Insurance Advocate March 18, 2013 by C Acunto

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VOLUME 124, NUMBER 6 / March 18, 2013

A CINN Group, Inc. Publication

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Contents

March 18, 2013 | volume 124 number 6

[COVER STORY ] 16 Impact: Employers Brace for Change Allen Roberts

[FEATURES] 4

Foreword: An icon by another name… Steve Acunto, Publisher

Insight: Time Out! Peter H. Bickford

10 Exposures and Coverages: The Challenges of Applying Deductibles Jerome Trupin, CPCU 22 Face to Face: A Class ACT…AUGIE and AIMS, too! Michael Loguercio 30 In Memoriam: Cummin Clancy Brian & Brendan Clancy

32 On the Level: Ben Franklin: Electricity, Insurance, Proverbs and Extensions of Time N. Stephen Ruchman, CPA 34 In the News: Greenberg Tells the AIG Story in Edgy New Book

40 Courtside: Doberman Bites Little Girl on the Face, but We Get Suit Dismissed Lawrence N. Rogak 43 Classiﬁeds 44 Looking Back: March 12, 1988 46 In Dispute: Agent’s Book of Business in Play Katlin Nash

[ AD FEATURES] 17

MSO: Employment Practices

Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / March 18, 2013 3

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[ FORE WORD ]

Steve Acunto

An icon by any other name…

he spirited vitality of industry icon Maurice “Hank” Greenberg comes through quite clearly in his new book, The AIG Story, a “must read” if you are in the insurance, banking, political, legislative or regulatory sphere….or simply on the planet “business.” Greenberg is pleasantly direct. I know this first hand. Some years back, I attended a meeting at Starr on Park Avenue with Mr. Greenberg and another gentleman. When I walked in I handed him my card which read: CINN, the name of our corporation. Mr. Greenberg took the card, looked at it quickly, looked up at me and said, “How the hell can you have that guy on your TV station?” I was stunned. Of course, what had happened is that he had read CINN as CNN and assumed that I had something to do with having Eliot Spitzer appearing on CNN. I explained and then he shook hands with me and said “Nice to meet you.” We use words like icon, legend, leader and the rest with great frequency from microphones, podiums and even from the pages of our publications. Hank Greenberg in his new book demonstrates that he is a clearheaded, tough force for free enterprise, even when dealt a tough hand. We need a new vocabulary word here, readers. Please suggest yours. I thoroughly encourage you to read the book; it is highly entertaining and provocative… Speaking of clear headedness, in this issue we present a thoughtful article by Allen Roberts on five issues facing businesses on the human resources side and other related areas. We have known Allen for some time both as an authoritative exponent of good decision making by business leaders through knowledge and as a cultured gentlem. As insurance agents and brokers and many others in the insurance profession might otherwise learn the hard way, it is thoroughly worthwhile to gain an understanding of what faces your clients, friends and your own businesses. Allen’s article presents a hard look at HR and taxation issues that we genuinely need to absorb and make part of our business relationships. We are proud to present his work once again, and do encourage you to pass it along. Please remember to give credit to him and his law firm Epstein, Becker; they deserve it for providing this kind of information. [IA] 4 March 18, 2013 / INSURANCE ADVOCATE

VOLUME 124, NUMBER 6 MARCH 18, 2013

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

CINN G R O U P, I N C .

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

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

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[ INSIGHT ]

By Peter H. Bickford

Time Out! “Many baseball fans look upon an umpire as a sort of necessary evil to the luxury of baseball, like the odor that follows an automobile.” - Hall of Fame Pitcher Christy Mathewson Spring is here, and with it a new baseball season. As a new season begins, the past is history, optimism abounds and no team is “mathematically eliminated” from a run for the championship. Spring also reminds us of the structure of the game as pitchers loosen arms, batters regain their timing and fielders retrain their reflexes. And then there are the umpires – the enforcers of the rules – universally unloved but necessary to the game. Peter H. Bickford For the business of insurance, the state insurance departments are the umpires enforcing the rules of the game, which means they are more often than not booed for bad calls but seldom cheered for the good ones. They are unloved but often patronized by the regulated out of fear for the power they hold. In New York, the role falls to the Department of Financial Services headed by Superintendent Benjamin Lawsky, and more specifically to the Insurance Division of DFS headed by Executive Deputy Superintendent Rob Easton. I have been riding the DFS Insurance Division pretty hard in past columns, as is the prerogative of any fan of the insurance business. However, in homage to Spring, I thought it would be appropriate to take a momentary step back – a time out – to discuss the essential role of our beloved regulators to ensure a robust and successful insurance industry in the state. Most insurance people only see a part of the regulatory system that directly affects them, such as the broker dealing with the licensing bureau, the underwriters dealing with the rate and form units of the property, life or other bureau, or the claims units dealing with consumer complaints. All of these regulatory functions are central to the business, although we may disagree strongly about the need for or effectiveness of par6 March 18, 2013 / INSURANCE ADVOCATE

ticular rules or requirements, or the extent of the regulators’ interference in the business. Those disagreements are the neverending natural conflict between regulator and regulated that will continue forever. They reflect the day-to-day tension that prevails on the playing field and in the stands between the players, fans and umpires. The role of the regulator, however, goes beyond the routine functions of individual regulatory units. The regulator also serves as a valuable buffer between the industry participants, policyholders, claimants, legislators, politicians and the media. A review of the DFS reaction to the effects of Superstorm Sandy helps illustrate this role. As demonstrated by DFS press releases issued since Superstorm Sandy, Superintendent Lawsky’s boss, Governor Cuomo, took ownership of all policy decisions relating to Sandy, mostly aimed at “forcing” the insurance companies to do their job and pay claims quickly. For the four months from the time of the storm through February 2013, the DFS issued 34 Sandy related press releases of which 13 referred to announcements by Governor Cuomo. All 21 of the other releases were announcements by the DFS of locations of insurance assistance facilities. Not one Sandy related release in this four-month period was an announcement by Superintendent Lawsky. All policy related press releases addressing Superstorm Sandy were issued in the name of Governor Cuomo and none in the name of the chief regulator of the business of insurance in New York! The press releases set the tone for the Cuomo administration’s message – insurance companies better not try any of their usual shenanigans to avoid paying claims! And they better pay up quickly! Never mind that this is what the large majority of companies do as a matter of course without having to be goaded by regulators, politicians or the media. Never mind that the administration repeatedly scolds the industry for following statutory contract provisions and time requirements

mandated by law. And never mind that forcing quick resolution of claims may not, in fact, be in the best interest of many policyholders. Poor Superintendent Lawsky! (Pay attention: this may be the only time I will ever use the adjective “poor” before Superintendent Lawsky!) He is left with the unenviable task – as the umpire of the insurance business in New York – of carrying out those orders and suffering the slings and arrows of the industry on the one hand, and the consumers on the other. Despite the Sandy-induced anti-insurance industry political and media frenzy, the Insurance Division of the DFS has worked closely with industry and policyholder representatives for a balanced and effective response to the many legitimate and difficult issues resulting from the storm and its aftermath. Superintendent Lawsky, his chief insurance regulator Rob Easton, and the staff of the Insurance Division of the DFS deserve credit for their efforts to deal with the unprecedented logistical, contractual and personal issues in responding to the storm, and for providing necessary attention to and flexibility in meeting certain requirements by all sides, while assuring legislators in Albany that, on the whole, the industry has performed well (yes, we are not all crooks and thieves!). Sandy does not represent the first, nor will it be the last time that the insurance industry bears undue criticism for a response to an extreme event. While the industry may have many issues and disagreements with regulators, it can generally count on them – politics notwithstanding — to be even handed in their assessment of the industry responses, and to work with the industry and its customers to ensure as smooth a response as possible. There are many issues arising from the actions of the Cuomo Administration that will need to be reviewed and addressed in the future, including the propriety of certain of the emergency changes to the insurance law and regulations, interference with private contracts, and forcing quick settlements. Sandy will not be the last catastrophic event we will face in the future. To the extent possible, insurance companies and their customers should be able to know continued on page 8

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[ INSIGHT ] continued from page 6

the rules that will apply to such events. In the coming months and years, serious efforts should be made to review postSandy responses – not just by the industry, but by the Administration and the regula-

tors as well. Knowing how the rules will change in advance of a similar future emergency will benefit everyone. Not even the umpire should be able to change the rules during the game! OK. Time out is over! Back to business! [IA]

“I’ve never questioned the integrity of an umpire. Their eyesight, yes.” – Leo Durocher

[ IN T H E ASSOCIATIONS ]

A.G. Arrests NYC Psychiatrist for Couching $230k From Medicaid

EW YORK, N.Y.—Following an undercover investigation, Attorney General Eric T. Schneiderman announced the arrest of Dr. Jean Elie, a Brooklyn psychiatrist, on grand larceny charges for billing the state’s Medicaid program $230,000 for services he did not provide. Dr. Elie, 59, of Elmont, wrote prescriptions for Seroquel valued at over a million dollars over a three-year period to a revolving door of clients. Dr. Elie, who worked out of the Family Practice offices at 1155 Broadway, in Brooklyn, faces up to 15 years in prison. According to a complaint filed in Brooklyn Criminal Court today, Elie billed over $232,000 for therapy sessions which he falsely claimed lasted a minimum of 45 minutes. Instead, the sessions routinely lasted less than ten minutes. By law, physicians are required to submit claims for payment using billing codes which accurately reflect the services they provided. As described in the court papers, undercover investigators from the Attorney General’s office, posing as patients, signed up for seven sessions with Elie. None of these sessions lasted for more than six minutes. Even so, the doctor billed Medicaid using a code, known as the “hour code,” which requires, in addition to a medical evaluation, 45 to 50 minutes of face-to-face therapy with a patient. Between 2009 and 2012, Elie wrote prescriptions for Seroquel valued at over a million dollars, making him one of the top prescribers of Seroquel in the State. The anti-psychotic medication is frequently abused and has a street value among

addicts. Elie’s prescribing patterns and the observations made by MFCU investigators during the course of the investigation appear to indicate that some of Elie’s patients sought prescriptions for medications they could sell on the street. The arraignment follows a successful effort by Attorney General Schneiderman to overhaul the state’s prescription drug monitoring system in order to prevent overprescribing by doctors. In June 2012, the legislature unanimously passed the Internet System for Tracking Over-Prescribing Act, or I-STOP. First introduced by Attorney General Schneiderman, I-STOP requires doctors to review a patient’s prescription drug history and update it in real time when writing prescriptions for certain controlled substances. Had such a system been in place at the time Elie committed his crimes, authorities could have detected it more quickly. At his arraignment, prosecutors charged that Elie worked at the Family Practice offices for only four hours a day but routinely billed Medicaid for therapy sessions that, if legitimate, would have taken longer than the 24-hour period he claimed they occurred in. On one date, Elie billed the hour code 30 times; and on 94 separate dates he billed it 20 or more times. Elie is charged with Grand Larceny in the Second Degree, which carries a maximum prison term of 5 to 15 years. He also faces multiple counts of Offering a False Instrument for Filing, which carry a maximum term 1 and 1/3 to 4 years behind bars. The charges against Elie are accusations and, of course, he is presumed innocent until and unless proven guilty.[IA]

8 March 18, 2013 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] By Jerome Trupin, CPCU and Arthur L . Flitner, CPCU, ARM, AIC

The Challenges of Applying Deductibles

andy propelled insurance issues front and center. One issue was increased wind deductibles. In coastal areas exposed to hurricane-force winds, insurers have pushed for higher deductibles, ranging up to 5 percent for homeowners wind claims. In a storm like Sandy, a 5 percent deductible on all policies might reduce insurers’ paid losses by a billion dollars or more.

Hurricane Deductibles Eighteen states and the District of Columbia have regulations dealing with hurricane deductibles.1 The governors of many of the affected states were quick to issue statements saying that the higher deductibles didn’t apply to . The insurance industry’s instinctive reaction was to groan, “There they go again,” but the regulators were on firm ground; they weren’t just jawboning.2 The three states that sustained the most damage from Sandy (New Jersey, New York, and Connecticut) are among those that regulate hurricane deductibles. Here’s a brief outline of the hurricane deductible regulations that apply in those three states: • New Jersey: Applies to losses from a storm designated a hurricane by the National Weather Service but only if sustained winds speeds of 74 mph have been measured somewhere in the state.3

• New York: Applies to a category 1 hurricane (sustained winds of at least 74 miles per hour) or higher making landfall anywhere in New York as determined by the National Weather Service, or a hurricane making landfall outside the state but which is determined by the National Weather Service to have reached Category 1 or higher winds in the area within New York State in which the losses occur.4 • Connecticut: Applies when the National Weather Service declares a hurricane with winds of 74 miles per hour or more anywhere in Connecticut.5 Sandy, which is now ranked as the second most expensive storm to strike the , showed how tricky applying a deductible can be. In all three states, despite the devastation wrought by the storm, it wasn’t a category 1 storm when it made landfall or as it made its way through the state. Applying hurricane deductibles is not the only deductible issue. While other deductible issues won’t generate front page headlines, they can be challenging for property loss adjusters, and their effect on loss payments can be significant for policyholders.

continued on page 12

1 The states are: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas, Virginia, and Washington, DC. Source: “Hurricane and Windstorm Deductibles,” Evans, Ewan & Brady Insurance Agency, Inc., an excellent state-by-state analysis based on Virginia Bureau of Insurance and Virginia Property Insurance Association information. http://www.eebins.com/blog/hurricane_and_windstorm_deductibles.aspx 2 “Jawboning” is politely defined as “moral suasion,” but arm-twisting may be a more accurate description. Prior to hurricane Irene, ’s hurricane-deductible regulations allowed insurers much more flexibility. When Irene devastated his state, the governor asked insurance companies to voluntarily waive the higher hurricane deductible. All the leading companies, except one, complied. “Homeowners Spared Costly Hurricane Deductible.” MSN Money http://money.msn.com/saving-moneytips/post.aspx?post=41b5e2ac-3a6c-45b3-9f17-392fcb0bae16 3 “Applicability of N.J.A.C. 11:2-42.7 to the Use of Hurricane Deductibles In Connection With Hurricane Irene,” http://www.state.nj.us/dobi/bulletins/blt11_16.pdf 4 J. Wylie Donald, “A Tale of Two Deductibles: Post-Tropical Cyclone Sandy Is Not a Hurricane,” Climate Lawyers Blog, http://climatelawyers.com/category/Legislation.aspx 5 “Hurricane Deductibles,” Connecticut Insurance Department Legislative Summary 2012, p. 31, http://www.ct.gov/cid/lib/cid/2012_Year_End_Final_Report.pdf

10 March 18, 2013 / INSURANCE ADVOCATE

Jerome Trupin

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

This article is the copyrighted material of The American Institute For Chartered Property Casualty Underwriters and is used with its permission. Arthur L. Flitner, CPCU, ARM, AIC, is senior director of knowledge resources at The Institutes. He and Jerry Trupin co-wrote several textbooks used in the Chartered Property Casualty Underwriter program and other programs offered by The Institutes.

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[ EXPOSURES AND COVERAGES ] continued from page 10

Does Deductible Apply to the Loss or to the Limit? The fictitious case that follows illustrates an issue that can arise when the amount of loss to covered property exceeds the limit of insurance: Does the deductible apply before, or after, application of the limit? If the deductible is subtracted after application of the limit, the deductible, in effect, reduces the limit. Mechanical Engineers, Inc. (MEI) provides design/build services out of a building in suburban New Jersey in which it leases space. A fire originating in the restaurant on the floor below MEI’s office spread to MEI’s premises and caused a total loss of MEI’s property. MEI has a commercial property policy providing $1,000,000 business personal property coverage with a $10,000 deductible. The policy applies on a replacement cost basis with agreed value (suspension of coinsurance). The replacement cost of MEI’s damaged and destroyed property is $1,250,000. In no event will the insurer pay more than the $1,000,000 policy limit for MEI’s contents. However, MEI’s loss settlement could be either $990,000 or $1,000,000, depending on how the deductible is applied. The deductible provision in the commercial property forms developed by Insurance Services Office, Inc. (ISO) anticipates this problem and clearly addresses it: “If the adjusted amount of loss is less than or equal to the Deductible, we will not pay for that loss. If the adjusted amount of loss exceeds the Deductible, we will then subtract the Deductible from the adjusted amount of loss, and will pay the resulting amount or the Limit of Insurance, whichever is less.”6 ISO businessowner forms contain a Deductible provision that is differently worded but has the same effect. If MEI’s policy includes the ISO Deductible provision, the insurer will pay $1,000,000. (The amount of the loss in excess of the deductible exceeds the limit.) Other policies state that the insurer will pay the amount of the loss that exceeds the deductible, without clarifying that that amount will be paid up to the applicable

limit. When that guidance is omitted, an insurer might reason that the “loss” is $1,000,000—the policy limit—and subtract the deductible after applying the limit, in which case the insurer would pay $990,000 for MEI’s loss. In effect, the insurer will have subtracted the deductible from the limit, not from the loss. Subtracting the deductible after applying the limit guarantees that the insured would never be able to collect the full limit, even when the loss exceeds the limit by more than the deductible. An informal and unscientific survey of a number of adjusters indicates that applying the deductible to the loss, rather than to the limit, is the method used by most adjusters unless the policy specifically provides otherwise.

thing because none of the individual building losses equaled or exceeded the deductible.7 If, instead, Building 3 had sustained a $5,500 loss, the insured could have collected $500 on Building 3 plus the $7,500 combined losses to Buildings 1 and 2. Some policies do not contain such a provision, but simply state that the insurer will pay the part of the loss that exceeds the deductible amount. In this case, the adjuster can combine the losses to two or more specifically insured items and then pay the amount of loss that exceeds the deductible. Finally, when multiple property items are insured on a blanket basis (one limit applying to all covered property), the current ISO form’s prohibition against combining losses to multiple items does not apply.

Can Losses to Separate Items Be Combined?

Does It Matter Which Item the Deductible is Subtracted From?

In another fictitious case, Charter High School’s campus is hit by a windstorm that damages three of its buildings. The repair costs are as shown: Building 1: $3,500 Building 2: $4,000 Building 3: $4,500 The repair costs for all buildings total $12,000, and the school’s commercial property policy has a $5,000 per occurrence deductible. Assuming that each building is insured (on a replacement cost basis) for a separate limit that is sufficient to avoid a coinsurance penalty, how much will the insurer pay for this loss? Can the building losses be combined before applying the deductible? If so, the insurer would pay $7,000 ($12,000 minus the $5,000 deductible). ISO commercial property forms state that when a loss involves damage to two or more specifically insured items (such as three buildings), the losses cannot be combined before applying the deductible. Instead, the amount of loss to any one item must equal or exceed the deductible in order for the insured to collect for loss to any of the buildings. However, the deductible applies only once for each occurrence. If its policy contained that provision, the school would not be able to collect any-

Does it matter whether the deductible is subtracted from one covered item instead of another? It might. For example consider this hypothetical case: A commercial property policy covers two buildings. Both buildings are damaged in a single explosion. Limit of Insurance – Building 1: $60,000 Limit of Insurance – Building 2: $80,000 Loss to Building 1: $60,100 Loss to Building 2: $90,000 Deductible: $250 If the deductible is applied to Building 1, the insured will collect $59,850 for the Building 1 loss and $80,000 for the Building 2 loss—total $139,850. If, instead, the deductible is applied to the Building 2 loss, the insured will collect $60,000 for the Building 1 loss and $80,000 for the Building 2 loss—total $140,000. In this case the insured is paid the full amount of insurance on Building 1 because the deductible is applied to the Building 2 loss. The full amount of insurance is also paid on Building 2 because the amount of the loss that exceeds the deductible is larger than the amount of insurance.8 continued on page 14

6 ISO form CP 00 10 06 07 © ISO Properties, Inc., 2007 7 It might be argued that the deductible is being applied three times, once to each building, and that the insured should therefore be able to collect $7,000. 8 It would be more dramatic with a larger deductible. A $5,000 deductible would produce a difference of $4,900 between the two methods.

12 March 18, 2013 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] continued from page 12

The ISO Building and Personal Property Coverage Form (CP 00 10 06 07) uses this same example, applies the deductible to the Building 1 loss, and calculates the total amount of loss payable as $139,850. However, the coverage form contains no provision that would require the deductible to be applied to the Building 1 loss or prevent the adjuster from applying the deductible to the Building 2 loss. Therefore, the authors believe that the deductible can be applied to the Building 2 loss, in the manner described in the deductible provision, allowing the insured to recover $140,000 for the loss. The same type of claim situation could occur under a homeowners policy when both the dwelling and personal property have been damaged in one occurrence. There too, the insured will benefit from applying the deductible to whichever item (building or personal property) exceeds the applicable limit of insurance, thereby allowing some or all of the deductible to be absorbed by the amount of loss in excess of the limit. In the case of a percentage windstorm deductible, the amount of the deductible could be significant. For example, a 5 percent deductible with a $300,000 Coverage A limit of insurance is $15,000. Does Deductible Apply Before, or After, Coinsurance? At one time, commercial property forms didn’t say whether to subtract the deductible before or after you applied the coinsurance provision. Now, most forms contain a provision that makes this clear, although there’s a dramatic difference between the method specified in ISO forms and the one that AAIS (American Association of Insurance Services) forms call for.

In summary, the most important advice to help you overcome the challenges of applying deductibles is to pay close attention to the wording of the deductible and coinsurance provisions in the particular policy.

The deductible provision in the ISO Building and Personal Property coverage form says, “…we will first reduce the amount of loss required by the Coinsurance Condition or the Agreed Value Optional Coverage.” In contrast, the Building and Personal Property Coverage Part of the American Association of Insurance Services (AAIS) says, “The deductible applies to the loss before application of any coinsurance or reporting provision.” To see why it matters, consider this hypothetical case: The insured suffers a $500,000 fire loss to its building. The building limit in the insured’s policy is $600,000. The policy calls for replacement cost coverage, 80 percent coinsurance and a $10,000 deductible. The replacement cost value of all covered property immediately before the loss occurred was $1,500,000. Because the limit is less than 80 percent of the property’s value, the coinsurance provision must be applied. The resulting reduction of the collectible loss amount is often referred to as a coinsurance penalty.

In the ISO form, the deductible is subtracted from the loss after the coinsurance penalty is applied, as shown: - Step 1: $1,500,000 × 80% = $1,200,000; - Step 2: $900,000 ÷ $1,200,000 = 0.75; - Step 3: $500,000 × 0.75 = $375,000; - Step 4: $375,000 - $10,000 = $365,000 payable by insurer; Using the method described in the AAIS form, the coinsurance factor of 0.75 is calculated as in steps 1 and 2. However, the deductible is subtracted from the loss (step 3) before applying the coinsurance penalty to the amount of loss (step 4) as shown: - Step 3: $500,000 - $10,000 = $490,000 - Step 4: $490,000 × 0.75 = $367,500 payable by insurer Subtracting the deductible before applying the coinsurance penalty always results in a larger recovery for the insured, in this case an additional $2,500. The example shows the importance of checking the deductible provision to ascertain when the deductible is subtracted. The resulting difference between the two approaches becomes more dramatic as either the amount of the deductible or the coinsurance penalty increase. For example, had the deductible been $25,000, the difference between the two methods would have been $6,250. If the amount of insurance had been $600,000 (which would make the coinsurance percentage in step 2 above .50 instead of .75) the difference would have been $5,000. In summary, the most important advice to help you overcome the challenges of applying deductibles is to pay close attention to the wording of the deductible and coinsurance provisions in the particular policy. [IA]

The Consumer Brand of the Independent Agent. www.iiabny.org/TrustedChoice 14 March 18, 2013 / INSURANCE ADVOCATE

Senator John Sherman Author, Sherman Antitrust Act

a political king over and sale of life.”

Sen. John Sherman 21 Cong. Rec. 2456 (1890)

“If we would not submit to an emperor we should not submit to an autocrat of trade, with the power to prevent competition...”

“If we will not endure a king as power we should not endure a the production, transportation, of any of the necessaries

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urgood Marshall U.S. V. Topco Assoc., 405 U.S. 596 (1972)

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e Supreme Court of the United States agrees with the provisions of the Sherman Antitrust Act

Sen. John Sherman 21 Cong. Rec. 2456 (1890)

“No private corporation shall be created e corporate rights granted to one are open to all.”

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[ COVER ]

By Allen B. Roberts

16 March 18, 2013 / INSURANCE ADVOCATE

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[ COVER ]

Allen Roberts, member of the law firm Epstein, Becker and its former managing partner, provides the Insurance Advocate’s readers with a rundown of five topics which will impact employers in 2013 and beyond. In the article that follows, Allen offers an alternative, even contrarian view of each issue in focus. We believe that this material should be understood by agents and brokers and those who advise any one who has employees, runs a business et cetera. We note particularly his focus upon independent contractors as a class and upon the Affordable Care Act. The Insurance Advocate thanks Mr. Roberts and Epstein, Becker and trusts that this will be of value to our readers. SA

Affordable Care Act—Will Incentives and Disincentives Change Employer Patterns of Health Insurance Payments for Family Members? By popular account, the Affordable Care Act (“ACA”) would preserve the base of insureds and extend health insurance coverage to as many as another 32 million Americans. That estimate could be wrong if ACA disrupts patterns and experience of spouse and dependent coverage on employer-paid policies. Much of the political and media comment has focused on mandates, exchanges, and reasons that employers may maneuver to satisfy requirements concerning employee coverage, or drop it completely. Left out of the discussion has been the cost of covering family members of employees and the opportunity to shift employer dollars away from spouse and dependent premiums and place more dollars in premiums for individual employees. If that happens, spouses and dependent children will receive insurance coverage under employer-provided plans only if their premiums are paid by the employee, a household member, or some third party. Otherwise, those family members must obtain insurance elsewhere or join the ranks of the uninsured, something that might have been unimaginable for many of them—and perhaps for advocates of ACA who have considered it a move towards universal health care coverage. Proposed regulations issued by the Internal Revenue Service (“IRS”) establish that dependent children up to age 26 must be offered insurance coverage under plans that an employer provides to its employees, but there is no similar requirement for spouses because—intentionally or not— ACA does not include them. If spouses of employees obtain coverage under employer plans, it will not be because federal law requires it. ACA is silent, also, with regard to the source of payment for dependent premiums, and employers may reallocate dollars from voluntarily subsidizing spouse and/or dependent coverage in the preACA era to paying premiums for employee-only coverage now that legal obligations and penalties are being clarified. Whether total employer costs will rise,

fall, or be managed differently to assure ACA compliance and avoid penalties remains to be seen as large and small employers reexamine the realities of attracting and maintaining workforces, while managing total compensation and corporate objectives of employee satisfaction. Total costs will matter as employers decide how to allocate dollars to health care premiums. However, it is not likely that employers will disregard altogether the complexities of important decisions affecting valued employees accustomed to receiving spouse and dependent coverage as part of a comprehensive compensation and benefit package. Corporate philosophy and policy, combined with the practicalities of employee experience and expectations, competitive factors, and a possible trigger to union organizing, are likely to influence how employers respond to ACA’s provisions and interpretations concerning spouse and dependent coverage—and payment for it. The IRS interpretation of dependent coverage also may present an occasion for employers to equalize their costs of employing individuals and those with families and to remove benefit disparities, perhaps by presenting a menu of available benefits and a schedule of costs from which employees register their priorities within the array of selections. If employees with families qualify for the same compensation and paid time off for vacations, sick and personal days, and holidays as single employees, is it irrational for employers to allocate the same amount for medical coverage or invite tradeoffs? It may not be too farfetched for employers to designate the additional cost of health insurance for family members as a cafeteria item of available benefits, paid by the employer until a finite purse is exhausted and then available at the employee’s cost. Family health coverage under ACA possibly could trigger a wholesale employer examination of the totality of employee benefits and related costs and conduce a restructuring—from paid time off to medical insurance—that makes employees active stakeholders, as well as beneficiaries.

continued on page 18

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[ COVER ] continued from page 17

Multiemployer Pension Plans—An Imperative to Define the Benefit It is commonplace for unions to promote the message that the multiemployer defined benefit pension plans included in the contracts that they negotiate provide comfortable retirement security—touted as “superior” to that offered by employer or individual retirement programs—for those they represent and those they wish to organize. That postulate may not withstand current scrutiny or the test of time for several reasons. Multiemployer defined benefit pension plans are designed to provide a defined monthly benefit at retirement based on a formula taking account of years of employer contributions and employee service. Since enactment of the Pension Protection Act of 2006, annual certifications are required based on standardized funding and liquidity measures for determining the financial health of those plans. According to a January 2013 report to Congress by the Pension Benefit Guaranty Corporation (“PBGC”), data available through late 2012 indicate that 52 percent of participants are in moderately or severely distressed plans. The report identifies several triggers for “critical” status, including a funded percentage of less than 65% and projected insolvency during the next 7 years, or a projected accumulated funding deficiency or insolvency within 4 years. Plans with a funded percentage of less than 80% or with a projected funding deficiency within the next 7 years are in “endangered” status; plans that have both are “seriously endangered.” Plans that are in neither endangered nor critical status are in [non-distressed] “green” status. The PBGC report shows that legislation has allowed some plans to: • defer actions that their status should require; • extend the time for demonstrating progress under their funding improvement or rehabilitation plans, amortizing investment losses incurred in the 2008 market crisis over a period nearly twice as long as otherwise required; and • lessen the impact of investment losses on the actuarial value of plan assets 18 March 18, 2013 / INSURANCE ADVOCATE

used to determine their future funding requirements and funding status. While economic performance may have deteriorated, the optics could indicate that funds are performing acceptably relative to previously set goals. There is nothing insidious in a grace period to recover from financial market turmoil. But reliance on a legislated window should not mask fundamental problems of importance to stakeholders. Funds will fulfill their promise—and participant expectations—only through a combination of positive portfolio performance relative to assumptions made by fund trustees, guided by actuaries they engage, and a contribution base nourished by new entrants into the plans. Dollars contributed for employees support amounts currently unfunded as well as the credits active participants earn during their own employment. But, for many plans, the realities of investment experience and revenue from new participants fall short of funding needs. In the optimal pyramidal model, retirees would be supported by a broad base of new and younger employees who continue as plan participants until reaching their own retirement or who depart, leaving contributions made for them to accumulate for any benefit in which they have vested and a surplus to be shared by others. If employer expansion or union organizing does not add new bargaining unit members as participants, the pyramid is likely to become recontoured to silo or inversion, and there may be no refreshing supply of contributions to fulfill actuarial expectations and assumptions on which current and future commitments and benefit levels are set. The current circumstances of multiemployer defined benefit pension plans pose issues for current stakeholders as well as employers and employees who are not subject to collective bargaining agreements requiring contributions. For employers and employees operating outside the sphere of multiemployer defined benefit pension plans, union enticements and the merit of entry should be assessed thoughtfully. Circumstances of even currently stable funds in stable industries can change. Conditions in business sectors that are predominantly unionized may change because of technology, new competitors in a market, geographic relocations, outsourcing, or imports. Furthermore, outside the con-

It is commonplace for unions to promote the message that the multiemployer defined benefit pension plans included in the contracts that they negotiate provide comfortable retirement security—touted as “superior” to that offered by employer or individual retirement programs—for those they represent and those they wish to organize. That postulate may not withstand current scrutiny or the test of time for several reasons. trol of an employer contributing to a healthy fund, mergers with currently or prospectively weaker funds, or funds having less favorable demographics or characteristics, can alter financial soundness. An employer contributing to a multiemployer plan also must assess the value of its total benefit package absolutely and relative to the needs and expectations of its own unionized workforce in the context of overall compensation and benefits, weighing its philosophy with respect to a menu and array of benefits and experience with transfers and promotions to positions outside of bargaining units, as well as norcontinued on page 20

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ADVERTORIAL

Employment Practices Liability EVERY COMPANY THAT HAS employees needs Employment Practices Liability (EPL) coverage. Employment Practices Liability provides protection to employers against claims by their employees that they were treated unfairly in a variety of scenarios: hiring, firing, sexual harassment and discrimination to name a few. In addition to the company itself, the coverage applies to directors and officers of the company. EPL claims can be made by current and former employees, as well as those who were never hired. Understanding the need for, and the protection provided by, Employment Practices Liability coverage is another value-added service of the true insurance professional. According to the regulations such as According to the Equal Employment Americans With DisEqual Employment abilities Act (ADA), Opportunity Commission (EEOC), Family and Medical Opportunity nearly 75% of all litiLeave Act (FMLA), Commission (EEOC), Age Discrimination gation against corporations is employin Employment Act nearly 75% of all ment-related. The (ADEA), and The most common types Civil Rights Acts of litigation against of claims are dis1964 and 1991. For corporations is crimination, sexual companies with operharassment and ations in multiple employmentwrongful terminastates, the EPL coverrelated. tion. The most comage will need to be taimon types of dislored to address the crimination charges in 2012 were state-specific requirements. retaliation, race, and sex discriminaEPL provides defense for the comtion, including pregnancy. EEOC stapany for claims made as well as paying tistics for New York show that, in 2012, judgments to settle claims. It is importhere were 3,914 total discrimination tant to note that, in many states, defense charges filed. This represents 3.9% of is included within the main liability the total charges in the United States limit. Money available to pay claims for the same period. In New Jersey, the will be reduced by defense costs. EPL number was 1,797, or 1.8 %. coverage will not provide coverage for Not all EPL policies are alike. Alintentional disregard of the law by the though there are standardized EPL policompany, but it may provide protection cies available, most insurers have their to the company for such acts done by own wording. It is important for the employees without the knowledge or insurance agent to understand the proapproval of the company. gram differences in order to properly Most EPL policies are written on a advise and obtain coverage for their claims-made basis. This may be a probclients. lem since EPL claims may be based on a Employment Practices Liability covseries of incidents. Claims-made policies erage is intended to address requirerequire that the act or acts in question ments in federal and state employment occur after a set Retroactive Date, and

during the policy period. The insuredâ&#x20AC;&#x2122;s knowledge of an allegation triggers the claim date, but the claim must also be reported to the insurance company within the policy period. If there is a string of events going back over multiple policy periods, there may be a problem determining when the claim was actually made. When did the employer know about the allegation? In order to obtain higher limits of EPL coverage, a company may be required to show that it has proper loss prevention practices in place. An important added benefit of EPL coverage is that some insurers offer resources outlining suggested practices and procedures to reduce the likelihood of employment-related claims. Employment practices liability is an insurance coverage that is growing in popularity. Helping clients understand the exposure, reduce the possibility of loss, and procure the proper coverage is the sign of a true insurance professional.

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mal attrition and turnover. Those considerations are further impacted by the complexities of a withdrawal liability that could be assessed for the employer’s proportionate share of a plan’s unfunded liability when its contributions cease. Employees also may have their own preferences for retirement benefits that are different from those available in the context of a multiemployer defined benefit pension plan. Young employees may have financial priorities and an interest in controlling retirement investment in a way that matches their own career ambitions and mobility and is portable as employment and other circumstances change—a view sometimes criticized as not sufficiently objective and thoughtful. Such individuals also may be concerned that contributions on their behalf would do less to secure a benefit for themselves than pay off the unfunded liability attributable to current retirees and longterm participants, possibly because of a credit formula giving less than full value for their employer’s contributions for current service and considered disadvantageous to new participants. The landscape for multiemployer defined benefit pension plans has its share of obstructions and craters to be navigated. For employers committed by collective bargaining relationships with unions, options may be explored to find a negotiated course that realizes the best value for the good of the current and anticipated workforce and for the future of the enterprise. For employees, it is important that realistic preferences and needs be considered in the bargaining that is conducted between their employers and the union representing them. A large group of employers not yet committed to such funds may opt to circumnavigate the multiemployer defined benefit pension plan road altogether.

The NLRB—Organizing by Pop-Up Unions in Break-Out Units Despite some perceptions of cohesiveness and political acumen, influence and wherewithal following the 2012 election cycle, labor unions represent only about 7.3 percent of the private sector workforce in the United States, and only 6.6 percent 20 March 18, 2013 / INSURANCE ADVOCATE

of workers are actually union members. When concentrations in certain industries and geographic areas are factored, that leaves entire swaths entirely union-free, or substantially so. Foreseeably for the next four years, unions will continue to benefit from a National Labor Relations Board (“NLRB”) that has innovated changes in substantive law and introduced procedures during the past four years that facilitate organizing and restrict the time for responsive employer communications. That advantage has not yet translated into material membership gains by “Big Labor”— although it may still. However, together with other breakthroughs by way of social media and electronic and physical access to employer premises and communications systems, expanded interpretations of protected concerted activity, and such movements as Occupy Wall Street and grass roots organizations, conventional unions may be eclipsed, if not displaced, by one-off, special purpose organizations formed solely to serve discrete affinity groupings of employees in new bargaining units. If this occurs, it will be enabled by two bedrock principles of the National Labor Relations Act (“NLRA”), aided by a recent interpretation in case law. First, notwithstanding the attention given by supporters and critics alike to large, well-financed conventional unions with institutionalized structures and processes, the NLRA defines a “labor organization,” capable of winning certification as the exclusive representative of employees, to mean any body that exists, in whole or in part, for the purpose of dealing with employers concerning grievances, labor disputes, wages, rates of pay, hours of employment, or conditions of work. This means that an outside force, planning and funding offsite meetings and campaigns, is not necessary; something as simple as a homegrown pairing or grouping of workers having common interests or worries could qualify as a labor organization. Second, with respect to the NLRB’s formulation of a unit appropriate for collective bargaining purposes, it is not necessary that the unit be the most appropriate or that it conform to management’s organizational structure. Historically, the NLRB has been mindful of its authority to make

For employers committed by collective bargaining relationships with unions, options may be explored to find a negotiated course that realizes the best value for the good of the current and anticipated workforce and for the future of the enterprise. determinations of the unit appropriate for purposes of collective bargaining, consistent with legislative policy assuring that employees have the “fullest freedom” in exercising statutory rights to organize. If it survives Circuit Court of Appeals challenge on review, an NLRB standard adopted in 2011 could lead to a proliferation of small, fractionated bargaining units; it would place the burden on an employer contesting the appropriateness of a labor organization’s preferred bargaining unit to show that employees excluded from the unit sought by the petitioning labor organization share an “overwhelming community of interest” with another readily identifiable group. If a readily identifiable group exists based on such factors as job classification, department, function, work location, and skills, and the NLRB finds that the employees in the group share a community of interest, the petitioned-for unit will be an appropriate unit, despite an employer’s contention that employees in the unit could be placed in a larger unit that also would be appropriate—or even more appropriate. Much as the NLRB’s approach has been perceived to benefit large, established unions, it may not be surprising if employee groups, newly aware of the NLRB’s outreach and enlargement of rights to engage in protected concerted activity through

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[ COVER ] social media and other means, realize also that they are capable of becoming homegrown, single-purpose labor organizations with authorization from the NLRB to define a bargaining unit by its lowest common denominator—or to invade and fractionate existing bargaining units currently represented by Big Labor.

Independent Contractors— A Convenient Classification Until Challenged by Personal Interest or Government Audit For reasons of economic and/or lifestyle choices, a significant segment of the U.S. population has elected to earn a living classified as independent contractors. No single legal definition of the term “independent contractor” exists within various federal tax and labor laws, their state law counterparts, or workers’ compensation and unemployment insurance laws and regulations. Nevertheless, the report currently available from the Bureau of Labor Statistics indicates that 10.3 million individuals were considered independent contractors, having no direct employer as of 2005. By way of comparison, there were 7.85 million union-represented workers in the private sector in 2012 and approximately 12.3 million classified as unemployed as of January 2013. In a truest form, an independent contractor arrangement enables an individual to control personal activity and profit or loss in arrangements with one or more businesses. Companies engaging independent contractors typically are not responsible for withholding taxes from payments or deducting and making their own contributions for such employment-related items as Social Security, Medicare, or unemployment insurance or for providing workers’ compensation insurance. Independent contractors are not considered employees for purposes of inclusion in the medical or pension plans that employers provide. When properly structured and implemented, independent contractor status can afford freedom, flexibility, opportunities, and incentives for the mutual benefit of individuals and businesses engaging their services. A breakdown can come when an independent contractor feels disadvantaged relative to employees of the business or when the relationship ends, especially if the termination is initiated by the busi-

ness. At that point, the individual may claim a regular or overtime wage entitlement or benefits that the business makes available to its employees, or unemployment, disability, or workers’ compensation insurance benefits. Alternatively, a federal or state enforcement agency may conduct a general audit or a specific, targeted audit that is initiated by an individual during the time that services are performed or after the termination of a relationship. Even a limited government audit may be expanded to additional individuals, arrangements, and facilities. Also, formal and informal programs and protocols for governmental agencies or enforcement authorities to share information can expose businesses to a comprehensive review of the practice of classifying individuals as independent contractors. When such audits determine that independent contractors have been misclassified, the outcome may subject businesses to remediation for the full term of the applicable statute of limitations—in some states, six years from the date of an initial claim or audit. The increased scrutiny of independent contractor status and the risks of misclassification warrant self-assessment to assure compliance and minimize exposure to claims.

Will “Unemployment Status” Become the Next Employment Protection? The list of protections against discrimination will grow to include those who have been unemployed if a bill (Intro 814A), which was passed by New York’s City Council, survives mayoral veto and gains traction elsewhere. The bill amends New York City’s Human Rights Law to prohibit an employer or employment agency, or an agent of either, from: • basing an employment decision with regard to hiring, termination, promotion, demotion, discipline, or compensation or the terms, conditions, or privileges of employment on the “unemployment status” of the applicant or employee without a bona fide reason that is substantially job-related; or • publishing or posting an advertisement for a job vacancy in New York City stating or indicating that current employment is a job qualification or

requirement or that unemployed applicants will not be considered for employment. Individuals alleging discrimination would be allowed to pursue claims by filing a complaint with the New York City Commission on Human Rights or bringing an action in court. The remedy available for meritorious claims could include conventional make-whole relief, compensatory damages, and penalties, in addition to injunctive relief. The applicant will have little difficulty showing that he or she was unemployed— with the term “unemployment status” defined to mean “an individual’s current or recent unemployment.” Most résumés and completed application forms are likely to reveal periods of unemployment. An employer should be able to defend a discrimination claim by showing that its denial of an employment opportunity was not based on unemployment status or that its reasons were bona fide and “substantially job-related.” Examples of permissible reasons that employers could consider are suggested in a City Council press release: “whether an applicant has a current or valid professional license; a certificate, permit, or other credential; or a minimum level of education or training.” The bill does not indicate whether an inquiry into reasons for prior denials of employment would be permissible, but it is permissible to inquire into circumstances of a previous employment termination or demotion and the basis for it. However, as a matter of policy, many employers decline to provide detailed responses to inquiries from prospective employers. Also, an applicant may not share—or even know—all the reasons for a prior adverse employment action or denial of opportunity. Under a New York City law enacted over mayoral veto—or others modeled on it—employers would have to address the extent to which previous unemployment or a history or pattern of unemployment may be considered with respect to decisions to hire applicants or change the status of current employees. Expansion of discrimination laws to protect those who have been unemployed would occasion review of interview and selection criteria that could indicate impermissible considerations and expose employers to new claims. [IA]

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[ FACE TO FACE ]

By Michael Loguercio

A Class ACT…AUGIE and AIMS, too!

s many of you know, I have long been involved with some wonderful insurance industry organizations, and ACT/AUGIE/AIMS is certainly in a class of its own, high class that is, of which myself and many others are proud to be active members.

agency is located. What’s been described as the largest of these ﬂoods took place in 1955, before I was born. More recently, we’ve seen ﬂooding brought on by extraordinary amounts of rain associated with tropical storms and hurricanes—Floyd in 1999, Ivan in 2004,

“Warnings coming from our insurance companies, local and state emergency preparedness officials and our ever-so-dramatic local weather forecasters were much different than they had been in previous years. The messages were much stronger. Everyone, including our agency staff, was in emergency mode.” -Lisa Parry, Principal, Parry & Son Michael Loguercio

Known for gathering some of the country’s top insurance carrier, agency, and service provider organizations to “ACT” (sorry, couldn’t resist that one!) in concert with each other, setting aside competitive egos, and working towards a common goal of developing new and innovative ways to utilize technology in order to assist those in this thing of ours to become more effective and efficient in their daily activities. Last week was our annual February conference, this time assembling in Dallas, and to no one’s surprise the conference was another tremendous success. However, this conference was slightly different, with so much of the conversation turning towards “Superstorm Sandy”, and how our industry may be more in tuned to prepare for, and facilitate the aftermath, of what a storm such as this leaves in its path. Lisa Parry, a principal of Parry & Son which is an independent insurance agency located in Langhorne, PA, is a fellow member of the ACT Committee. She wrote the following piece for ACT on how “Agency Pre-Planning Pays Off during Superstorm Sandy” and has graciously allowed me to share it with you: Over the past few years, our region has faced ﬂooding numerous times. Most often, it’s local—involving the Delaware River, which separates New Jersey, where I live, and Pennsylvania, where our family insurance 22 March 18, 2013 / INSURANCE ADVOCATE

Irene and Lee in 2011, and other events. So in the latter part of October, when buzz started about potential mid-Atlantic impact from what then was Tropical Storm Sandy—a system hundreds of miles away from the Florida coast—we thought we knew what was coming. We were wrong. This time was different. I was actually in Florida as Sandy began her approach. Early in the week, we talked about the storm at an industry dinner and while we gathered to watch the ﬁnal presidential debate. On Wednesday, I ﬂew home and on Friday, our world was turned upside down as we began implementing our disaster plan—and not our annual Halloween party preparations. Warnings coming from our insurance companies, local and state emergency preparedness officials and our ever-so-dramatic local weather forecasters were much different than they had been in previous years. The messages were much stronger. Everyone, including our agency staff, was in emergency mode. We believed we were ready for this storm and its potential impact, thanks to information and ideas I picked up from the Agents Council for Technology (ACT) website’s Disaster Planning page and from fellow agents I knew through my volunteer work with ACT, AUGIE 2

Getting ready We had our agency disaster plan in place, from the 2011 storms, which allowed us to act before the storm hit. We had thought through potential scenarios that could affect our agency and clients and were ready as Sandy approached. It was nice to have all of that work done ahead of time. All we had to do that Friday was go through the checklist and follow the steps we had outlined. Things were pretty much on autopilot. We had laptops, cell phones and, most important, extra chargers on hand to keep our portable electronics powered up. Given the likelihood that we would probably be operating without power, we printed expiration lists and client lists. This advice, from Gulf Coast independent agent Angelyn Treutel, who has lived through hurricanes, including Katrina and Rita in 2005, was invaluable, and had served us well in 2011. We updated and printed a spreadsheet that contained all of the contact information for our company claims offices so we’d have information handy and would be prepared to respond to customer calls. We needed to be able to go into action quickly. As independent agents, that’s what we do—we respond and act on behalf of our clients. It is emotionally stressful to have a claim; if we’re there when customers need us and if we can walk them through the process, we’ve done our job. By Friday afternoon, we had posted our claims cellphone number and my personal email address on our website, so customers could reach us in the event our office or our office phone system were not accessible. We posted similar information to our Facebook page and our LinkedIn pages, and shared it via Twitter. I am amazed at how many people saw the information online—I know, because I received calls, text messages and emails on those otherwise private numbers and email addresses. We shared hurricane preparedness information on our blog, including links to local resources and information we received from one of our carriers during Hurricane Irene that was worth saving. We distributed the blog post through Facebook, LinkedIn and Twitter. We used these forums to update continued on page 24

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readers on what was occurring. Using our various lists, we spent much of Friday calling flood customers and making priority arrangements with tree-removal companies, clean-up and restoration companies, contractors and others. We knew if the storm were less severe than predicted, we could always remove folks from the priority cleanup list— a lesson we learned a few years back during a different storm. Waiting it out Because we were able to do so much agency work ahead of time, we were able to spend time preparing my parents’ house on the river for potential flooding, including sand bagging and moving furniture from the first floor to higher ground. We continued to make work preparations, but we didn’t really have to spend a lot of time thinking about what we 3 needed to be doing, because all of the planning was already done. Again, we just continued to work through the checklist. Given the dire forecasts, my dad broke with tradition and decided he and mom would evacuate their home this time and stay with us. Usually, he likes to stay put so he can manually operate the sump pumps and get water out of the basement when it starts to come in. But this time he didn’t. I’m not sure why, but he apparently sensed things—including the wind—would be different this time. Over the weekend, I started receiving texts from clients—flood clients, in particular. We started receiving status updates from as far away as the Jersey Shore. This is actually the first time in 15 years we’ve seen much flooding there, so this was new and different—and we were glad we were ready. We started reporting claims right away, which enabled our clients to have first response from claims adjusters. As one of our carriers put it, we want to be first in to adjust and first out to pay claims. We were able to communicate via text with our employees. It was reassuring to check in and see how everyone was doing and to make sure they and their properties were okay. It’s important to take care of your employees and to make sure they’re prepared. When claims arrive, if their personal affairs are in order, they’re better able to help clients. At our home, we all waited for the full force of the storm to arrive. On Monday it hit with a vengeance. We lost power at 24 March 18, 2013 / INSURANCE ADVOCATE

around 8:00 PM Sunday evening and continued our wait by candlelight. We tried to sleep, knowing we’d need to be rested, but the wind and driving rain outside were relentless. After the storm When we woke up early the next morning, Dad and I boiled water for coffee and headed out to check on his and mom’s house, as well as neighboring houses. There was no power anywhere—generators were operating traffic lights. Everywhere we went, all we saw were trees, trees, and more trees strewn about. The downed trees had created a monstrous debris field down their lane and in the yard. Fortunately, there were no trees on the house and water had not entered the basement. Later in the morning, I headed to the office—about 30 minutes away. The scenery was the same. Downed trees all around. When I arrived at the office, fire alarms were sounding, even though there was no fire. A sprinkler within our condo unit complex had burst. Without power or telephones, it would have been difficult to work in the office. But with the constant ringing of alarms, it was impossible. So I set up my office in the parking lot—in the front seat of my SUV. I was equipped with chargers, powered-up cell phones, my Netbook and an iPad. I had printed ACORD loss notices from 2011 along with my printed expiration lists. I took calls from clients and called others. I received emails and text messages—some with pictures of storm damage. 4 And I responded to clients and forwarded information to claims offices and adjusters. As the day went on, the magnitude of losses became more apparent. We had a number of claims at the Jersey Shore, and numerous claims in eastern Pennsylvania and into central New Jersey. The worst property damage claims we had involved property damage resulting from falling trees. One was rather significant; the tree apparently caused the foundation to crack and some walls to move. After our contractor was out to assess the damage, we realized we needed the assistance of an engineer to identify, interpret and advise the needed repairs so the home could be structurally sound again. The engineer’s report was instrumental in settling this claim for our client. Another property claim—just 10 minutes up the road from our office—was caused by a number of trees falling on the insureds’ home and cars. On the less-severe-but-kind-of humorous

end of the scale was fence damage caused when a flying trampoline landed. Knowing nobody was hurt and property damage was minor, the image of an eight-foot trampoline soaring Frisbee-style through the air makes me chuckle. (It turns out this is a liability claim for the trampoline’s owner since she had not anchored the trampoline prior to the storm.) A local bank we insure, which had been decked out with Halloween decorations, had a tree come through the roof. Tree branches poking through the bank’s drop ceiling seemed to complement the holiday décor. 5 We worked quickly with the insured and the contractor to tarp the roof to prevent further damage, conduct some initial cleanup, and prepare estimates. I received a call from the claims adjuster the following Sunday evening for follow up—all parties in the claim system worked diligently to service and respond to claims. Agency & Carriers expedite the claims process In addition to claims for property damage caused by trees and trampolines and flooding, we also handled calls on loss of refrigerated products, business interruption, business income, and more. We worked with insureds and contractors to shore up properties, get emergency repairs done quickly, and get estimates put together for cleanup and repairs. And we worked with carriers to get claims moving. In many cases, when we did the pre-work and submitted photos, invoices and repair estimates to the insurance companies, they were able to adjust claims with this information which expedited check issuance. On Tuesday—the day after Sandy hit— one of our carriers sent out an email announcing it was hosting a series of webinars to provide claims response info. The company let us know it had positioned two teams of adjusters just outside of the impacted areas on the east coast, and it was ready to move. The company’s goal was to be first in and first out, to be first responders. The communication was fantastic, just like the claims response. Discussion with a commercial client from Sea Isle City, N.J., drove home our agency’s and carrier’s value. We had texted the weekend before Sandy hit and before they continued on page 26

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evacuated the island. On Monday afternoon, when they were able to return to the island, she let me know one of her two commercial buildings had sustained three feet of water damage within the building. We set up a flood claim that day. An adjuster was assigned right away and was available to go out to look at the building that same week. We were able to have him send an advance of $15,000 to the insured prior to completing a proof of loss. In contrast, she did not see an adjuster at her residential condo, which we don’t insure, for at least a couple of weeks. Two flood claims with two totally different response scenarios. 6 Two days after Sandy hit, we were able to return to our office; power had been restored and the sprinkler (and the noisy alarm) had been dealt with, but the phones were still down. When everyone returned to work, my brother Ryan and I divvied up the claims that had been coming through our cellphones, and fellow employees worked them using their own cell phones. We were able to tie all of our mobile communication back to our management system, so we have permanent records of what transpired. Lessons learned Needless to say, going through another major storm like Sandy taught us some important lessons. First and foremost, we’ll continue to trust Dad’s intuition. If he decides to evacuate his home, we know things will be serious. We also learned the value of preparation, which was aided by the information available through ACT and other industry sources. One of our carrier calls drove that home. On that call, other agents were asking for FEMA’s phone number and the number to report National Flood Insurance Program claims. They asked if they could report claims with just a name and/or property address. All I could think was, “Wow! I’m so glad we were prepared” and “I’m so thankful for the ACT documentation.” Because we weren’t scrambling for info like this, we could help our clients when they were scrambling and when they needed us most. I learned the importance of mobile technology and power. When the office is without power and phone service, we could respond, thanks to our laptops, iPads, cell phones and chargers. We could text pictures to claims offices, so adjusters could see first-hand what they were dealing with, and we could 26 March 18, 2013 / INSURANCE ADVOCATE

exchange info with clients anytime, anywhere. Equally important was social media. Being able to communicate early and often— and not having to learn social media as the storm approached, but knowing how it worked because we use it to connect with clients and prospects all the time—made a huge difference in response and customer reassurance. I suspect we’ll continue to build on the communication we started before and after the storm, and help clients prepare even more for possible future disasters. Being ﬁrst in with claims (thanks, again, to having info at the ready as part of our agency disaster plan) put us in a priority position with carriers, and got the ball moving early. I learned how valuable this was when our customers were getting checks before some of their neighbors had even heard from an adjuster. That’s huge: in a disaster like this, being able to move money makes all the difference in the world. Getting advances lets our insureds pay contractors and keep things moving. We’re rethinking our phone system. Our local phone company was affected by the storm; as a result, we had no service and we couldn’t retrieve voice mail. An Internetbased phone system could offer more ﬂexibility, and allow us to manage and route calls more easily if we face another similar disaster. Because school was cancelled for a week, and we were camping at home without electricity for nine days, I wasn’t the only one learning things. My eight-year-old son received several 7 days of on-the-job “claim adjuster assistant” training. He learned about roofs and tree damage, partial payments, deductibles and coverage triggers. This learning builds on other expertise he developed accompanying me on underwriting risk inspections starting when he was 18 months old. He also learned about how insurance agents respond when disaster hits. On Friday, at the end of one of the most draining weeks we’d encountered as a staff, he put his artistic skills into motion and drew pictures for everyone in the office under Uncle Ryan´s guidance. He even wrote my dad a letter, complimenting him on his hard work and client response. It made me proud—and a bit hopeful that the sixth generation of Parrys is being groomed to keep our local business moving forward. Ten weeks after the storm, I’m amazed at how much our region—and our staff and customers—went through. And how far we’ve

come. I’m honored to be an independent agent, and I’m privileged to have resources, like fellow agents and groups like ACT, that help me to support my clients and community, in good times and bad. Thank you, Lisa, for sharing your experience with us. If you wish to speak with Lisa, she may be reached at Lisa may be reached at lisa-parry@parry-insurance.com With all of the “good” that comes from the ACT/AUGIE/AIMS conference, there is one more story of a personal nature that I want to share with you as well. Many of you have met my Godson John Mariana, who is an MP and Staff Sergeant in our United States Army. Stationed in Tucson, AZ, John was en-route to his 4th deployment to an undisclosed location overseas in “The War Against Terror,” along with his MWD (Military Working Dog) “Benny.” As fate would have it, John and Benny were traveling through DFW, and knowing that I was in town he called and asked me if I would be able to meet him for an hour or so during his brief layover. Of course, with the thought that we would not see each other for at least another year and with the fact that he would be in a not so pleasant environment while away, I jumped at the opportunity and literally ran over to the terminal. Explaining my situation to the ticket agent at American Airlines, she immediately handed me a gate and priority security pass, so that I may greet them as they disembarked the aircraft…thank you American Airlines! After a brief visit with John and Benny at the terminal, we hugged good-by, and planned on speaking at his earliest convenience, in between his working hours throughout the next year. I left the terminal, teary eyed, asking God to please bless those who put themselves in harm’s way so that we may remain free and safe. I headed off to dinner with some friends, while he and Benny headed off to war. A short while later, John called me and said that his flight was cancelled and asked if he and Benny could spend the night with me. Of course I was overjoyed, and welcomed them both! A very huge “thank you” to the gracious folks over at the Embassy Suites, who cordially allowed John and Benny to be their guests, and treated them continued on page 28

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[ FACE TO FACE ] continued from page 26

with the utmost respect that the two soldiers deserved. That evening, quite a few of our fellow ACT/AUGIE/AIMS friends were able to spend some time with John and I, and I so very much appreciate the love and support that you all showed them both that night...I won’t ever forget that. John is now at his destination, and he has asked me to please pass along his utmost appreciate to all of you who were with us at that impromptu sendoff that evening, and he said that he anxiously awaits seeing all of you once again, when he and Benny safely return from helping to defend our country. Thank you, my friends, for being there for him…and me. Until next time, Ciao for now. [IA] Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as an insurance technology professional and a licensed insurance broker. He is an active Past President of the Young Insurance Professionals of New York State, current ACT/AUGIE/AIM;, 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. In 2010 Michael was honored with the NY-YIP/PIA Insurance Professional of the Year award; and in 2012 with a NYYIP/PIA Lifetime Achievement award. Michael is also Chair of the 2013 Professional Insurance Agents Regional Awareness Program on Long Island. In his community, Michael is President of the Longwood Central School District Board of Education on Long Island, NY; is a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of The Middle Island, NY, Rotary Club and Central Brookhaven Lion’s Club. In 2013 he was awarded the SCOPE Community Service Award for his dedication to his community. Michael is a regular Contributor to the Insurance Advocate since 2008, and may be contacted at 631-345-9359 or michael.loguercio@ezlynx.com.You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr. 28 March 18, 2013 / INSURANCE ADVOCATE

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t the far end of a field in rural Ireland, 13year-old Cummin Clancy was put to work. Irish track champion Ned Tobin was throwing the discus. As Cummin recalled to the Connacht Tribune recently, “Tobin used to come to Oughterard to see my brother. He was a big man – he must have been around 6'6” - and he used to practice in our field. He would take out and throw the discus and I would then throw it back to him. Eventually, I could throw it farther than he could.” And so began Cummin's athletic career, a career that earned him a job in the police, a place on the Irish Olympic team in 1948, and a scholarship to Villanova University. Cummin had already overcome challenges before he ever touched a discus. Orphaned at age 10, he was raised to maturity by his oldest siblings, who were just 16 and 15 years-old, and by his neighbors in his small village. As he developed as an athlete, he earned a coveted spot in the Garda Siochana, the national police force. His move to Dublin allowed him to continue his athletic career, twice winning the British AAA Championships among other prestigious events. Even though his size earned him the nickname “the Galway Giant,” his surprising speed and quickness helped him become a world class Rugby player two years after picking up the sport. With such athletic success, he represented Ireland in the 1948

30 March 18, 2013 / INSURANCE ADVOCATE

Olympics in London, competing in the discus and shot put. While he didn't medal, he caught the eye of Jumbo Elliott, the track and field coach at Villanova University. Cummin accepted Elliott's scholarship offer and left Ireland to continue his athletic career, becoming the first of a long line of Irish track and field men to compete for the Wildcats. While at Villanova, he began the next great chapter in his life, meeting, falling in love with, and marrying a young woman named Maureen O'Grady, who was attending Rosemont College up the road from Villanova. Maureen and Cummin raised five children. Cummin took his habit of success with him to the business world. After completing a General Motors management training program, he started Clancy & Clancy Brokerage, an insurance agency which continues to this day in Garden City. He became a leader in the insurance industry, as president of the Independent Insurance Agents Association on Long Island and representing insurance industry causes in both Albany and Washington. He never lost sight of his Irish roots, returning home with his family every summer to the home he built in his old village. He also was a strong supporter of Irish causes, including being a founding member of the Long Island chapter of The Friendly Sons of Saint Patrick, and of Villanova throughout his life. He is survived by Maureen, his wife of 58 years who he considered responsible for his great success and happiness in life. Despite his accomplishments in athletics and business, Cummin always considered his greatest achievement to be his wealth of friends. His generosity and hospitality were legendary. Cummin is survived by his beloved wife Maureen; their five children, Maura, Sean, Sheila, Brian, and Brendan; seven grandchildren and innumerable friends. [IA]

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[ ON TH E LEVEL ]

By N. Stephen Ruchman, CPA

Ben Franklin: Electricity, Insurance, Proverbs and Extensions of Time

enjamin Franklin is credited with many things: For example, we all learn in grammar school that Franklin demonstrated lightning in a form of electricity and that, as an inventor, he created one of the first electricity genera-

wires are all above ground. With the weather trends as they are, we are certain to have more weather-related damage; and I’m grateful both to Ben Franklin and Pure Insurance for their contributions to my serenity.

While the department has urged carriers to provide notice of premium due and allow repayment plans or further extensions, these acts of leniency are no doubt up to the carrier and will be interpreted differently by various individuals and businesses.

well, even five months later, considering the overwhelming amount of claims the storm caused. After all this time, though, there are lessons insurance consumers, professionals and even policymakers are still learning. Take for example, the situation we face with the New York State Department of Financial Services’ moratoriums on terminations and cancellation of policies. This is perhaps the best time to point out that Ben Franklin also is often credited with the quote: “Never put off to tomorrow what you can do today.”

N. Stephen Ruchman

tors. Another thing most people in our industry recognize is that he helped conceive and form the first mutual insurance company in America in 1752. Now, my home was damaged during Hurricane Sandy. I was not victimized by flood, but my neighbor’s trees fell on my home. As a result, we suffered damage in excess of $10,000 and went without electricity at my house for several days. So, I’ve been thinking about Ben Franklin a lot lately, with a good measure of gratitude. Recently, I received an email from Pure Insurance, the carrier that handles my personal homeowners insurance. It said that since I’m a member of the company, it was offering me the following benefit after my claim: Pure will send an arborist to my house to check all of the trees to ensure I am not in danger of suffering future damage from them; or they offered me an alternative option: a whole house generator system at a five percent discount through a deal they made with General Electric. (By the way, Ben Franklin is also considered the founder of General Electric). After what we went through on Long Island, having a generator will provide me with tremendous peace of mind. Long Island’s electrical infrastructure is old and 32 March 18, 2013 / INSURANCE ADVOCATE

Pure also said they will apply $2,500 toward the cost of either one of these two services. Like Ben Franklin, this is a company that has foresight, and takes customer relations beyond any other I’ve ever seen. I am thrilled. Additionally, every Pure employee with whom I’ve worked has been upbeat, positive and knowledgeable about what to do to help me throughout this claim. I can honestly say this commendation is my first in this column: Hats off to Pure Insurance. While I focused on Pure because it is my carrier, there are many, many carriers doing positive things like this for their insureds. And while we’re pleased with our insurance claims experiences after Sandy, readers of this column know there are many on the Island who understandably are not as happy. But overall, I think our industry has done pretty

It is my understanding that when the department issued the moratorium on Nov. 3, 2012, it was an unprecedented event. It has since extended the moratorium eight times, first amended to include commercial lines and then six more orders; each reducing its scope to fewer specific

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[ ON T H E LEVEL ] counties (and then ZIP codes) that had been acutely affected by the storm with each extension after Dec. 16. The moratorium prohibited carriers from sending out notices of cancellation or nonrenewal. This benefits policyholders who would have been required to pay premiums earlier, now they are expected to pay them, in full, as the moratorium was lifted in their respective areas. This understandably has led to confusion, despite the NYDFS’s efforts to clarify and advise on the situation by issuing circular letters. While the department has urged carriers to provide notice of premium due and allow repayment plans or further extensions, these acts of leniency are no doubt up to the carrier and will be interpreted differently by various individuals and businesses. PIA has fielded many calls from agents with questions and put together a “Q&A,” with input from both the department and the New York Insurance Association. But the situation gets even more confusing when we remember that many properties on Long Island have been placed in the non-admitted market and excess- and surplus-line commercial policies are excluded from these rules; and that there are companies that have multiple properties in and out of the impacted ZIP codes covered by the moratorium. If, says PIA, the policyholder has a separate policy for each individual location, then the moratorium applies to each one as a separate entity, but in the case where one policy covering all the locations and the headquarters is located in a ZIP code still under the moratorium , then the remaining locations also are covered. There are many unanswered questions, even now after the moratorium has been lifted. One example has to do with automatic renewals, which the department also suspended. If the renewal would have occurred while the moratoriums were in effect, and the carrier hasn’t proactively done anything to notify the insured, does this mean the policy will be renewed automatically, or is there a date the renewal goes into effect? It’s sticky stuff—and, as usual, agents are going to be in the middle of the confusion between carriers and their insureds. While I doubt Ben Franklin considered these complexities, I wonder if he imag-

ined how apropos his words would be in the insurance world of 2013. [IA] 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 SRuchman@aol.com .

INSURANCE ADVOCATE / March 18, 2013 33

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[ IN TH E NEWS ]

Greenberg Tells the AIG Story in Edgy New Book

ormer AIG Chairman and CEO Maurice R. “Hank” Greenberg and GW law professor Lawrence A. Cunningham “set the record straight” they contend, in The AIG Story (Wiley; February 2013; $29.95; hardcover & ebook; ISBN: 978-1-11834587-0), a riveting account of the rise and neardestruction of AIG, the company Greenberg led for 37 years.” The book reveals facts about AIG previously unknown to the public and promises to change the way people view AIG and the story behind its astonishing achievements, “offering invaluable lessons for entrepreneurs and businesses in search of success.” The AIG Story details how Greenberg, at the age of 27, chanced upon a career in the insurance industry and quickly distinguished himself as an innovative and daring business executive: competitive, entrepreneurial, risk-savvy, disciplined, and willing to challenge the industry’s status quo. In the late 1960s, he led the creation of AIG. By 2005, it was the world’s largest insurance company, generating unprecedented value for its shareholders. During the nearly forty years of his leadership, AIG's market value grew from millions to nearly $200 billion. As is widely known, AIG then suffered a reversal of fortune. AIG became the target of the notoriously overzealous New York State Attorney General, Eliot Spitzer. “Spitzer’s relentless war against AIG— which ultimately forced Greenberg to resign from the company he proudly built —would drive AIG to near destruction as underlined by the book.” Greenberg and Cunningham detail how Spitzer’s prosecutorial tactics served neither the interests of shareholders nor, more importantly, of the public. That was not the end of AIG’s troubles. As the AIG culture Greenberg helped to build faded after his departure, AIG found itself the in the middle of the financial collapse of 2008, teetering on bankruptcy. By the time the crisis was over, AIG was 34 March 18, 2013 / INSURANCE ADVOCATE

diminished. In spite of its recent troubles, AIG’s legacy will be that of a pioneer forging new trails, not only in the insurance industry but also throughout the world, by paving the way for globalization. It assembled an innovative, loyal and committed workforce without peer in the industry. Time and again it custom-tailored insurance products to fit clients’ needs, including groundbreaking insurance policies designed for a world plagued by tort litigation, environmental disasters, war, and terrorism. Thanks to AIG’s commitment to innovation and its clients, the total market value of AIG’s stock under Greenberg’s tenure soared from hundreds of millions in the late 60s to $180 billion—an increase of 19,000%. By 2005, it was the largest insurance company in world history and one of the largest companies in any industry. The AIG Story captures the excitement behind the birth and evolution of AIG as it conveys a sense of its distinctive strategies and culture. Although the book details the near-destruction of AIG, most of it is about how to build a business: how to develop the vision and promote an innovative entrepreneurial culture focused on risk management, cost control, and profitability. Successful businesses must excel at establishing relationships, creating products, and opening markets. No one knows how to accomplish these goals better than Hank Greenberg. Topics covered in The AIG Story include: • How AIG, in the days after 9/11, created a unique aviation insurance pool that would keep the world’s fleet of commercial and passenger aircraft aloft in spite of the newly emerged terrorist threat. • AIG’s key role in the US government’s top-secret mission to recover a sunken Soviet nuclear submarine deep in the waters of the Pacific Ocean at the height of the Cold War.

The AIG Story Excerpt I Chapter 13 - Hostile Change p. 171 - 174 In July 2002, President George W. Bush guessed that the Sarbanes Oxley Act made the “most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”1 Adding to the hype, critics lambasted public prosecutors, including those at the Securities and Exchange Commission (SEC) and Department of Justice (DOJ), for allowing such abuses to fester into billiondollar calamities.2 These prosecutors got the message. They escalated high-profile suits against esteemed corporate directors and prominent auditing firms.3 A symbol of the seismic shift in enforcement intensity occurred when 20 outside directors of Enron and WorldCom paid $31 million out of their own pockets, unreimbursed by insurance or indemnification, to settle suits against them personally.4 Directors across corporate America, including those exalted as independent, began to fear for their personal liability. For auditors, a stunning result occurred when the DOJ filed criminal charges for obstruction of justice against the venerable independent accounting firm of Arthur Andersen, whose Houston office had signed off on Enron’s books. During the government’s investigation into it, two senior employees reinvigorated an ignored firm policy of destroying drafts of documents relating to the work. For that, the government indicted the entire firm, then employing 85,000 people and earning annual revenue of $10 billion, and won a fine of $500,000. Though a unanimous U.S. Supreme Court eventually overturned that result,5 by then the prosecutorial enthusiasm had destroyed the firm. When Sarbanes-Oxley was passed,

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[ IN T H E NEWS ] • How AIG managed to do business with Iron Curtain nations and helped pave the way to reopen trade with China, thus setting the stage for globalization. • The “profit center model,” an organizational innovation implemented by Greenberg that boosted profits and became the distinctive hallmark of all the businesses in the AIG empire. • In overcoming institutional resistance to new business ideas and practices, Greenberg was a grandmaster. Learn how he did it in cultures as diverse as Japan, Russian, China, and, of course, in the U.S. • How Greenberg’s emphasis on relationships in business led him and AIG to befriend the late 20th century’s most important global leaders in government, business and diplomacy. • The ways in which AIG, with its vast international network of “global overseas personnel,” became a valuable asset to the U.S. government in the decades leading to globalization. • The true facts behind Spitzer’s attack on AIG and Greenberg’s resignation from the company • The real story behind the U.S. government’s intervention against AIG during the 2008 financial crisis • The latest on Greenberg’s current business endeavors as Chairman and CEO of C.V. Starr and Co., using the practices and policies that made AIG a uniquely world-class company. AIG’s culture was characterized by a relentless quest to be first—first to develop and launch products, first to open and grow markets, first in performance from earnings to growth to assets. The culture spawned a commitment to innovation unlike the culture at any other insurance company. Creativity was ignited by paying close attention to trends and pockets of hazards where insurance was needed. It paid rich rewards to shareholders, employees and customers alike. AIG is one-of-a-kind, perhaps impossible to duplicate, but the company remains a promising paradigm for business visionaries wishing to pursue their dreams and achieve unparalleled success. The AIG Story shows how Hank Greenberg put that remarkable paradigm into practice. [IA]

About the Authors… Maurice R. Greenberg is Chairman and CEO of C.V. Starr & Co. Inc. and Starr Insurance Holdings, Inc., global insurance and investments organizations. Mr. Greenberg is the former Chairman and Chief Executive Officer of American International Group, Inc. (AIG). Under his leadership, AIG became the largest insurance company in the world and generated unprecedented value for AIG shareholders. During the nearly 40 years of his leadership, AIG's market value grew from $300 million to $l80 billion. Mr. Greenberg is a very active member of the international business community. He is Honorary Vice Chairman and Director of the Council on Foreign Relations. He is also a former Chairman and current member of the U.S.-Korea Business Council, Vice Chairman of the Board of Directors and member of the Executive Committee of the National Committee on United States-China Relations, and a member of the Business Roundtable. In addition, Mr. Greenberg is a member of the U.S.-China Business Council. Mr. Greenberg received his BS from the University of Miami as well as a JD from New York Law School. Mr. Greenberg has been admitted to the New York Bar and has been granted honorary degrees from a number of institutions, including New York Law School, Brown University, Middlebury College and The Rockefeller University. Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at the George Washington University Law School and Director of GW's Center for Law, Economics and Finance (C-LEAF) in New York. Previous books include Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012). His writings—on a wide range of business and legal topics—have also appeared in leading scholarly journals published by universities including Columbia, Harvard, Michigan and Virginia, and such periodicals as the New York Times, the Financial Times, the New York Daily News, the Baltimore Sun and the National Law Journal.

Eliot L. Spritzer was the attorney general of New York, with his sights set on the governor’s mansion. As attorney general, Spitzer drew on an obscure New York law, the Martin Act, which Greenberg calls “a legal weapon of mass destruction,” at least when in the wrong hands.6 As Spitzer portrayed the Martin Act, businesspeople can be liable for wrongdoing by employees without any finding that they actually knew about it at the time it was occurring. This reading would expose people to enormous and uninsurable damages in lawsuits brought by the New York attorney general. If a court agreed with that view of the law, all senior executives in New York (and possibly elsewhere) would face claims that could run to the billions of dollars, whether or not they were aware of misdeeds when they happened. In fact, however, no court had ever permitted the attorney general to do so – and for good reason, since the federal securities laws preempted this approach by requiring proof not only of knowledge of wrongdoing but of intent to deceive.7 That did not stop Spitzer from invoking the Martin Act in his campaigns, however, which one lawyer aptly tagged as the “Sword of Spitzer” – the “legal equivalent of King Arthur’s Excalibur.”8 AIG enjoyed a reputation for following conservative accounting in the insurance industry. That tradition continued through February 2005, when AIG’s auditor, PricewaterhouseCoopers (PwC), was completing its audit of AIG’s 2004 financial statements and controls. Auditors found them in order, as they had for decades. PwC always approved AIG’s financial controls which Sarbanes-Oxley now required to be audited separately, entailing 50,000 hours of start-up work and costing AIG $12 million in the initial year.9 AIG held a conference call with securities analysts on February 9, 2005, reporting earnings of $11 billion despite a difficult year for the insurance industry. Asked about the prevailing regulatory environment-and the still hotly debated Sarbanes-Oxley Act10 – Greenberg excontinued on page 36

INSURANCE ADVOCATE / March 18, 2013 35

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[ IN THE NEWS ] continued from page 35

pressed concern that excessive regulation could put a drag on the U.S. economy. Greenberg also criticized overzealous prosecutors. Using a common tennis term, Greenberg challenged those who “look at foot faults and turn them into a murder charge.” That afternoon, Spitzer turned to his computer to catch up on the day’s news. One site featured Greenberg’s remarks about prosecutors and “foot faults,” which the AG apparently took as a reference to him, as he was then probing certain insurance practices industry-wide. Spitzer instructed his staff to dispatch subpoenas to AIG and Greenberg demanding various documents. Spitzer had earlier received, but not acted upon, information concerning AIG and many other insurance companies involved in transactions with General Reinsurance Co. (or Gen Re), a company acquired by Berkshire Hathaway, Warren E. Buffett’s company, a few years earlier. Virginia state authorities were investigating a medical malpractice firm that had gone bankrupt amid criminal activity that left two of its senior managers serving lengthy prison terms.11 Gen Re’s involvement with that firm led authorities to scrutinize numerous Gen Re reinsurance transactions that looked suspicious. Gen Re’s lawyers cooperated by providing documents not only to the Virginia authorities that requested them but to other authorities across the country, from the SEC to New York. Documents addressed numerous Gen Re deals involving “finite insurance,” a form of reinsurance used for a variety of accounting and operational reasons. AIG was one among many insurance companies that had entered into finite transactions with Gen Re. After ordering staff to get the subpoenas out on the evening of February 9, Spitzer dashed across Lower Manhattan to the headquarters of Goldman Sachs to give a speech. Attending were Goldman’s elite, including Henry Paulson, its chairman, who would a year later become U.S. Treasury Secretary.12 Just before Spitzer rose to address the New York financial executives, a deputy entered and whispered in his ear that the subpoenas had been faxed. Moments later, during his remarks, Spitzer referenced Greenberg’s comments of earlier in the day, mentioning him by name to the assembly audience. Spitzer then threatened Greenberg and vaguely accused him of wrongdoing, declaring to the crowd: “Hank Greenberg should be very, very careful talking about foot faults. Too many foot faults and you lose the match.”13

*The full text of this letter appears as Appendix E on this book’s companion web site. 1 Elisabeth Bumiller, “Bush Signs Bill Aimed at Fraud in Corporations,” New York Times ( July 31, 2002). 2 See, for example, Richard A. Oppel Jr., “Two Republicans Join Ranks of S.E.C. Critics,” New York Times ( July 3, 2002) 3 See Opinion, “Spitzer’s Latest Loss,” Wall Street Journal (August 2, 2011) (“Enron created a political incentive [for prosecutors] to pursue white-collar defendants”). 4 See Bernard Black, Brian R. Cheffins, and Michael Klausner, “Outside Director Liability,” Stanford Law Review 58 (2006): 1055. 5 Arthur Andersen LLP v. United States, 544 U.S. 696 (2005). 6 New York General Business Law § 334; see Frank C. Razzano, “The Martin Act: An Overview,” Journal of Business & Technology Law 2006 (2006): 125 7 See People v. Federated Radio Corp., 244 N.Y. 33, 164 N.E. 655 (1926). Under federal law and most state laws, proving business fraud requires “scienter,”

36 March 18, 2013 / INSURANCE ADVOCATE

That afternoon, Spitzer turned to his computer to catch up on the day’s news. One site featured Greenberg’s remarks about prosecutors and “foot faults,” which the AG apparently took as a reference to him, as he was then probing certain insurance practices industry-wide.

referring to a mental state evincing a deliberate intention to deceive. Some argue that the federal securities laws, enacted in 1933 and 1934, and requiring scienter, do or should preempt the Martin Act. See, for example, Steve A. Radom, “Balkanization of Securities Regulation: The Case for Federal Preemption,” Texas Journal of Business Law 39 (2003): 295. 8 Nicholas Thompson, “The Sword of Spitzer,” Legal Affairs (May/June 2004), available at www.legalaffairs.org/issues/May-June-2004/feature_thompson_ mayjun04.msp. 9 E-mail to Cunningham from Howard I. Smith, April 27, 2012; see Kurt Eichenwald and Jenny Anderson, “How a Titan of Insurance Ran Afoul of the Government,” New York Times (April 4, 2005). 10 See, for example, Henry R. Burler and Larry E. Ribstein, The Saranes-Oxley Debacle (Washington, DC: American Enterprise Institute, 2006); Roberta Romano, “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance,” Yale Law Journal 114 (2005); 1521 11 Greenberg’s lawyers have filed numerous requests to obtain related documents under Virginia’s freedom of information laws. None of the documents specifically sought by them has been produced. 12 Brady Dennis & Robert o”harrow Jr., “A Crack in the System,” Washington Post (December 30, 2008). 13 This episode has been widely reported. See, for example, Brooke A. Masters, Spoiling for a Fight: The Rise of Eliot Spitzer (New York: Times Books, 2006), 231; Peter Elkind, Rough Justice: The Rise and Fall of Eliot Spitzer (New York: Portfolio, 2010), 84.

The AIG Story Excerpt II Chapter 17 - Chaos p. 239-241 Amid this turmoil, AIG opted to seek additional capital from the public markets. It prepared an offering of securities to raise up to $30 billion in a combination of debt and common stock. Strikingly, the prospectus describing the securities and the company, first dated July 13, 2007, and supplemented on May 12, 2008, nowhere mentioned PwC’s concerns about managerial qualifications or internal control and risk management defects. Shareholders grew anxious. On May 11, 2008, Greenberg, the company’s largest individual shareholder and representing the company’s largest shareholder group, detailed some concerns in a letter to the board.37 The company was in crisis, he said, most obvious due to its financial and capital problems but more fundamental and pervasive deteriorations were occurring across all businesses. The May 2008 letter* highlighted the following changes since March 2005, besides the growing cumulative losses unprecedented in AIG’s history: • Losing AIG’s unique leading positions in China and Japan. continued on page 38

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[ IN THE NEWS ] continued from page 36

• Eroding the leading position of AIG’s Asian Life operations. • Releasing capital by converting overseas branches into subsidiaries. • Allowing U.S. life insurance operations to stagnate. • Increasing the number of employees by 24,000 (“the equivalent of two Army divisions,” from 92,000 to 116,000) • Bloating the expense ratio from 20 to 26. • Bloating the loss ration from 64 to 71. • Therefore, bloating the combined ratio from 84 to 97. In other words, AIG’s healthy underwriting profit of 16 percent had shrunk to 3 percent and was vanishing. Gone were venerable employee-centric values and concepts such as profit centers, underwriting profit, risk analysis, expense control and long-term compensation programs. As PwC echoed, effective board oversight had disappeared along with competence among senior management. Significant costs were being incurred for legal fees, consultancy fees, and accounting fees – the latter alone soaring from $35 million in 2005 to $108 million in 2008 without any obvious benefit.38 The board ignored Greenberg’s warning letter. It sent a curt formal note in reply that did not address any of the substantive points raised. Although the note’s salutation said simply “Mr. Greenberg,” it read more like a form “Dear Shareholder” letter to a remote owner of a few shares than a response to the founder, former chairman and chief executive officer, and largest shareholder representative.39 But as later independent research reports would confirm, Greenberg’s diagnosis of AIG’s problems was spot on. According to a Congressional oversight report produced by Elizabeth Warren, the law professor and consumer advocate who became a Democrat U.S. senator from Massachusetts in 2012, AIG’s risk management and internal control systems failed, especially in 2007 and 2008.40 AIG’s new management had overlooked the risks that FP and the securities lending group were taking. The practice of concentrating on “super senior” groupings had made managers complacent. When problems mushroomed in 2007, AIG lacked management and technical resources to address credit concerns, Warren’s report concluded. The board belatedly responded to the mounting evidence of danger in June 2008, when it requested that Sullivan resign as Chief executive officer and asked Willumstad to succeed him-becoming both chairman and CEO, sensibly repudiating the Levitt-Zarb policy of separating those functions.41 On his departure, AIG gave Sullivan a severance package worth $47 million.42 Willumstad, who had been serving as chairman for nearly two years, held a conference call, telling investor analysts that he would conduct a strategic planning study of AIG “within 60 to 90 days, and hold an in-depth investor meeting shortly after Labor Day to lay it all out for you.”43 Pity that AIG’s seasoned chairman could not complete such an exercise in a shorter period, however: before that deadline passed, the company would be nearly destroyed. Warren’s report noted discussion among experts about whether, had Greenberg remained in office, these problems would never have arisen or been solved at the outset. Insurance industry legend John J. (“Jack”) Byrne, famous for turning around Fireman’s Fund and GEICO, is among those convinced that AIG would have averted its fate had Greenberg stayed on board. In an interview for a retrospec38 March 18, 2013 / INSURANCE ADVOCATE

tive on the insurance industry from 1981 to 2011, he said: Hank Greenberg was the most amazing manager I ever saw. Just by dint of his personality and his fierce drive he turned AIG from a medium sized company into a giant, until the day it wasn’t a giant anymore. It is quite remarkable the story of how AIG grew and grew, spread its tentacles around the world and developed enormous relationships. The end result was they forced Greenberg out and brought the company down. I continue to believe that if Hank had been there for that last five years he never would have let the risks taken on by those derivative traders get so out of hand.44 Comparing the history of AIG that Greenberg led to the changes wrought by the Levitt-Zarb reforms, it is hard to gainsay Byrne. Directors and senior managers seemed unaware of how AIG’s previous culture defined its success and how their changes doomed it. Warren’s report, after acknowledging inherent difficulties in making such “what if” judgments after the fact, quoted one comment that may be distressingly apt: former AIG in-house counsel Anastasia Kelly said that at AIG after March 2005, “no one was in charge.”45 Shortly after Labor Day in 2008, as chaos engulfed AIG, the U.S. government would take charge. [IA]

*The full text of this letter appears as Appendix E on this book’s companion web site.

37 This letter is reproduced as Appendix E on the Companion web site for this book, at www.wiley.com/go/theaigstory. 38 AIG proxy statement (2009); 3-mail to Cunningham from Howard Smith, April 26 2012. 39 This letter is reproduced as Appendix F on the companion web site for this book, at www.wiley.com/go/theaigstory. 40 Oversight Report: The AIG Rescue, Its Impact on Markets and the Government’s Exit Strategy (Elizabeth Warren, chair, June 2010). This report is hereafter called the Warren Oversight Report. 41 AIG press release, AIG Names Robert B. Willumstad Chief Executive Officer ( June 15, 2008). 42 Reuters, July 1, 2008. 43 Guaazardi, Grose, et al., “Worth the Risk,” chap. 23 p. 2. 44 Michael Loney, “30 Years in Insurance: Learning the Hard Way,” Reactions: Euromoney Institutional Investor (April 1, 2011). 45 Warren Oversight report, 54, n. 144: Former AIG General Counsel Anastasia Kelly stated: “There wasn’t focus on the fact that now that Hank’s gone, what do we need, what kind of succession planning should we have in place. . . A lot of companies have very robust human resource-driven succession plans, have people identified. AIG didn’t have that. Maybe they would have had Hank stayed as long as he wanted to and had done it himself.” She continued, saying that when the crisis hit, AIG did not have the “infrastructure to call upon to respond” and that “there was no one in charge.” Ian Katz and Hugh Son, “AIG Was Unprepared for Financial Crisis, Former Top Lawyers Says,” Bloomberg News (March 13, 2010) (online at www.bloomberg.com/apps/news?pid+ 20601087&sid+aYq7MDFtelkc).

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Shelter Island home when his daughter, infant plaintiff Nicolette, was bitten about her face and head on August 7, 2010 by "Max," defendants' Doberman Pinscher. The plaintiffs, earlier that day, were in the back yard with the defendants, and Max, for a barbecue, whereby the children were in the pool while Max ran around, and the children played ball with Max. The children went inside at about 9:00 PM to watch television, when, as per the deposition of the infant plaintiff, Max "sat down, like a dog, Erica petting him, when he bit me." An owner of a domestic animal who either knows or should have known of the animal's vicious propensities will be held liable for the harm the animal causes as a result of those propensities. Collier v Zambito, 1 NY3d 444. A vicious propensity is the propensity to do any act that might endanger the safety of persons and property of others in a given situation. Dickson v McCoy, 39 NY 400. Knowledge may be established with evidence of prior acts of a similar kind of which the owner had notice. While it is not necessary to prove a prior bite, proof constitutes knowledge that the dog had been known to growl, snap or bare its teeth or evidence showing that the animal was restrained. In addition, an animal that behaves in a manner that would not necessarily be considered dangerous or ferocious, but nevertheless reflects a proclivity to act in a way that puts others at risk of harm, can be found to have vicious propensities -- albeit only when such proclivity results in the injury giving rise to the lawsuit. [In another case] the owner of a domestic animal made a prima facie showing of entitlement to summary judgment as a matter of law by presenting evidence that they lacked knowledge of the dog's propensities, as they demonstrated that their pet dog had never previously been aggressive, growled, bared his teeth, bitten anyone, or exhibited any other signs of viciousness. Ayres v Martinez, 74 AD3d 1002. Notably,

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[ COURTS ID E ] plaintiffs argued in their appellate brief that the dog, Nico, a mixed breed pit bull, occasionally wore a muzzle, the defendants posted a beware of dog sign, and Nico was euthanized after the incident. Evidence tending to prove that a dog has vicious propensities, for purposes of an owner's liability, include a prior attack, the dog's tendency to growl, snap, or bare its teeth, the manner in which the dog was restrained, and a proclivity to act in a way that puts others at risk of harm. Hodgson-Romain v Hunter, 72 AD3d 741. The defendants made a prima facie showing of entitlement to summary judgment by presenting evidence that the defendants' dog was a playful animal, and the defendants had no knowledge that the dog ever growled at, chased, bitten or attacked anyone. Summary judgment dismissing the action of an infant victim of a dog attack in Sers v Manasia, 280 AD2d 539 was affirmed as the victim of the dog attack failed to prove that the dog had vicious propensities, or knowledge of the dog's owners thereto, despite the fact that the dog was occasionally confined in a pen on the property, the nature and severity of the attack, evidence of the violent tendencies of the breed, and the use of "beware of dog" signs on the residence where the dog once lived. The infant plaintiff was a guest at the defendants' property when he was injured by a German Shepard owned by the defendants. The court reasoned that there was no evidence that the pen was built in response to any vicious attacks by the dog, evidence of this particular breed does not raise an issue of

The defendants submit the sworn affidavit of veterinarian Glenda B. Wexler who avers that in the past two and a half years, Max was seen for office visits, grooming and boarding, and was well behaved, did not growl, snap, bare his teeth or act in a manner that put others at risk of harm. fact as to the propensities of this particular dog, and the posting of a 'beware of dog' sign did not raise an issue of fact as to the vicious propensity of the dog as the defendant testified he posted the signs as a deterrent to intruders. And in DeVaul v Carvigo Inc., 138 AD2d 669, the Court held that there is no authority for the proposition that judicial notice should be taken as to the ferocity of any particular type of domestic animal. Here, the defendants made a prima facie showing of entitlement to summary judgment as a matter of law by demonstrating that they lacked knowledge of a vicious propensity of the dog, and demonstrated that their dog had never been previously aggressive, growled, bared his teeth or bit anyone before, and did not exhibit any signs of viciousness. The defendants never saw

the dog growl or jump on anyone prior to the incident, testified that the dog's demeanor with children was playful, the dog never snapped at children prior to the incident, and plaintiff infant had been to the defendant's other home on more than five occasions and expressed no fear of Max. The defendants submit the sworn affidavit of veterinarian Glenda B. Wexler who avers that in the past two and a half years, Max was seen for office visits, grooming and boarding, and was well behaved, did not growl, snap, bare his teeth or act in a manner that put others at risk of harm. The plaintiffs, in opposition, have failed to raise a triable issue of fact to warrant denial of this motion. Ferreri's opinion that the Doberman breed is "schizophrenic" and could snap at any time, and his prior experience with a pet Doberman, which he kept isolated in his back yard, is unavailing. Ferreri's opinion about the Doberman breed is irrelevant as there is no authority for the proposition that a particular type of domestic animal is ferocious or has vicious propensities in New York. Additionally, the plaintiff has not submitted any evidence that the defendants kept Max in the kitchen, or the back yard, when the infant plaintiff visited, in response to any vicious acts or propensities of Max. In light of the foregoing, the defendants' motion is granted and plaintiff 's complaint is dismissed. [IA] Supreme Court, Nassau County Index 23210/2010 Feinman, j.

Plaintiff’s Release to Third Party Defendant Relieves it of Liability to Third Party Plaintiff Balkheimer v Spanton

n an action to recover damages for legal malpractice, the third-party defendants appeal from an order of the Supreme Court, Suffolk County (Tanenbaum, J.), dated December 9, 2011, which denied their motion pursuant to CPLR 3211(a)(5) and (a)(7) to dismiss the third-party complaint. ORDERED that the order is reversed, on the law, with costs, and the motion of

There is no indication in the record that the release was not executed in good faith.

the third-party defendants pursuant to CPLR 3211(a)(5) and (a)(7) to dismiss the third-party complaint is granted. Pursuant to General Obligations Law § 15-108(b), “[a] release given in good faith by the injured person to one tortfeasor as provided in [General Obligations Law § 15-108(a)] relieves him [or her] from liacontinued on page 42

INSURANCE ADVOCATE / March 18, 2013 41

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[ COURTSIDE ] continued from page 41

bility to any other person for contribution as provided in article fourteen of the civil practice law and rules.” Here, the plaintiffs executed a general release in favor of the third-party defendants. There is no indication in the record that the release was not executed in good faith. Therefore, pursuant to General Obligations Law § 15-108(b), the third-party defendants are relieved from liability to the third-party plaintiffs for contribution (see Ziviello v O’Boyle, 90 AD3d 916, 917; Kagan v Jacobs, 260 AD2d 442). Accordingly, the Supreme Court should have granted that branch of the motion of the third-party defendants which was pursuant to CPLR 3211(a)(5) to dismiss the contribution cause of action in the thirdparty complaint as barred by the release. In considering a motion to dismiss for failure to state a cause of action pursuant to CPLR 3211(a)(7), the court must “accept the facts as alleged in the [pleading] as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit

In considering a motion to dismiss for failure to state a cause of action pursuant to CPLR 3211(a)(7), the court must “accept the facts as alleged in the [pleading] as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. within any cognizable legal theory” (Leon v Martinez, 84 NY2d 83, 87-88). “[T]he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indemnitee by the indemnitor’” (Raquet v Braun, 90 NY2d 177, 183, quot-

ing Mas v Two Bridges Assocs., 75 NY2d 680, 690; see Lovino, Inc. v Lavallee Law Offs., 96 AD3d 909, 909-910). Here, the third-party complaint does not allege the existence of any duty owed by the third-party defendants to the thirdparty plaintiffs (see Raquet v Braun, 90 NY2d at 183; Breen v Law Off. of Bruce A. Barket, P.C., 52 AD3d 635, 638; Keeley v Tracy, 301 AD2d 502, 503). Furthermore, the third-party plaintiffs would not be compelled to pay damages for the alleged negligent acts of the third-party defendants (see Lovino, Inc. v Lavallee Law Offs., 96 AD3d at 910; Jakobleff v Cerrato, Sweeney & Cohn, 97 AD2d 786, 786-787). Accordingly, the Supreme Court should have granted that branch of the motion of the third-party defendants which was pursuant to CPLR 3211(a)(7) to dismiss the common-law indemnification cause of action in the third-party complaint. The third-party plaintiffs’ remaining contention is without merit. [IA] 2013 NY Slip Op 00715 Decided on February 6, 2013 Appellate Division, Second Department

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Dauria v CastlePoint Ins. Co.

n this action arising out of defendant CastlePoint’s rescission of a homeowner’s insurance policy after a fire at plaintiffs’ residence, based on its determination that the premises contained a basement apartment rendering it a “three family” dwelling as opposed to the “two family” designation that was listed on the insurance application, plaintiffs’ argument that they did not misrepresent the premises as a two family dwelling is contrary to this Court’s recent decision in Hermitage Ins. Co. v LaFleur (100 AD3d 426 [1st Dept 2012]). There, we held that the only reasonable interpretation of the question “# Families” on an insurance application is that it seeks the number of separate dwelling units in the building. Plaintiffs maintain that their response of “2” to this question was correct because all of the residents of the premises lived together as one “family” or “household.” However, based on plaintiffs’ interpretation, the logical answer would have been “1.” Thus, even if, as plaintiffs claim, all the residents of the premises shared a single “household” in the sense of living together, the premises is a three family dwelling because of its structural configuration, i.e., three separate units, each with its own kitchen, bathroom and separate entrance. The motion court erred in finding that CastlePoint failed to establish the materiality of the misrepresentation because three family dwellings are not included among the “unacceptable exposures” listed in its underwriting guidelines. Three family dwellings are not listed in the “eligibility” section of the policy because CastlePoint does not issue policies to cover such dwellings. That the underwriting guidelines do not specifically exclude them does not indicate otherwise and does not raise an issue of fact to defeat summary judgment. Nor is there any ambiguity in the policy term “residence premises” which, as

…the reference to “family units” makes clear that the named insured need only reside in one of the two “family units” that, by definition, constitute a two family dwelling. The term “family,” as used in “family units,” “one family dwelling” and “two family dwelling,” necessarily relates to an entire self-contained dwelling unit

relevant here, is defined as “a two family dwelling where you reside in at least one of the family units and which is shown as the residence premises’ in the Declarations.’” When read in context, as the rules of policy interpretation require (Harris v Allstate Ins. Co., 309 NY 72, 7576 [1955]), the reference to “family units” makes clear that the named insured need only reside in one of the two “family units” that, by definition, constitute a two family dwelling. The term “family,” as used in “family units,” “one family dwelling” and “two family dwelling,” necessarily relates to an entire self-contained dwelling unit (see LaFleur, 100 AD3d at 427). Since the premises here consists of three dwelling units, it is a three family dwelling and does not fit within the policy definition of a covered “residence premises. [IA] 2013 NY Slip Op 01349 Decided on March 5, 2013 Appellate Division, First Department

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lbany, N.Y.—The Supreme Court, Appellate Division, Third Department granted the defendants’ Farm Family Casualty motion for summary judgment dismissing the complaint from Richard Wysong, plaintiff. Richard Wysong, an experienced insurance agent, entered into an agreement with defendant Thomas M. Kolberg, a general agent for defendants Farm Family Casualty Insurance Company and Farm Family Life Insurance Company (Farm Family), “to take custody of ” an Ulster County book of Farm Family’s business. Richard Wysong and Farm Family then entered into agent contracts. Almost seven years later, Farm Family terminated Richard Wysong based on his mishandling of certain matters and transferred the Ulster County book of insurance business to another Farm Family agency. Mr. Wysong commenced this action for, among other things, unjust enrichment, alleging that he had purchased the Ulster County book of business and was entitled to compensation for its transfer. The Supreme Court granted Farm Family’s motion for summary judgment and dismissed the complaint in its entirety. Mr. Wysong argued on his appeal that there are questions of fact precluding Supreme Court’s determination that he did not purchase the Ulster County book of business and dismissal of his unjust enrichment claim. The Appellate division affirmed. Richard Wysong did not contest the validity of the agent contracts he entered into with Farm Family which provide, among other things, that Farm Family owns all insurance business assigned to or produced by plaintiff and that the book of business may be reassigned to another agent in the event of plaintiff’s termination. Instead, he contested that he had a separate, oral agreement with Thomas Kolberg whereby he purchased the book of business according to the terms of Mr. Kolberg’s handwritten “fact sheet” listing the income earned from the book’s policies and the amount that plaintiff would be required to pay Mr. Kolberg “to take custody of ” it. The Appellate Division found that Mr.

These contracts specifically provide that they “supersede all prior agreements between the parties hereto” and that they “represent the entire understanding and agreement of the parties hereto.”

Wysong failed however, to present evidence sufficient to raise any material issue of fact rebutting the plain, unambiguous terms of the agent contracts. These contracts specifically provide that they “supersede all prior agreements between the parties hereto” and that they “represent the entire understanding and agreement of the parties hereto.” Furthermore, any modification of the agent contracts was required to be in writing and executed by a duly authorized officer or representative of Farm Family. The unsigned “fact sheet,” on the other hand, was provided to Mr. Wysong prior to his execution of the agents contracts, and it does no more than to memorialize his apparent agreement to pay Thomas Kolberg a portion of any commissions earned in order to be able to serve Mr. Kolberg’s former customers. The Appellate Division found as the agent contracts are clear that Farm Family owns the book of business, the Supreme Court properly concluded that there were no issues of fact as to whether Mr. Wysong purchased it from Thomas Kolberg. The Appellate Division concluded in as much the agent contracts govern the ownership of the book of business, Mr. Wysong cannot recover on an unjust enrichment cause of action. The Court found no merit to Mr. Wysong’s unjust enrichment claim as he was provided with established policies from which he immediately started earning commissions and, during the course of his time servicing the book of business, he netted approximately $350,000 in commission income after paying less than $50,000 to do so. [IA]

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