. Amazingly, my friend was unaware of shredding services that can come to his office to take care of this disposal in a secure way. Agents, who don’t have a regular shredding program, should set one up. These services have shredding bins that look like a piece of furniture in your office and they will send shredding trucks to your location and make sure information is secured and destroyed properly. These days, all agents have some type of management system—do you know what protections your system administrator has in place to protect the information being put through it? Your management system IT team may tell you it has the best process to protect information—but consider what happened at Target. I have another agent friend whose agency’s data was hacked. The hacker con-

tacted him, threatening that if he didn’t pay the thief, he would sell his clients’ information. Some hackers encrypt the owner’s data and hold it hostage until a ransom is paid— known as the CryptoLocker threat. This type of extortion is surely going to grow. There are coverages for agencies to deal with potential data breach issues. Unfortunately, we agents are often like the shoemaker, whose children have no shoes. For scenarios discussed above, I know PIA offers members coverage for first-party expenses as well as third-party coverage for privacy and network security breaches. There is even an option to cover damages incurred by employees who misuse personal information obtained from your computer and office files. I know no agent wants to imagine the scenarios above. We’d like to think we can trust our employees, many of whom we consider family. But, as agents, we know such situations can, and have, surfaced. We see more and more are unthinkable cyber threats in the news every day: cyber-terrorism and extortion; even slander and liable have new homes in social media. We should all learn a lesson from Target and Neiman Marcus: Get your cyber-coverage today. Remember: No agency is too small to be a “Target.”[IA] N. Stephen Ruchman, CPIA, is a retired partner of B&B Coverage LLC. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and has sat on, or chaired, nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. A graduate of Michigan State University, with a major in insurance, Ruchman is past president of the Peninsula Counseling Center and a member and past president of the Rockville Centre Chamber of Commerce board of directors. He is division chair for the Insurance Division of the United Jewish Appeal and has served on the business advisory board of The First National Bank of Long Island. He can be reached via email at nsruchman@gmail.com.

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ADVERTORIAL

The Danger of Carbon Monoxide Exposure ACCIDENTAL CARBON MONOXIDE poisoning is responsible for over 430 deaths, 20,000 emergency room visits and 4000 hospitalizations per year. www.cdc.gov. These deaths and hospitalizations could be prevented with proper maintenance of appliances and equipment, along with installation of carbon monoxide detectors. Helping clients understand the hazards of carbon monoxide and the importance of properly maintained carbon monoxide detectors is another value-added service of the professional insurance agent. Although carbon monoxide issues are more frequently in the news during colder months, carbon monoxide poisoning is a year round hazard. The Hillsborough NJ fire marshal advises that the breath. Exposure Carbon monoxide over extended perifire department responds on average to ods or at high conpoisoning is one carbon monoxide centration levels realarm activation per sults in symptoms preventable. week. Carbon monoxthat become increasHelping clients ide is detected in about ingly more severe, inhalf the instances, with cluding confusion, understand the others being due to vomiting, impaired dead batteries or mal- dangers of exposure muscular coordinafunctioning alarms. tion, loss of conand how to avoid Carbon monoxide sciousness and death. tragedy is a sign of Some of these sympis a result of incomplete combustion. may be misthe true insurance toms Sources can be furtaken for the flu. The naces, space heaters, long term effect of professional. gas dryers and autocarbon monoxide exmobiles. Generators, posure is difficult to snow blowers, lawn tractors and other determine, but it is believed to include gas-powered tools and equipment can neurological problems. also pose a poisoning hazard. Such State laws usually require carbon equipment should be operated only in monoxide detectors only in residential well-ventilated areas, and not in an enoccupancies. However, carbon monoxclosed garage, shed or basement. Unide poisonings can happen anywhere. usually cold weather and high cost of Since 2007, there have been over two fuels sometimes leads people to use aldozen cases of teachers and students beternate methods, such as fireplaces and ing exposed to high levels of carbon charcoal grills, to heat their homes, inmonoxide. Only two states, Connecticut creasing the likelihood of a carbon and Maryland, require carbon monoxmonoxide poisoning event. ide detectors in schools. A carbon Initial symptoms of carbon monoxmonoxide leak left one dead and multiide poisoning include dizziness, fatigue, ple people hospitalized in a Long Island headache, nausea and shortness of restaurant in February 2014. This

prompted a proposal by New York legislators to require detectors in businesses, government buildings and schools. As with any safety practice, it is important to keep up with the latest information. Carbon monoxide detectors should be replaced every 5-7 years. Detectors may be battery operated, plug in or hard wired. Combination alarms detect both smoke and carbon monoxide. Some models show a display of carbon monoxide levels, including a record of the highest levels. Newer models are equipped with â&#x20AC;&#x153;end of lifeâ&#x20AC;? timers that alert the user when it is time to replace the detector. There have been a number of recalls of carbon monoxide detectors. Check www.cpsc.org for a list of recalls. Carbon monoxide poisoning is preventable. Helping clients understand the dangers of exposure and how to avoid tragedy is a sign of the true insurance professional.

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[ COVER ]

The Insurance Research Council is a division of the American Institute For Chartered Property Casualty Underwriters (The Institutes). The Institutes are affiliated with the CPCU Society, a community of credentialed insurance professionals who promote excellence through their technical expertise and ethical behavior and The Griffith Insurance Education Foundation, a not-for-profit educational organization that promotes the study and teaching of risk management and insurance. The IRC provides timely and reliable research to all parties involved in public policy issues affecting insurance companies and their customers. The IRC does not lobby or advocate legislative positions. It is supported by leading property-casualty insurance organizations.

16 February 24, 2014 / INSURANCE ADVOCATE

The property-casualty insurance industry is likely to become the target of signiďŹ cant additional cost-shifting by hospitals, physicians, and other medical providers responding to the cost-containment provisions of the Patient Protection and Affordable Care Act (ACA). The ACA dramatically alters healthcare markets and health insurance systems in the United States. Although the property-casualty insurance industry is not directly included or targeted by the act, it is not entirely immune to its effects. As a purchaser of healthcare services and as a participant in healthcare markets, the property-casualty industry ďŹ nds itself in a changed environment, where the medical providers with whom they engage and the claimants they serve are themselves confronted by major changes related to the ACA. Increased cost-shifting could have potentially signiďŹ cant and long-lasting consequences for property-casualty insurance. Cost-containment efforts by other public and private health insurance systems are likely to result in higher billings and higher utilization when property-casualty insurance claims are involved in the months and years ahead, as medical providers seek to offset lost revenue from health insurance sources. Strengthening the tools available to property-casualty insurers to address higher charges and higher utilization of medical services should be considered. The following chart summarizes our assessment of each potential pathway by which the act could affect the property-casualty industry.

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[ COVER ]

igned into law on March 23, 2010, the ACA was the most far-reaching and controversial piece of social legislation enacted since the creation of the federal Medicare program in 1965. The ACA was not the first legislative attempt since then to adopt sweeping changes to the nation’s healthcare and insurance system, though. A similar measure, the Health Security Act of 1993, included provisions to significantly expand health insurance coverage and access to healthcare services. Unlike the ACA, the 1993 legislation was defeated after months of divisive debate. Also unlike the ACA, the 1993 proposal included provisions directly targeting the property-casualty insurance industry. The most prominent provision would have combined the medical portion of workers compensation insurance coverage with general health insurance coverage, creating a so-called “24-hour” approach to health insurance. In contrast, the ACA does not generally apply to property-casualty insurance.1 However, by virtue of the ACA’s profound and wide-reaching changes in health insurance products and markets, in how medical providers are reimbursed, and in the financial incentives that influence the behavior of healthcare consumers and medical providers, property-casualty insurance will be affected in one or more possible ways. The objective of this analysis by the Insurance Research Council (IRC) is to identify some of the pathways by which property-casualty insurance may be affected by the ACA. The focus is on how the behavior of claimants and medical providers may change in response to the ACA. In this analysis, because of the uncertainties in predicting provider and claimant behavior and the complex interaction among the different provisions of the act, we are not attempting to estimate the cost impact of individual effects of the act or of the act as a whole. We do, however, provide our assessment of the likely direction and the potential magnitude of each effect.

Cost Shifting From Health Insurance Systems to PropertyCasualty Insurance Systems The ACA will likely prompt significant changes in the behavior of medical providers as new cost containment efforts and initiatives by public and private health insurers begin to affect providers financially.

The fragmented nature of healthcare markets and the uncoordinated manner in which prices for medical services are determined leaves some payers, including property-casualty insurers, particularly vulnerable to cost-shifting efforts by hospitals and other providers. To offset anticipated reductions in revenues from health insurance systems, medical providers may seek to increase revenues from other payers, such as property-casualty insurers, by seeking higher reimbursements from other payers and by increasing the volume and mix of services provided to patients covered by other payers. In addition to cost containment efforts already underway, the ACA includes several new initiatives and provisions aimed at controlling Medicare and Medicaid program costs: • Beginning in 2014, payments to hospitals for treatment provided to indigent patients are reduced by 75 percent. • Payments to Medicare Advantage plans have been revised and tied to fee-for service reimbursement levels. • Future payments to hospitals will be reduced for hospital readmissions of Medicare patients and for hospitalacquired conditions. • Affordable-care organizations were created with the express purpose of improving the quality and reducing the cost of medical care. • An Independent Payment Advisory Board was created to recommend ways to achieve reductions in Medicare spending. • Medicare will experiment with bundled payment approaches to provider reimbursement, replacing traditional fee-for-service reimbursement with a global fee that encompasses all the care associated with a specific medical condition. These and other initiatives will create ad-

ditional incentive for medical providers to shift costs to other revenue sources, including property-casualty insurance, to replace lost revenues from health insurance providers. Private passenger auto insurers are already prime targets for such cost-shifting behaviors, as reported in a 2010 IRC report examining hospital charges and diagnostic imaging costs for auto injury claims. IRC estimated that hospital cost shifting for auto liability claims in states with tort-based auto injury insurance systems resulted in $1.2 billion in excess charges in 2007.2 The total of cost-shifting in all property-casualty claims with medical expense is likely much higher.3 The fragmented nature of healthcare markets and the uncoordinated manner in which prices for medical services are determined leaves some payers, including property-casualty insurers, particularly vulnerable to cost-shifting efforts by hospitals and other providers. The prices that are charged and that are ultimately paid for medical services often are different, sometimes dramatically, across payers. Large health insurers, of which Medicare is the largest, are able to negotiate or impose lower prices or substantial discounts for medical services provided to plan participants. At the other extreme, individual, uninsured purchasers of healthcare services typically pay the highest prices with little or no discounts because of relatively weak bargaining positions. Other payers, including property-casualty insurers, are somewhere in the middle. The authority and ability of property-casualty insurers to negotiate reimbursement levels varies significantly across states. Medical fee schedules specifying the prices to be paid for medical services have been adopted by thirty-seven states for workers compensation and seven states for private passenger auto insurance. Even among the states with medical fee schedules, however, reimbursement levels vary greatly—from slightly above Medicare reimbursement rates to 200 percent or more of Medicare rates. Medical providers may also raise revenues by increasing the volume and number of services provided to patients. Insurance systems and programs with relatively weak utilization controls are especially vulnerable to such efforts. Property-casualty insurance often lacks the kind of precertification and concurrent utilization review controls that continued on page 18

INSURANCE ADVOCATE / February 24, 2014 17

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[ COVER ] continued from page 17

12in-

are frequently applied in public and private health insurance programs. This is especially true of automobile insurance, which typically relies on the application of “reasonable and necessary” standards to review and, if possible, question the appropriateness of treatment. Reasonable and necessary standards are often based more on historical practice styles in local medical communities than what clinical research indicates is appropriate treatment.4 Reasonable and necessary standards also are difficult to apply where third-party liability insurers often aren’t aware of the medical treatment being provided until after the fact. The ability of workers compensation insurers to monitor medical utilization and challenge inappropriate and excessive utilization is somewhat stronger in states that authorize insurer involvement in the management of claims and the medical treatment involved. To the extent the cost containment provisions of the ACA negatively affect medical provider revenue, then efforts by providers to increase revenue from other sources, including property-casualty insurance, should be expected. Most medical providers involved in the treatment of injuries covered by property-casualty insurance products are likely to be affected by the cost containment efforts of public and private health insurers. For this reason, we believe the impact of these changes could potentially have a significant long-term effect on property-casualty insurance claims experience and costs.

Claim Shifting From Health Insurance Systems to Property-Casualty Systems The cost shifting discussed above involves changes in provider behavior—namely, hospitals, physicians, and other treating providers responding to the cost containment efforts of public and private health insurers by seeking to increase revenues from other payers, including property-casualty insurance companies. Another potential effect of the ACA is to prompt individuals with injuries to file a property-casualty insurance claim instead of a health insurance claim because the ACA may have made it more expensive or more difficult for them to file a health insurance claim. The ACA accelerates a trend already underway to increase cost-sharing in health 18 February 24, 2014 / INSURANCE ADVOCATE

insurance plans. Under the ACA, many employers have replaced previous plans with plans including much higher deductibles and coinsurance provisions that will increase out-of-pocket costs for many insured individuals receiving treatment for injury or illness until such time as the health insurance policy’s maximum annual outof-pocket amount has been reached. While increased cost-sharing may decrease health insurer outlays, it also may encourage individuals with health insurance to assert coverage for injuries under property-casualty insurance where the opportunity is present to do so. The motivation of claimants would be to avoid incurring costs due to health insurance deductibles and cost-sharing requirements, and the effect would be a shifting of claims from health to propertycasualty insurance systems. Public and private health insurers may also become more aggressive under the ACA in refusing to provide coverage for certain diagnostic procedures and treatments where evidence-based research indicates the procedure or treatment is unwarranted. This may be especially likely if the PatientCentered Outcomes Research Institute (PCORI), created by the ACA to conduct research on the comparative quality of different medical treatments, produces research drawing into question the appropriateness of diagnostic procedures or treatments frequently associated with accidental injuries. If insured individuals know or suspect that desired procedures or treatments will not be reimbursed by their health insurer, some may claim that the injury involved is covered by property-casualty insurance. In some cases, the claim may be legitimate, but would have been previously filed as a health insurance claim. In other instances, the claim is not legitimately covered by property-casualty insurance but is fraudulently represented to be covered by property-casualty insurance coverage. In either case, claim shifting has occurred. We believe that claim shifting behavior in the manners described above is plausible and potentially significant.

Fewer Property-Casualty Claims Due to Fewer Uninsured The primary objective of the Affordable Care Act is to reduce the number of individuals in the United States without health insurance. In 2010, the year

of the ACA’s enactment, approximately 49 million nonelderly Americans did not have health insurance coverage.5 When injured or ill and confronted with the prospect of hefty medical bills, and where the circumstances presented the opportunity to do so, some uninsured individuals would file workers compensation or automobile insurance claims. These claims were fraudulent because they either were not workrelated, in the case of workers compensation claims, or they were unrelated to an automobile accident covered by the auto insurance policy involved, in the case of auto insurance claims. The frequency of fraudulent claims where the primary motive is to secure coverage for medical treatment because the individual involved has no health insurance coverage is often debated. However, there is substantial evidence that fraudulent claims of this nature are fairly common. In a 2008 study, the IRC found suspicion of fraud in approximately one in ten first-party no-fault auto insurance claims. In 29 percent of these claims, the claimed injury was unrelated to the accident reported in the claim.6 By reducing the number of uninsured, the ACA could potentially reduce the number of fraudulent claims previously submitted under these circumstances. There is little basis, however, for estimating the magnitude of this effect. First, it is unclear how many individuals will no longer be uninsured as a result of the ACA. During the first three months of activity, 2.2 million people enrolled in coverage through the marketplace mechanism created by the act.7 This number does not include those who are newly covered via the expansion of state Medicaid programs, but does include many who lost previous coverage as non-qualifying policies were cancelled, forcing those affected to seek replacement coverage. In any event, the actual impact of the ACA on the uninsured population remains highly uncertain. If the impact of the ACA on the uninsured population is significant, then the potential impact on property-casualty claim frequency could also be significant. In a 2012 study, researchers at the RAND Institute for Civil Justice examined the impact of health insurance reforms in Massachusetts that had much the same effect as ACA seeks—significantly reducing Photos continued on page 20

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LIC

[ COVER ] continued from page 18

the number of people without health insurance. The researchers attributed a 5–7 percent reduction in workers compensation emergency room bill volume to a 40 percent decrease in the number of uninsured presenting in Massachusetts emergency rooms. The study did not examine the impact of reforms in Massachusetts on overall claim costs.8 Nor did it examine the impact on auto injury claim outcomes.

Although reducing the number of uninsured could potentially reduce the frequency of property-casualty casualty insurance claims, opposing forces could moderate this effect. For example, many of those previously uninsured individuals who obtain health insurance coverage will continue to face strong financial incentives to file property-casualty insurance claims, much as before. As noted earlier, many individuals purchasing coverage in the insurance marketplace created by ACA are purchasing

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high-deductible coverage with high annual out-of-pocket costs. For some, the incentive to assert coverage under a property-casualty insurance policy will continue to exist.

More Fraudulent Claims Due to Increased Fraud Fighting Emphasis In an October 2013 paper, the National Insurance Crime Bureau (NICB) predicted that the frequency of fraudulent propertycasualty insurance claims will increase as fraud-fighting provisions of the ACA are implemented.9 Unlike fraudulent claims that are associated with actual injuries but for which health insurance coverage is not available, these claims are entirely profitmotivated. According to NICB, because property-casualty insurance is not covered by the ACA, career criminals and unscrupulous medical providers will shift their attention to the property-casualty business to avoid increased scrutiny from health insurers. No estimate of the magnitude of the effect is made, but NICB suggests several steps insurers could take to address the potential increase in fraud, including the following: • Closely monitoring and evaluating orders and referrals for durable medical equipment (DME) and other services to confirm the eligibility of the provider(s) involved. • Monitoring DME billings that require physician evaluation and authorization to protect against fraudulent schemes. • Remaining aware of federal moratoriums on accepting new medical providers and the regions involved, so that monitoring efforts can be focused on those regions and any diversion of criminal activity to property-casualty claims will be more likely to be detected. • Adopting anti-fraud bill review processes and claim reimbursement standards similar to what is required of public health insurance programs.

Lower Future Medical Damages (and General |Damages) in Some States The ACA may potentially reduce the value of future medical costs included in continued on page 24

20 February 24, 2014 / INSURANCE ADVOCATE

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LICONY

ADVERTOR IAL

LICONY

The Life Insurance Industry: A Longstanding Employer, A Noble Business By Thomas E. Workman, President & CEO, Life Insurance Council of New York, Inc.

ife insurance is a long-standing industry in the state of New York, starting years ago when one company formed in 1842. Today, there are 132 life insurers licensed to do business in our great state. Seventy-nine of those are domiciled in New York and call it home. Together, we stand as an industry that is a significant employer, and one that has an important responsibility to the citizens of New York. It is a noble business. The life insurance industry is a face-toface business in many respects. Seventy-five thousand licensed life insurance agents work throughout New York State to help our citizens protect their families and their businesses. Life insurance agents, I believe, have a difficult task. Life insurance agents initiate often difficult conversations with people about death and potential disability. While retirement may seem far away for some people, life insurance agents bring planning issues to the forefront. Life insurance agents also address taking care of family members after a loved one’s passing, and continuity planning for many of our start-up businesses. But, life insurance agents also have one of the most rewarding professions. The policies placed by a life insurance agent delivers on a promise made to a family covered by life insurance; the resulting benefit payment helps the family move on financially after an untimely death. When that retire-

Behind the scenes, approximately 30,000 more New Yorkers work for the life industry. ment date finally comes for someone, a life insurance agent helps start a stream of income from an annuity. A life insurance agent is also there to recommend long term care insurance to families considering future needs when family members will become elderly and may require full time care. These are just a few examples. Behind the scenes, approximately 30,000 more New Yorkers work for the life industry. These employees process claims, ensure compliant paperwork, provide customer service and develop products and services, among other key responsibilities. Employees of life insurance companies ensure suitable insurance coverage and work to keep prices steady. These employees also protect the investments of their customers by following conservative investment strategies, minimizing losses, and ensuring that claims are paid. But it doesn’t end there. The life insurance industry generates thousands of additional jobs by the goods and services it purchases or leases from other businesses in the state. The industry also works with law firms, as well as accounting, actuarial and consulting firms throughout the state.

Everyone is needed. For every person who has life insurance protection, there are many New Yorkers who need more life insurance, more annuities, more long-term care insurance, and more disability income insurance. On behalf of the life insurance industry and the citizens of New York State, my team and I at the Life Insurance Council of New York will continue to do everything possible to make it easier for New Yorkers to secure this critically important protection. [IA] Thomas E. Workman is the President and Chief Executive Officer of the Life Insurance Council of New York, Inc. LICONY is the principal voice of the life insurance industry in New York. LICONY works to create and maintain a legislative, regulatory, and judicial environment that encourages its members to conduct and grow their life insurance businesses here in New York State. For stories about New Yorkers who have benefitted greatly from purchasing the products of life insurers, go to www.licony.org, click on “Published Articles” in the NEWSROOM box on the homepage.

O: (212) 986-6181 F: (212) 986-6549 551 Fifth Ave., 29th Floor, New York, NY 10176 website: www.licony.org INSURANCE ADVOCATE / February 24, 2014 21

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IN THE MATTER OF THE LIQUIDATION OF FRONTIER INSURANCE COMPANY Supreme Court County of Albany Index No.: 000097/2006 NOTICE Pursuant to an order of the Supreme Court of the State of New York, County of Albany (the “Court”), entered on November 16, 2012, the Superintendent of Financial Services of the State of New York and his successors in office were appointed as liquidator (the “Liquidator”) of Frontier Insurance Company (“Frontier”) and, as such, have been directed to take possession of Frontier’s property and liquidate its business and affairs pursuant to Article 74 of the New York Insurance Law (the “Insurance Law”). The Liquidator has, pursuant to Insurance Law Article 74, appointed Michael J. Casey, Acting Special Deputy Superintendent, as his agent to carry out the responsibilities of the Liquidator, through the New York Liquidation Bureau, 110 William Street, New York, New York 10038. The Liquidator has submitted to the Court a verified petition (“Verified Petition”) seeking an order: (i) approving the Liquidator’s Report on the Status of the Liquidation of Frontier Insurance Company (the “Liquidation Proceeding”) and Request for Authority to Distribute Assets and Establish a Final Bar Date (the “Report”) and the financial transactions delineated therein; (ii) establishing December 31, 2014 as the final bar date, the final date by which the Liquidator must actually receive in respect of any claim presented prior to December 31, 2013 (the “Bar Date”, which was established in the Liquidation Proceeding by order of the Court entered on September 23, 2013) any and all evidence demonstrating (a) that such claim has been liquidated and (b) that there has been actual loss and/or payment in respect of such claim; (iii) authorizing the continued payment of administrative expenses; (iv) authorizing the Liquidator to distribute Frontier’s assets, consistent with this Court’s orders and the priorities set forth in Insurance Law Section 7434, to those creditors of Frontier with allowed claims, to the extent that, in the Liquidator’s discretion, sufficient funds are available; and (v) providing for such other and further relief as this Court deems appropriate and just; A hearing is scheduled on the Verified Petition on the 10th day of March, 2014, at 1:00 p.m., before the Honorable Richard M. Platkin, A.J.S.C., New York Supreme Court at the Courthouse, 16 Eagle Street, in the County and City of Albany, State of New York, 12207. If you wish to object to the relief sought, you must serve a written statement setting forth your objections and all supporting documentation upon the Liquidator and the Clerk of the Court, at least seven days prior to the hearing. Service on the Liquidator shall be made by first class mail at the following address: Superintendent of Financial Services of the State of New York as Liquidator of Frontier Insurance Company 110 William Street, New York, New York 10038 Attention: General Counsel. The Verified Petition and Report are available for inspection at the above address. In the event of any discrepancy between this notice and the documents submitted to Court, the documents control. Requests for further information should be directed to the New York Liquidation Bureau, Creditor and Ancillary Operations Division, at (212) 341-6809. Dated: January 14, 2014 Benjamin M. Lawsky Superintendent of Financial Services of the State of New York as Liquidator of Frontier Insurance Company. 24 February 24, 2014 / INSURANCE ADVOCATE

[ COVER ] continued from page 20

the calculation of damages in third-party liability claims. Before the ACA, future medical costs were calculated based on estimates of billed charges for the medical care expected to be required in the future. Some have argued that guaranteed health insurance coverage with no exclusions for preexisting conditions and no lifetime limits on benefits paid will provide claimants access to medical treatment where reimbursement is based on much lower rates negotiated by public and private health insurance plans. As a result, the actual damages involved should be significantly less than what past practice would suggest.10 Some have gone so far as to suggest that the calculation of future medical costs should be limited to the cost of premiums for health insurance coverage plus any outof-pocket costs.11 In addition to reducing damages for future medical costs, to the extent that general damages are calculated in relation to economic damages incurred by the claimant, then general damage amounts might also be lowered. Efforts to reduce future medical damages in third-party liability cases would face strong opposition from claimants’ attorneys seeking to maximize the amount of damages awarded in major liability cases.12 In addition, efforts to apply new standards and methods in the calculation of future medical damages could face serious challenges in states with strict adherence to the collateral source rule. Also, whatever the impact ACA might have on future medical calculations, lowering the specified damages involved is unlikely to deter health insurers, including Medicare, from pursuing subrogation actions to recover whatever amounts they expect to pay in the future for treatment costs.

Healthier Populations The ACA includes several provisions aimed at improving the health and fitness of the general population. Most importantly, preventive services must be provided to plan participants without cost sharing. Significant financial incentives also are created to encourage employers to provide wellness programs for employees. Some of these incentives, in turn, are pushed down to employees to encourage their participacontinued on page 34

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[ ON M Y RADAR ]

By Barry Zalma

Policy Must Be Read as A Whole Single Fire – Multiple Occurrences

ad facts with severe injuries make bad insurance law when courts attempt to interpret policies to provide maximum funds available for the vic-

Inc. (Lexington Healthcare), the lessee of that property, and Lexington Highgreen Holding, Inc. (Highgreen), the operator of Greenwood. This case concerns the amount

Insurance is important to the operation of a modern society. It is not an eleemosynary entity. Insurers are only obligated to pay that which they agree to pay by the terms and conditions of the policy agreed to by the insured and the insurer.

Barry Zalma

tim. The Supreme Court of Connecticut was asked to interpret various provisions of a professional liability insurance policy to determine the amount of coverage available when the same general event has given rise to a large number of claimants against the policy. In Lexington Ins. Co. v. Lexington Healthcare Group, Inc., SC 18681, S.C. 18682 (Conn. 01/28/2014) the Supreme Court dealt with such a decision and read the policy as a whole rather than as a means to help the injured. Insurance is important to the operation of a modern society. It is not an eleemosynary entity. Insurers are only obligated to pay that which they agree to pay by the terms and conditions of the policy agreed to by the insured and the insurer.

FACTS On February 26, 2003, multiple residents of Greenwood Health Center (Greenwood), a Hartford nursing home, tragically died or were injured when the facility was set ablaze by another resident and rescue efforts by staff members fell short. As a result, thirteen negligence actions seeking damages for wrongful death or serious bodily injury were filed by some of the victims’ personal representatives against Greenwood, Nationwide Health Properties, Inc. (Nationwide), the owner and lessor of the property housing Greenwood, Lexington Healthcare Group, 26 February 24, 2014 / INSURANCE ADVOCATE

of liability insurance coverage available for these claims. The plaintiff, Lexington Insurance Company, brought this declaratory judgment action against Lexington Healthcare, which is the insured party under a general and professional liability insurance policy issued by the plaintiff, as well as Highgreen, Nationwide and the victims’ personal representatives (individual defendants). Nationwide and most of the individual defendants each filed counterclaims in regard to the policy, also seeking declaratory judgments. Following the parties’ filing of cross motions for summary judgment, the trial court determined the amount of coverage available under the policy and rendered judgment accordingly. The plaintiff appealed from the judgment of the trial court determining the available coverage. The plaintiff claimed that the trial court misconstrued the policy language pertaining to ‘‘related medical incidents’’ and the endorsement relating to the “aggregate policy limit,” thereby providing more coverage for the individual defendants’ claims than that to which they were entitled. The policy issued by the plaintiff to Lexington Healthcare provided both general liability and professional liability coverage for Lexington Healthcare’s seven nursing home facilities. As to the amount of coverage available for those claims, the trial court found that: (1) for purposes of applying the policy’s $500,000 per medical incident limit

for professional liability coverage, the acts, errors or omissions underlying each individual defendant’s injuries or death constituted separate medical incidents and did not collectively comprise related medical incidents, in which case a single $500,000 limit would have applied; (2) the total amount of professional liability coverage available under the policy for all of the individual defendants’ claims was the $10 million “aggregate policy limit” provided via an endorsement to the policy, rather than the $1 million “aggregate limit” for professional liability coverage stated in the policy declarations; and (3) a $250,000 “self insured retention (SIR) per occurrence” described in another endorsement to the policy applied to reduce the $500,000 per medical incident coverage to $250,000 per medical incident.

ANALYSIS Related Incidents The plaintiff claims first that the trial court improperly interpreted the phrase “related medical incidents” as used in the policy, thereby affording greater coverage for the individual defendants’ claims than the parties to the policy had intended. According to the plaintiff, the individual defendants’ claims arose from “related medical incidents,” because all of their injuries or deaths stemmed from the same root cause, namely, the admission of the individual who started the fire to Greenwood and the failure to supervise her properly. The plaintiff argues, therefore, that a single policy limit applies to all of the individual defendants’ claims collectively rather than to each claim individually. “Related” generally is defined as “connected by reason of an established or discoverable relation,” or “associated; connected” or “standing in relation; connected; allied; akin”. Courts of other jurisdictions, considering these or similar definitions, have opined that the term related covers a broad range of connections, both causal and logical. Applying the foregoing definitions and their associated limits to the specific allegations of negligence raised by the individual defendants, the court noted that each individual defendant has raised multiple continued on page 28

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[ ON MY RADAR ] continued from page 26

allegations of negligence, in some cases upwards of twenty. Although some allegations pertain to negligent supervision of the individual who started the fire, others aver a wide variety of different safety and response failures by Lexington Healthcare. Overall, the medical incidents underlying the individual defendants’ claims are as dissimilar as they are alike. The phrase related medical incidents does not clearly and unambiguously encompass incidents in which multiple losses are suffered by multiple people, when each loss has been caused by a unique set of negligent acts, errors or omissions by the insured, even though there may be a common precipitating factor.

AGGREGATE LIMITS The plaintiff also claims that the trial court improperly concluded that the policy provides a total of $10 million in professional liability coverage for all of the individual defendants’ claims, rather than a total of only $1 million. The policy contains a number of endorsements, including endorsement no. 3, which provides in an amendment to the definitions section of the policy, which applies to both the general and professional liability parts, to add seven locations. Endorsement no. 3 also amended the policy to make the aggregate policy limit at $10,000,000. After examining endorsement no. 3 of the policy, the trial court concluded that the total amount of professional liability coverage available for the individual defendants’ claims clearly and unambiguously was $10 million and not $1 million. The Supreme Court found that the trial court’s interpretation of the policy was incorrect for the following reasons. First, the court improperly equated the different terms aggregate limit and aggregate policy limit when no compelling reason existed to do so. Using the ordinary meanings of its component words, the phrase aggregate policy limit, which appears only in endorsement no. 3, clearly conveys that the amount specified, $10 million, is the maximum amount of insurance available under the entire policy when claims for both general liability and professional liability coverage, at all insured locations, are combined. Additionally, that endorsement 28 February 24, 2014 / INSURANCE ADVOCATE

explicitly provides that the aggregate policy limit is the most the plaintiff will pay annually for the sum of all damages under both the general liability and professional liability parts of the policy. In contrast, the term aggregate limit appears both in the declarations page, directly beneath the heading, Healthcare Professional Liability. By virtue of its placement and the absence of the word “policy,” the term aggregate limit logically means the total amount available for professional liability coverage only, at a particular location. Next, in reading the policy as it did, the trial court rendered the portion of the declarations page pertaining to aggregate limits superfluous, referring to it as ‘‘irrelevant, ’’ instead of attempting to read the declarations in conjunction with endorsement no. 3 to see if each part of the policy could be given effect. By its plain terms, the portion of endorsement no. 3 providing for an aggregate policy limit for general and professional liability coverage does not purport to alter or supersede any specific, preexisting part of the policy, but only to amend the policy as a whole. The policy, without consideration of the endorsements, provides for a total of $1 million in general liability coverage and a total of $1 million in professional liability coverage for a single location. These coverage limits are stated clearly on the declarations page under the heading of “Limits of Insurance,” where an “Aggregate Limit” of $1 million is listed for each type of coverage. The clear language of the policy, read as a whole, with the endorsements provides $1 million in the aggregate at each location. Properly construed, the aggregate policy limit amends the policy to reduce the total combined coverage to an amount that is less than what it otherwise would have been. A firm foundational rule in the construction of insurance contracts is that the expressed intent of the parties is to be ascertained by examining the contract or policy as a whole. By equating distinct terms and reading endorsement no. 3 in isolation, rather than in conjunction with other parts of the policy, the trial court improperly rendered the aggregate limits provided by the declarations superfluous and improperly concluded that a total of $10 million in professional liability coverage was available for all of the individual defendants’ claims. The Supreme Court concluded, to the contrary,

that the policy provides for only $1 million in professional liability coverage for those claims, because that is the aggregate limit for that coverage part at a single insured location.

The SIR The trial court interpreted the SIR endorsement as requiring the plaintiff to provide coverage to Lexington Healthcare for each medical incident only to the extent that damages for that incident exceeded $250,000, the amount of the self-insured retention. According to the court, even though Lexington Healthcare is insolvent and, therefore, unable to pay the selfinsured retention amount itself, the policy clearly provides that the plaintiff is not responsible for the first $250,000 of damages for each medical incident. The trial court concluded further that the SIR endorsement operates to reduce the maximum amount payable by the plaintiff for any one medical incident from $500,000, as stated in the declarations, to $250,000. To begin, paragraphs A and B of the SIR endorsement make it abundantly clear that Lexington Healthcare, and not the plaintiff, must pay the first $250,000 of damages attributable to any one medical incident, including investigation and defense expenses. The Supreme Court disagreed with the trial court’s conclusion that, once the plaintiff ’s duty to indemnify is triggered by the amount of a particular claim exceeding $250,000, its liability for that claim is limited to only the next $250,000 of damages, and not the $500,000 per medical incident provided in the declarations, which is the most the plaintiff will pay. Because the $500,000 per medical incident limitation provided in the declarations was not altered by the SIR endorsement the plaintiff remains potentially liable for the next $500,000 in damages for each medical incident over the first $250,000.

ZALMA OPINION This is an important decision on several levels, the most important of which was taking the time and effort to read the insurance policy as a whole rather than take its component parts out of context to provide additional indemnity dollars available to the victims of a bankrupt defendant. Although the continued on page 31

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[ COURTSI DE ]

New York Court of Appeals Rejects Insurance Company’s Use of Limitations Period “That Renders Coverage Valueless”

ew York, NY— Rejecting what plaintiff ’s counsel called a “heads we win, tails you lose” insurance company argument, the New York Court of Appeals has found that an insurance company cannot enforce a two-year suit limitation period on a property claim for “replacement cost” while simultaneously urging that the policyholder cannot bring suit until all work to repair a damaged building is completed — and then invoke the limitation period to get the policyholder’s suit dismissed if repairs take longer than two years to complete. The New York Court of Appeals was responding to a question certified to it from the United States Court of Appeals for the Second Circuit. The case is Executive Plaza, LLC v. Peerless Insurance

30 February 24, 2014 / INSURANCE ADVOCATE

Company (February 13, 2014) . Anderson Kill filed an amicus brief in support of Executive Plaza on behalf of United Policyholders, a nonprofit devoted to helping policyholders recover value from their insurance policies. The plaintiff owned an office building that was severely damaged by a fire on February 23, 2007. The $1 million policy had a replacement cost option, but stipulated that replacement cost would not be paid until the property was actually repaired or replaced, and unless the repairs were made as soon as possible. The policy also included a two-year suit limitation. Peerless paid the actual cash value of the damaged building but withheld payment of the replacement value until such time as repairs completed. Executive Plaza

could not complete the repairs in two years, and so filed suit on February 23, 2009 seeking a declaratory judgment. Peerless sought to dismiss the claim for full replacement cost because the claim was, in effect, “too early”. The United States District court agreed and dismissed that suit on grounds that the claim was premature because repairs were not finished. Upon completion of repairs, in October 2010, Executive Plaza demanded payment of the unpaid portion of the policy limits to cover the promised replacement costs. This suit too was dismissed in the U.S. District Court, then appealed to the Second Circuit, which certified this question to the New York Court of Appeals, as follows:

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[ COURTS I D E ] “If a fire insurance policy contains “(1) a provision allowing reimbursement of replacement costs only after the property was replaced and requiring the property to be replaced ‘as soon as reasonably possible after the loss’; and “ (2) a provision requiring an insured to bring suit within two years after the loss; “is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?” In its amicus brief United Policyholders argued that a negative answer would render the coverage illusory: Peerless’ position would improperly create illusory coverage by denying payment of replacement costs unless the policyholder can meet Peerless’ implicit but invisible requirement of completely rebuilding with two years of the date of the loss. Insurance coverage is illusory “where part of [an insurance] premium is specifically allocated to a particular type or period of coverage and that coverage turns out to be functionally nonexistent” [citations omitted]. Amicus at 19. Similarly, Judge Smith wrote for a unanimous New York Court of Appeals; The problem with the limitation peri-

od in this case is not its duration, but its accrual date. It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit — in this case, completion of replacement of the property — that cannot be met within that two-year period. A “limitation period” that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a “limitation period” that renders the coverage valueless when the repairs are time-consuming. Decision at 3. William G. Passannante of Anderson Kill, counsel to amicus United Policyholders, commented, “Insurance companies display endless ingenuity in finding ways to use suit limitation clauses, as well as other policy provisions, to attempt to deny coverage for claims clearly within the coverage grant. The New York Court of Appeals has rightly rejected a wrongful attempt at ‘nullification’ of a covered claim.” Executive Plaza was represented b David Jaroslawicz, and Peerless by John N. Love. [IA]

[ ON MY RADAR ] continued from page 28

victims of the fire deserve to be compensated, because of the insolvency of the defendant, they are limited to recovery from the insurance available. [IA] Barry Zalma, Esq., CFE, has practiced law in California for more than 40 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. Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/ Gettingthe-Whole-Truth_p_254.html. Mr. Zalma recently published the ebooks, “Zalma on California Claims Regulations – 2013 ; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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[ COVER ] continued from page 24

tion in health and fitness programs. It certainly seems possible that a healthier population will be less prone to injury—either at work or in their cars. However, that any of these initiatives will affect the frequency and cost of injuries covered by propertycasualty insurance programs should not be assumed. In the property-casualty arena, less serious injuries do not always promise lower claim costs. In numerous studies of auto injury claims, the IRC has documented a steady decline in the seriousness of injuries involved, but that decline was coupled with a steady increase in average claimed medical expenses and payments by property-casualty insurers.13

More Appropriate Utilization Due to Clinical Research As mentioned earlier, the goal of the PCORI is to conduct research comparing the clinical effectiveness of different medical treatments. Medical treatment provided for injuries associated with propertycasualty insurance claims is often characterized by overutilization and wide variation in the type of treatment provided, as documented in a 2013 IRC study.14 We believe there is significant opportunity to improve the quality of care provided to property-casualty liability claimants, and an entity like PCORI could prove instrumental in that regard. However, the chief obstacle to improving the quality of care provided to property-casualty insurance claimants is not the lack of knowledge of how best to treat compensable injuries. Instead, the chief obstacle is changing the behavior of medical providers so that the treatment provided is more closely aligned with what is already known about how best to treat compensable injuries. Past efforts to change provider behavior typically relied on the development and use of treatment guidelines developed by government agencies and insurance companies and used as standards against which provider behavior was assessed. In the mid1990s, a federal agency, the Agency for Health Care Policy and Research (AHCPR), developed a set of guidelines addressing the treatment of back pain. Back and neck sprains and strains are common conditions in property-casualty injury claims, accounting for very large portions of claims and 34 February 24, 2014 / INSURANCE ADVOCATE

claim costs. Opposition to the AHCPR guidelines from the orthopedic medicine community was fierce and nearly resulted in a complete defunding of the agency.15 The provision of the ACA creating PCORI expressly directs the new agency to ensure that its research findings “not be construed as mandates for practice guidelines, coverage recommendations, payment or policy recommendations.”16 This provision of the ACA seriously undermines the value of PCORI and the value of its work. Therefore, we do not expect the activities of the new agency to have any significant impact on the property-casualty industry.

Conclusion The property-casualty insurance industry will be touched in many ways by the ACA. We believe the most significant impact will be cost shifting by hospitals and other providers from public and private health insurers to property-casualty insurers. Cost shifting will occur in response to increased cost containment efforts by public and private health insurers, and will appear in the form of higher charges and a higher volume of billed services. Cost shifting will be particularly severe in state jurisdictions and with coverages where the differences between public and private health insurance reimbursement levels and property-casualty reimbursement levels are greatest. To mitigate this potential impact, property-casualty insurers should consider options to ensure that the prices paid as reimbursement for medical services are consistent with prices paid by public and private health insurers. Market-based fee schedules and bill review authority are among the tools often applied to address medical pricing issues. Property-casualty insurers also should consider alternatives for ensuring that only medically necessary and appropriate treatment is provided to property-casualty insurance claimants and reimbursed by insurers. Utilization review authority, evidence based treatment guidelines, and the authority to deny reimbursement for unnecessary or inappropriate treatment are among the tools that should be considered. [IA] 1 An important exception is Section 1556 of the Act, addressing benefit eligibility in the federal Black Lung program.

2 Insurance Research Council, Hospital Cost Shifting and Auto Injury Insurance Claims (Malvern, Pa.: Insurance Research Council, 2010), p. 43. 3 There is considerable debate among health economists regarding the reality of cost shifting. See, for example, Chapin White, Contrary To CostShift Theory, Lower Medicare Hospital Payment Rates For Inpatient Care Lead To Lower Private Payment Rates, Health Affairs, May 2013, content.healthaffairs. org (accessed February 3, 2014), and Cost shifting is still not a thing, The Incidental Economist, March 7, 2013, theincidentaleconomist.com (accessed February 3, 2014). These assessments, however, do not examine cost-shifting as it applies to propertycasualty insurance claims, which are uniquely vulnerable to cost-shifting efforts by hospitals and other medical providers. 4 Jonathan Skinner and Elliott Fisher, Reﬂections on Geographic Variations in U.S. Healthcare, The Dartmouth Institute for Health Policy & Clinical Practice, March 31, 2010, www.dartmouthatlas.org/ downloads/press/Skinner_Fisher_DA_05_10.pdf (accessed February 11, 2014). 5 Key Facts about the Uninsured Population, The Kaiser Commission on Medicaid and the Uninsured, September 2013, www.kff.org/ uninsured/ (accessed January 17, 2014). 6 Fraud and Buildup in Auto Injury Insurance Claims, 2008 Edition (Malvern, Pa.: Insurance Research Council, 2008), pp. 9-10. 7 Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Health Insurance Marketplace: January Enrollment Report, January 13, 2014, aspe.hhs.gov (accessed February 7, 2014). 8 Paul Heaton, The Impact of Healthcare Reform on Workers’ Compensation Medical Care, Evidence from Massachusetts, RAND Institute for Civil Justice, www.rand.org (accessed January 20, 2014). 9 National Insurance Crime Bureau, Anticipated Effects of the Patient Protection and Affordable Care Act on P&C and Workers’ Compensation Carriers, 2013. 10 H. Thomas Watson, Using the PPAC to reduce future medical expense tort damages, Horvitz & Levy, LLP, www.horvitzlevy.com (accessed January 15, 2014); and Ann S. Levin, The Fate of the Collateral Source Rule After Healthcare Reform, www.uclalawreview.org/pdf/60-3-4.pdf (accessed January 15, 2014). 11 Joshua Congdon-Hohman and Victor A. Matheson, Potential Effects of the Affordable Care Act on the Award of Life Care Expenses, College of the Holy Cross, Department of Economics, www.holycross.edu (accessed January 15, 2014). 12 Bruce G. Fagel, The Collateral Source Rule under the Affordable Care Act, Plaintiff, www. plaintiffmagazine.com (accessed January 15, 2014). 13 Insurance Research Council, Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Cost, and Compensation (Malvern, Pa.: Insurance Research Council, 2008). 14 Insurance Research Council, Interstate Differences in Medical Utilization in Auto Injury Claims (Malvern, Pa.: Insurance Research Council, 2013). 15 Bradford H. Gray, et. al., “AHCPR and the Changing Politics of Health Services Research,” Health Affairs, June 2003, pp. W3 283-W3 307. 16 Public Law 111-148, 124 Stat. 735 (2010).

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