April 14, 2014 by C Acunto

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VOLUME 125, NUMBER 7 / April 14, 2014

A CINN Group, Inc. Publication

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

The Hartford and IBM Ink $500 Million Cloud Accord Move Aimed at Agent and Customer Service

Public Hearing Held to Examine Auto Insurance Market in New York State STORY PAGE 24

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Contents [COVER STORY ] 18

The Hartford and IBM Ink $500 Million Cloud Accord

April 14, 2014 | volume 125 number 7 44

Guest Editorial: Clumsy Regulation Puts Insurance at Risk Diane Katz

Classiﬁeds

Guest Opinion: Top 9 Ways Government Attacks American Seniors Elizabeth Lee Vliet, M.D.

[FEATURES] 4

Foreword: Can Spring be far behind…? Steve Acunto, Publisher

Insight: Pension Stripping and De-Risking Peter H. Bickford

Exposures and Coverages: A Collapse is a Collapse is a Collapse?; What’s your Problem? More on Improvements & Betterments; ISO’s New CGL Data Breach Exclusions; Labor Law Claims Continue to Keep New York’s Courts Busy Jerome Trupin, CPCU

What is Cloud Computing? Judith Hurwitz, Robin Bloor, Marcia Kaufman and Fern Halper

Auto Insurance UNDER THE KNIFE: Standing Committee on Insurance Holds Public Hearing to Examine NYS Auto Insurance Market

Face to Face: This Internet Thing of Ours Michael Loguercio

Looking Back: March 1989

On My Radar: No Excuse For Failure to Appoint Umpire Barry Zalma

Tech Talk: 5 Tech Trends Revolutionizing the Insurance Industry John Sarich

[ AD FEATURES] 22

IIABNY: Membership Give You the Tools and Resources You Need to Thrive…

American Transit Insurance Company: 2014 Annual Conference Atlantic City, NJ

18 Like us on Facebook… The Insurance Advocate Magazine

www.insurance-advocate.com INSURANCE ADVOCATE / April 14, 2014 3

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[ FORE WORD ]

Steve Acunto

Can Spring be far behind…?

VOLUME 125, NUMBER 7 APRIL 14, 2014

e need some thought and some thaw on several fronts, as Spring starts to show its green. How could any legislator ignore the fact that the Terrorism Risk Insurance Act (TRIA) saves U.S. taxpayers billions of dollars to cover losses that could result from a terrorist attack? A RAND Center for Catastrophic Risk Management and Compensation study found that eliminating TRIA could increase federal spending by as much as $7 billion in the event of another terrorist attack along the lines of 9/11 or a major natural disaster like Hurricane Katrina. The increased federal spending would stem from uninsured loss that would place an even greater burden on the federal Disaster Relief Fund.” TRIA, which expires in 8 months , has provided critical stability to the economy since it was enacted in the wake of 9/11, when reinsurers and primary insurers – after paying more than $30 billion in claims – withdrew from the terrorism risk insurance marketplace. The absence of coverage contributed to tens of thousands of job losses. This must be extended.… Speaking of rationality in lawmaking, NYIA, again, asked lawmakers to act decisively to move toward an end to insurance fraud adopting a zero tolerance stance to stop multi-million dollar illegal enterprises that are a legal, financial and ethical scourge. Can any law maker disagree with this approach? We all pay dearly for it – they do too – and deserve a break. NYIA’s Ellen Melchionni said. “Our healthcare system has been held hostage for too long by corrupt individuals posing as medical professionals. Patient safety needs to be restored. Medical mills that have no interest in treating people seeking medical care need to be shut down. These mills exist solely to bill for treatments that are often never even performed. If treatment is provided it is typically excessive or not necessary—putting those that are treated in harm’s way.” The zero tolerance for fraud agenda includes enacting the following bills: • S3547 and A7989 would make staging an auto accident a felon; • S3540 would end fraudulent billing from fly-by-night durable medical equipment providers; • S1959A/A3774A would permit retroactive cancellation of fraudulently obtained auto policies; • S3545 would require providers to prove a treatment is medically necessary. Sounds about right to us. Like TRIA, maybe it’s too simple to be acceptable.…Some fresh, Spring news from Richard White, CEO of First Rehab, now the largest DBL provider in New York State; the Company has acquired J.M.I.C. Life Insurance Company (J.M.I.C.), licensed in 48 states and territories. “We are pleased to add J.M.I.C. to our organization. This acquisition represents a key investment in our growth plans and our commitment to a national presence in the insurance marketplace. We are excited to start rolling out our unique, super-simple employee benefits products across the country.” It’s called going national and this is just the winning team to do it. Congrats, Rich, Dino, Bruce and the team at First Rehab.…Mayer Brown LLP’s inaugural Global Insurance RICHARD WHITE M&A Outlook, published in association with Mergermarket, holds that, despite sluggish volume in the insurance sector since the financial crisis, dealmakers are now optimistic that there will be an uptick in activity over the next 12 months. Survey results reveal that respondents anticipate M&A activity to rise in both the property and casualty (P&C) (88%) and life subsectors (87%). The positive outlook is supported by the improving economy, which 68% of respondents cite as the main factor spurring the increase. Given the limited opportunities for organic continued on page 8

4 April 14, 2014 / INSURANCE ADVOCATE

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

CINN G R O U P, I N C .

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

•S

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

385 38501A

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[ INSIGHT ]

By Peter H. Bickford

Pension Stripping and De-Risking

ension what? Is this some form of new TSA security protocol? A new energy source? An X-rated event for old people? No, but it does involve the alchemy of converting pension obligations into annuities.

transfers — which they refer to as pension stripping transactions. These groups are encouraging states to adopt pension derisking legislation to help minimize these adverse consequences. The most obvious consequence is the loss of Federal insur-

Advocacy groups for retirees, such as ProtectSeniors.org, have been pressing Federal and state regulators and legislators to understand what they perceive as significant adverse consequences of these transfers — which they refer to as pension stripping transactions. Peter H. Bickford

Corporations, particularly large organizations with massive pension obligations, are always looking for ways to reduce or stabilize these long-term liabilities. One way that seems to be gaining favor is through the purchase of group annuities under which the pension obligations to certain employees is transferred to the annuity issuer. The most noted example is the recent transfer of more than 40,000 retired Verizon employees out of their pensions plan and into annuities under a group annuity policy issued by Prudential. Despite a hefty up-front premium payment to the annuity issuer, the benefits to a company can be significant including: no longer having to pay annual premiums to the Pension Benefits Guaranty Corporation (PBGC), removing long-term pension obligations from the balance sheet, reducing future pension related expenses, and potentially lowering borrowing costs resulting from improved credit ratings. The employees would also seem to benefit from having the assurance of an annuity from one of our leading financial institutions, The Rock! So what’s the problem? Advocacy groups for retirees, such as ProtectSeniors.org, have been pressing Federal and state regulators and legislators to understand what they perceive as significant adverse consequences of these

ance benefits through the PBGC, which critics say forces pensioners into a maze of state-run guaranty associations with a patchwork of inconsistent coverage and dollar limitations. The industry response to these concerns is to point to the strength of The Rock and the success of the statesanctioned guaranty fund system in protecting policyholders of the few life insurer insolvencies that have occurred over the decades. The substitution of an inconsistent, limited and often discriminatory state guaranty fund system for full Federal insurance coverage, however, is but one of a number of issues advanced by critics of pension stripping. For instance, critics argue that once the pension obligation is transferred to the annuity issuer, the protections of ERISA, including its fiduciary standards, are lost. Also lost are the annual financial disclosures to retirees regarding the financial performance of their pension accounts. No similar accountability rules are currently applicable to annuity issuers. One of the more overlooked yet significant criticisms is that once their benefits are no longer protected by Federal law, retirees are subject to the inconsistent vagaries of state debtor/creditor laws that may or may not protect retirees from creditors or bankruptcy trustees. A retiree, for

instance, caught short in hard financial times, may find that his annuity payments may be subject to garnishment by a creditor. Under Federal law, pension benefits are not subject to attack by creditors. In the absence of Federal laws prohibiting or limiting pension stripping, retiree advocacy groups are asking state legislators to consider adopting pension de-risking laws requiring a level of oversight, disclosures and protections for the benefit of annuitants similar to those provided to pensions under Federal law. Pension derisking legislation has been proposed in several states, including New York and Connecticut, and the National Conference of Insurance Legislators (NCOIL) has presented a model bill for consideration. In fact, at its most recent meeting, NCOIL hosted a presentation on the pension stripping issues among advocates for and against the proposed de-risking legislation. Interestingly, so far this conversation has lacked any significant input from the regulators, particularly New York’s normally less than shy enforcers. While equity investors in annuity issuers have been the target of DFS through the imposition of stricter standards of capitalization than other investors in the name of protecting annuitants, and while DFS recently imposed a well-publicized fine against an annuity issuer for failing to inform DFS of changes in some of its annuity products, it has been mostly silent on the pension de-risking effort. The life insurance industry in New York has developed a well-earned respect over the decades with the regulators and legislators, and it is understandably opposed to de-risking legislation as an unnecessary burden on annuity issuers. Besides, we’re not looking at a financial lightweight here. The Rock is one of the strongest financial institutions in the US, and pension de-risking is simply another example of regulatory overkill adding unnecessary expense and red tape to an already complex industry. Wait! Have we learned nothing from the insolvency of Executive Life Insurance continued on page 8

6 April 14, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ] willingness to do so. For example, even thought two full legislative sessions have passed since ELNY depleted the life guaranty fund in New York, the fund still has no current statutory authority to assess life companies or otherwise obtain funds to respond to a future insolvency. The lessons that we should have learned from ELNY are too fresh to be ignored. Even accepting the imposing financial strength of Prudential and the unlikelihood of there ever being an ability to pay issue

continued from page 6

Company (ELNY)? ELNY exposed the significant shortcomings of the state guaranty fund system, and the less than stellar response of the life industry to the damage done to the neediest ELNY annuitants. The defects and inconsistencies in the system ELNY exposed have not been addressed by regulators or legislators, nor is there any meaningful indication of a

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(with due deference to the passengers of the unsinkable Titanic and the creditors of indestructible Lehman Brothers), there is nothing to prevent companies from transferring their pension obligations to lesser financial stalwarts than Prudential. Once the precedent has been firmly established without controls in place, who is to say that XYZ annuity issuer will not seek a piece of the lucrative pension pie at more “competitive” rates? And who is to say that with our genius for inventing new investment products that some even riskier avenue of pension stripping may not occur? This is a very serious issue for people who have a secure, Federally insured pension one day and wake up the next with an annuity from a company they did not choose, without having been asked or given any option to accept or reject, and protected by a flawed, inconsistent and limited safety net. At the very least this development requires serious and open discussion at all levels – a discussion that the state regulators need to join as soon as possible.[IA]

[ FORE WORD ] continued from page 4

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growth, companies are seeking avenues to expand their product offerings and distribution capabilities through acquisitions. In fact, for half of respondents, one of the most important alternative growth strategies will involve the development of new distribution channels. Most respondents believe that private equity firms will play an increasingly important role in insurance dealmaking. The majority of them predict that alternative asset managers and/or private equity firms will be among the most active buyers driving M&A in the life and P&C subsectors over the next 12 months. It’s already begun says savvy Steve Nigro, quarterback of the M&A team at TAG Financial in the Empire State Building. His view is that the marketplace will respond as aggressively to good news as it did to the negative news that has been afoot. Steve may have some announcements coming out in the agency force and on the carrier side very soon, he tells us.[IA]

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[ EXPOSURES AND COVERAGES ] A Collapse is a Collapse is a Collapse?; What’s your Problem? More on Improvements & Betterments; ISO’s New CGL Data Breach Exclusions; Labor Law Claims Continue to Keep New York’s Courts Busy A Collapse is a Collapse is a Collapse? “Is a Collapse a Collapse if nothing actually Collapses?”1 If we could channel Gertrude Stein, she might answer, “A Collapse is a Collapse is a Collapse.” Here’s the loss that triggered the headline: On March 23, 2003, Rose Wangerin and her tenants, Alex and Karen Herrera, awoke to find that the floor in their upstairs bathroom had dropped approximately four inches overnight. There were also similar drops in the hallway outside the bathroom and on the first floor at the bottom of the stairs. In addition, the ductwork in the basement had also shifted downward. Was this a covered collapse loss? The insureds2 said yes, New York Central Mutual said no, and a court case ensued. The court quoted the following wording in the NY Central Policy: “The policy…specifically covers ‘physical loss to covered property involving collapse (emphasis added) of a building or any part of a building, but only if such collapse is caused by, among other things, ‘hidden insect or vermin damage.’ While the policy does not define what constitutes a collapse, it provides that a ‘collapse does

“The policy…specifically covers ‘physical loss to covered property involving collapse… of a building or any part of a building, but only if such collapse is caused by, among other things, ‘hidden insect or vermin damage.’…” not include settling, cracking, shrinking, bulging or expansion.’”3 According to the court, “the clear modern trend is to hold that collapse coverage provisions, which define collapse as not including cracking and settling, provide coverage if there is substantial impairment of the structural integrity of the building or any part of a building.” Based on that, the lower court and the appellate court ruled in favor of the insureds. Drawing the line between collapse and wear and tear has been difficult. ISO has tried for years to make it clear that a struccontinued on page 12

1 Lead-in to an article by Steven E. Peiper in “Coverage Pointers” Volume XV, No. 10 Nov. 8, 2013 Hurwitz & Fine, Buffalo, NY http://www.hurwitzfine.com/shownews.php?type=coverage&id=502 (accessed 12/24/13) 2 Oddly, the owner, Rose Wangerin, and her two tenants were all named as insureds on the policy. However, that wasn’t an issue in this case. 3 Rose Wangerin et al. v. New York Central Mutual Fire Ins Co. NY Supreme Court, Appellate Division 3rd Dept. 515723 November 7, 2013

10 April 14, 2014 / INSURANCE ADVOCATE

By Jerome Trupin, CPCU

Jerome Trupin

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

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[ EXPOSURES AND COVERAGES ] continued from page 10

ture must fall down to trigger collapse coverage. After many changes over the years, the current ISO Homeowners Form 3 (HO 00 03 05 11) collapse coverage reads, in part, as follows: Collapse a. The coverage provided under this Additional Coverage – Collapse applies only to an abrupt collapse. b. For the purpose of this Additional Coverage – Collapse, abrupt collapse means an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose. c. This Additional Coverage – Collapse does not apply to: (1) A building or any part of a building that is in danger of falling down or caving in; (2) A part of a building that is standing, even if it has separated from another part of the building; or (3) A building or any part of a building that is standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion ISO commercial lines Special Form

The lease is clear, the tenant has to insure the I&B. and that’s what the tenant should do. (The time to argue about it was before signing the lease.)

(CP 10 30 10 12) has this wording in the collapse coverage section: …Additional Coverage, Collapse, applies only to an abrupt collapse…abrupt collapse means an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose. In both forms, collapse coverage is limited to certain specific causes. One of the covered causes is collapse due to hidden decay that’s unknown to the insured. The loss in Wangerin versus New York Central Mutual occurred prior to the promulgations of the current forms. Would a loss like this be covered under the current wording? For what it’s worth, I think so. The collapse appears to have

been due to hidden decay unknown to the insured. It was abrupt (it happened sometime during the night) and it was a caving in of a part of a building. An insurer might argue that the house can be occupied for its intended purpose, but would you live in a house with that kind of damage?

What’s your Problem? More on Improvements & Betterments An agent in Fairfield, CT writes: “I read your article in the Advocate (re improvements and betterments). What about the situation where the landlord pays for the I&B, but the lease requires that the tenant insure them should they be damaged in the future?” That’s actually a good situation. The lease is clear, the tenant has to insure the I&B. and that’s what the tenant should do. (The time to argue about it was before signing the lease.) The insurance should be written as building coverage. Your insured has a clear insurable interest—it will suffer an economic loss should the additions be damaged. The building owner will want it to pay for the repairs, if there’s no insurance. The amount of insurance should be based on the replacement cost of additions. In the distant past, the specific additions to be covered could be spelled out in a commercial property policy, but that’s not always possible today. Confirm with the underwriter what the coverage is to be and put it in writing.

ISO’s New CGL Data Breach Exclusions

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Insurance companies really don’t want to cover cyber-liability claims under a commercial general liability policy—and that’s before Target had 40 million customers’ credit card information stolen. However, attorneys see possible coverage for some claims under the CGL. A leading insurance defense attorney writes: “ISO can’t ignore the fact that, under its CGL policy, coverage is provided for personal and advertising injury, which is defined, in part, as the offense of an oral or written publication, in any manner, of material that violates a person’s right of privacy. Data breach + personal information being continued on page 14

12 April 14, 2014 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] continued from page 12

revealed = no surprise that attempts have been made to obtain coverage, for such losses, under a provision that addresses violation of the right of privacy.”4 To avert such claims, ISO has filed two new CGL endorsements: CG 21 06 05 14 (Exclusion – Access Or Disclosure Of Confidential Or Personal Information And Data-Related Liability – With Limited Bodily Injury Exception) and CG 21 07 05 14 (Exclusion – Access Or Disclosure Of Confidential Or Personal Information And Data-Related Liability – Limited Bodily Injury Exception Not Included).5 In “belt and suspenders” fashion, the ISO endorsements exclude coverage for both Coverage A –Bodily Injury And Property Damage Liability and Coverage B – Personal and Advertising Injury Liability, even though coverage claims appears to be most likely under Coverage B. The exclusions are very broad. Here’s some of the wording: Access Or Disclosure Of Confidential Or Personal Information And Data-related Liability Damages arising out of: (1) Any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information; or (2) The loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data. This exclusion applies even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of that

which is described in Paragraph (1) or (2) above. Notice that paragraph (2) states that the exclusion applies “even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense.” Those are exactly the costs faced by a firm whose records are stolen. The two versions differ in only respect: CG 21 06 provides limited bodily injury coverage, just as its heading indicates, CG 21 07 does not. It applies only to claims arising out of the inability to access or manipulate data. It does not apply to claims arising out of disclosure of confidential information, etc. That’s exactly what insureds are concerned about when they think of cyber-liability. The bodily injury coverage is very limited. Another caveat: the exclusion isn’t limited to cyber claims. Paragraph (1) excludes patents, trade secrets, etc. Furthermore, the form excludes disclosure of confidential or personal information and data-related liability. This will clearly give insurers grounds to deny claims that don’t readily come to mind when we discuss cyber fraud. (The words “cyber” and “fraud” do not even appear in the exclusion.) Personal information can be revealed the old-fashioned way: someone can steal paper or computer records by breaking and entering or just finding a lost laptop. That’s excluded too. I’ll conclude by quoting a few lines from Randy Maniloff ’s column in White and Williams’ e-newsletter Coverage Opinions. (White and Williams are leading insurance defense attorneys.): “Like all new exclusions, ISO’s Data Breach exclusion(s) can be expected to be tested on several fronts. First, even when the exclusion is raised in a situation where it clearly applies, efforts will be made to pick it apart to create an ambiguity. That’s just how coverage disputes work. Second, as the world of data breach emerges, and no doubt hacking and technology are ever-

evolving, situations may arise that were not contemplated by the exclusion – because they didn’t exist at the time that the exclusion was drafted. That’s just how new exposures work. Third, ISO’s new exclusions, and their Impact statements, can be expected to be used by policyholders seeking coverage for data breaches under policies that do not yet have the new exclusion. That’s just how policyholder counsel works.”6 Marketing Opportunity: Tell your insureds and prospects about these new exclusions now; they’ve been filed in all states and approved in New York, New Jersey, and Connecticut and most other states. Tell them even if your companies aren’t using these endorsements yet. Point out that ISO is clearly worried about cyber losses—so they should be too. And insurers will argue that even policies without these exclusion don’t provide coverage. Your recommendation: cyber risk management and cyber insurance. And it just so happens that you can help them with both.

Labor Law Claims Continue to Keep New York’s Courts Busy Sections 200, 240, and 241 Labor law claims are a constant problem in New York.7 Recent court cases have somewhat narrowed the scope of the laws. That’s not a good solution as courts are an expensive place to win your argument, but it’s something. In one case, Flossos v. Waterside Redevelopment Company8, the building owner hired Pelar Painting Company to paint an apartment that has just become vacant. Georgios Flossos, an employee of Pelar, climbed on a ladder to paint the ceiling. As he was painting, a piece of the ceiling fell on him and he and the ladder wound up on the floor. The ladder was fine, but Flossos was injured. Section 240 case, right? After all, fall from an elevated position is the basic 240 claim. The Queens continued on page 16

4 Randy Maniloff “More On ISO’s Just-Filed CGL Data Breach Exclusions” http://www.coverage opinions.info/CoverageOpinionsVol2Issue18.pdf (accessed 12/24/13) 5 ISO has also filed exclusions for OWNERS AND CONTRACTORS PROTECTIVE LIABILITY and PRODUCTS/COMPLETED OPERATIONS LIABILITY forms exclusions (CG 33 53 05 14 and CG 33 59 05 14). These exclusions deal only with bodily injury as OCP and Products/Completed Operations forms do not include personal injury coverage. The language is the same as the CGL endorsements. 6 http://www.coverageopinions.info/ThePublication.html (accessed 12/27/13) 7 I’ve written about New York Labor Law claims before, most recently in the February 4, 2013 issue of the Insurance Advocate. 8 108 A.D.3d 647, 970 N.Y.S.2d 51 (2d Dep’t 2013)

14 April 14, 2014 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] continued from page 14

Supreme Court said, yes. But the appellate court says no. It ruled that the statute’s purpose is to protect against gravity-related accidents as falling from a height or being struck by a falling object that wasn’t properly hoisted or secured. Section 240(1) applies where the falling of an object is related to “a significant risk inherent in ... the relative elevation ... at which materials or loads must be positioned or secured.” The appellate court wrote that the “plaintiff must show that, at the time the object fell, it was being hoisted or secured... and must show that the object fell because of the absence or inadequacy of a safety device of the kind enumerated in the statute.” In the appellate court’s opinion, Flossos’s claim didn’t meet the standard required by the statute. In another labor law case, this time based on Section 200, Brett Bellreng, an

employee of the contractor engaged to renovate the roof of a building, was injured when he fell through a roofing deck after he disconnected his lifeline. He stated that he disconnected the lifeline in order to work on a portion of the roof he could not reach with the lifeline on. Section 200 is much broader in scope than 240 and 241 (the so-called “scaffold law” statutes). It applies to virtually all types of construction accidents, but it does not impose absolute liability. In section 200 cases, defendants can argue that they did not exert control and are therefore not culpable. This time the lower court ruled in favor of the defendants, the owner and general contractor. It said that while the defendants monitored the timing and quality of work, that was not sufficient supervision or control to trigger Labor Law section 200 or common law negligence.9 The plaintiff appealed, but the Appellate Division of the Fourth Judicial Department

affirmed the lower court’s decision. Why did the plaintiff appeal the lower court’s decision? Most likely his attorney was handling the case on a contingent fee basis—that is, Bellreng would only have to pay his attorney if the attorney collected damages for him. While attorneys can’t be sure what the outcome will be in any one case, experienced negligence lawyers know that they will win a sufficient number of cases to more than offset expenses on those cases that are lost. The fees on successful cases can be huge; one-third is the typical contingent fee. (A very successful plaintiff ’s attorney once told me that when he’s asked what he charges, he replies “I don’t charge anything at all. In fact, I’m going to give you two-thirds of everything I collect.”) Unfortunately, that arithmetic doesn’t apply to the insurance company. Win or lose, it has to pay its attorneys and when it loses it has to pay the award too.[IA]

9 Bellreng v. Sicoli & Massaro, Inc., 108 A.D.3d 1027, 1030-1031 (4th Dep’t July, 2013)

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[ COVER ]

The Hartford and IBM Ink $500 Million Cloud Accord Move Aimed at Agent and Customer Service 18 April 14, 2014 / INSURANCE ADVOCATE

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[ COVER ]

he Hartford and IBM (NYSE: IBM) just announced a new six-year technology services agreement to implement a new service model that includes a private cloud infrastructure. The project will leverage the expertise of both firms, market insights and research to build new business models and competitive capabilities that will enhance The Hartford’s ability to anticipate and meet the needs of customers and agents. The partnership supports The Hartford’s strategy to drive profitable growth and increase operational effectiveness as it continues to focus on its property and casualty, group benefits and mutual funds businesses, according to the company. The Hartford will move to a private cloud-based infrastructure on IBM’s

“Clients today are looking for IT partners who can understand and help drive their business with a focus on innovation and delivering business outcomes, not just IT efficiency. This expansion of our partnership with The Hartford illustrates the work IBM is leading with cloud.”

Exactly what is Cloud Computing? See next page.

PureFlex System. Under the $500 million agreement, IBM will also provide a number of other services related to mainframe, storage, backup and resiliency. The Hartford will define the services it requires, and IBM will be responsible for the solution and delivery of those services. “Today’s announcement is an example of how leading organizations are utilizing cloud technology to gain competitive advantage,” said Philip Guido, general manager, IBM Global Technology Services, North America. “Clients today are looking for IT partners who can understand and help drive their business with a focus on innovation and delivering

business outcomes, not just IT efficiency. This expansion of our partnership with The Hartford illustrates the work IBM is leading with cloud.” A recent IBM study reveals that 66 percent of organizations are using cloud to strengthen the relationship between IT and lines of business, and the majority are using cloud to integrate and apply mobile, social, analytics and Big Data technologies. As part of the agreement , The Hartford and IBM will also partner on the creation of a joint innovation committee to foster collaboration on strategic initiatives. The project will leverage the expertise of both firms, market insights and research to build new business models and competitive capabilities that will enhance The Hartford’s ability to anticipate and meet the needs of customers and agents. As part of the agreement, The Hartford and IBM will also partner on the creation of a joint innovation committee to foster collaboration on strategic initiatives. IBM has helped more than 30,000 clients around the world with its 40,000 industry experts. Since its acquisition in 2013, IBM SoftLayer has served 4,500 new cloud clients. Today, IBM has 100+ cloud SaaS solutions, thousands of experts with deep industry knowledge helping clients transform and a network of 40 data centers worldwide. Since 2007, IBM has invested more than $7 billion in 17 acquisitions to accelerate its cloud initiatives and build a high value cloud portfolio. IBM holds 1,560 cloud patents focused on driving innovation. In fact, IBM for the 21st consecutive year topped the annual list of US patent leaders. IBM processes more the 5.5M client transactions daily through IBM's public cloud. For more information about IBM cloud offerings, visit http://www.ibm. com/cloud. The Hartford, with more than 200 years of experience, is a leader in property and casualty insurance, group benefits and mutual funds.

continued on page 18

INSURANCE ADVOCATE / April 14, 2014 19

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[ COVER ]

What is Cloud Computing? As explained by Judith Hurwitz, Robin Bloor, Marcia Kaufman, and Fern Halper from Cloud Computing For Dummies, edited for the Insurance Advocate® CLOUD COMPUTING IS THE NEXT STAGE IN THE INTERNET'S EVOLUTION, providing the means through which everything — from computing power to computing infrastructure, applications, business processes to personal collaboration — can be delivered to you as a service wherever and whenever you need. The “cloud” in cloud computing can be defined as the set of hardware, networks, storage, services, and interfaces that combine to deliver aspects of computing as a service. Cloud services include the delivery of software, infrastructure, and storage over the Internet (either as separate components or a complete platform) based on user demand. (See http://www.dummies.com/howto/content/cloud-computing-models.html?cid=embedlink for the lowdown on the way clouds are used.) Cloud computing has four essential characteristics: elasticity and the ability to scale up and down, self-service provisioning and automatic deprovisioning, application programming interfaces (APIs), billing and metering of service usage in a pay-as-you-go model. This flexibility is what is attracting individuals and businesses to move to the cloud.

20 April 14, 2014 / INSURANCE ADVOCATE

The world of the cloud has lots of participants: • The end user who doesn’t have to know anything about the underlying technology. • Business management who needs to take responsibility for the governance of data or services living in a cloud. Cloud service providers must provide a predictable and guaranteed service level and security to all their constituents. (Find out what providers have to consider in Cloud Computing Issues.) • The cloud service provider who is responsible for IT assets and maintenance. Cloud computing is offered in different forms: public clouds, private clouds, and hybrid clouds, which combine both public and private. Cloud computing can completely change the way companies use technology to service customers, partners, and suppliers. Some businesses, such as Google and Amazon, already have most of their IT resources in the cloud. They have found that it can eliminate many of the complex constraints from the traditional computing environment, including space, time, power, and cost.

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[ FEATURE ]

By Betty Flood and Casey O’Brien

Auto Insurance

Under t

24 April 14, 2014 / INSURANCE ADVOCATE

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[ FEATURE ]

r the Knife Standing Committee on Insurance Holds Public Hearing to Examine High Costs and Coverage Gaps

LBANY, N.Y.—The New York Assembly Standing Committee on Insurance held a public hearing on April 10th to examine the automobile insurance market in the state. The hearing was conducted by Committee Chair Assemblyman Kevin A. Cahill (D/WFKingston), as well as Committee members Thomas J. Abinanti (D/IND- Westchester), Will Barclay (R/IND/C- Fulton), Gary D. Finch (R/C/IND-Auburn), Nick Perry (D/WF- Brooklyn), and Phil Steck (DSchenectady). The hearing examined a plethora of issues within the automobile insurance business that related to the high costs and coverage gaps found in the New York market and astounded Chairman Cahill with the intricate testimony of the witnesses. “New York State has the most expensive automobile insurance in the nation,” Chairman Cahill stated in his opening remarks. First to testify was Robert Easton, Executive Deputy Superintendent of the Insurance Division at the New York State Department of Financial Services (DFS). “New York hosts a vibrant and competitive auto insurance marketplace. Today, over 100 separately licensed companies offer coverage to New York drivers,” Easton said. “Measures taken by the Legislature, such as the introduction of multi-tier programs in 1995, have enabled insurers to write auto insurance in the voluntary market for a wide array of underwriting profiles. As a consequence, most consumers can find coverage that fits their needs.” “The sufficient availability of coverage is perhaps best reflected in the trending depopulation of the New York Automobile

ASSEMBLYMAN KEVIN A. CAHILL

“New York State has the most expensive automobile insurance in the nation.”

Insurance Plan (also known as the “assigned risk” market), New York’s insurer of last resort. In the 1990’s, more than one in six vehicles were insured in the assigned risk market; today the AIP has less than one-half of one percent of the automobiles registered in the state,” said Easton. “There has been an unprecedented reduction in the population of the AIP. From a peak of 1.7 million vehicles in the early 1990’s, there are now fewer than 50,000 vehicles insured through the Plan.” The DFS is encouraging insurers to offer a “usage-based insurance” program, which provides discounts to the consumer if they opt in. “Many UBI programs involve the use of a telematics device – a gadget is installed in a vehicle – that gathers data about an insured’s driving habits, such as the time of day a person drives, or her acceleration and breaking patterns. That information can be used to better align pricing to risk, and to inform consumers about aspects of their driving habits that insurers consider most relevant to pricing. In that manner,” Easton continued, “policyholders can modify their behaviors and drive more safely, which can lead to fewer accidents, and, in the end, help lower premiums for drivers continued on page 26

INSURANCE ADVOCATE / April 14, 2014 25

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[ FEATURE ] continued from page 25

statewide.” Easton went on to define the minimum coverage requirements for New York drivers; Liability Insurance, Personal Injury Protection (PIP), and Uninsured Motorist coverage. Liability insurance provides payment to third parties for pain and suffering should the operator or owner of a vehicle be found legally responsible for injury or property damage. The minimum coverage is $25,000 per person and $50,000 per accident for bodily injury. In the event of death, the coverage is $50,000/$100,000, and $10,000 is for property damage. PIP, also known as no-fault, provides up to $50,000 to the occupants of a vehicle or to pedestrians struck by a vehicle. “PIP is primarily comprised of medical expenses and lost wages, but not pain and suffering,” Easton said. PIP has remained at $50,000 since the no-fault law in 1973 was passed. The uninsured motorist coverage provides payment for pain and suffering if it is associated with bodily injury to occupants of a vehicle or pedestrians if the motorist was driving illegally without insurance. “The minimum amounts of coverage are $25,000 per person, $50,000 per accident, and $50,000/$100,000 in the event of death,” said Easton. “Most drivers in New York carry more coverage than the basic minimum limits. But many who opt for the minimum limits live in areas of the State where claims experience is among the worst, and where insurance costs are among the highest,” said Easton. Besides the minimum limits, insurers are required in New York State to offer supplementary uninsured or underinsured motorist coverage. Consumers can also opt to purchase collision and comprehensive coverage; collision coverage pays the insured regardless of fault for damages to their car with another car or object. Comprehensive coverage will cover damages made to their car from incidents such as theft or flooding. “Insurers typically offer collision and comprehensive coverages with deductibles, 26 April 14, 2014 / INSURANCE ADVOCATE

“Auto insurance premiums in New York for 2012 added up to $12.6 billion. The New York auto insurance market is competitive, with over 60 insurance carriers writing private passenger auto policies and 120 carriers writing commercial auto insurance policies” - Ellen Melchionni, President, NYIA

which gives policy holders the flexibility to decide how much of the cost they want to absorb in repairing or replacing a vehicle. Not surprisingly, consumers who opt for higher deductibles tend to pay less in premiums,” said Easton. In March of 2012, Governor Cuomo announced a two-pronged statewide initiative aimed at removing some of the cost drivers or delays from the no-fault system. The DFS amended Regulation 68, which effectuates the no-fault law. By amending Regulation 68, they could speed claims resolutions by “establishing certain timeframes to enable insurers to take prompt action on claims; clarifying that health providers should cooperate with insurers when certain claims information is requested; and authorizing insurers to deny claims payments when no services are rendered by providers or when the fees charged by providers exceed those permissible under the governing fee schedules.” The DFS also worked upstate and downstate to seek out doctors and health providers who provide unnecessary or excessive medical treatments to maximize insurance payments. The DFS is aiming to bar these doctors and health providers from

ELLEN MELCHIONNI

participating in the no-fault system, and has already banned 18 physicians or health care providers from billing for no-fault claims, and have many more under investigation. Testifying second were President of the New York Insurance Association (NYIA) Ellen Melchionni, Gary Henning, Vice President of the Northeast Region for the American Insurance Association (AIA), and Kristina Baldwin, Assistant Vice President of Property Casualty Insurers Association (PCI). Melchionni began her testimony urging the Legislature to take a zero tolerance policy with auto insurance fraud. “No-fault and auto accident fraud is a public safety issue and costs New Yorkers millions of dollars a year,” she said. “Auto insurance premiums in New York for 2012 added up to $12.6 billion. The New York auto insurance market is competitive, with over 60 insurance carriers writing private passenger auto policies and 120 carriers writing commercial auto insurance policies,” Melchionni said. “Turning to no-fault specifically, New York’s Personal Injury Protection benefit of up to $50,000 is second in the nation among no fault states with only Michigan providing a higher PIP benefit level.” Speaking on fraud, Melchionni said the reason for thriving fraud was inaction by public policymakers, “making our roadways more dangerous, diminishing the quality of health care in our state, and adding financial burdens to New York families.” As part of the zero tolerance policy, continued on page 28

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[ FEATURE ] continued from page 26

Melchionni suggests the following measures: • Making staging an auto accident a felony crime, ending fraudulent billing from fly-bynight durable medical equipment providers; • Allowing the retroactive cancellation of fraudulently obtained auto insurance policies; Requiring health providers to prove that a treatment is medically necessary. NYIA supports the following bills: • S3547 and S3540, both introduced by Senator Seward; • A7989, introduced by Assemblyman Weprin; • Assemblyman Heastie’s bill A3774-A and its companion bill in the Senate, S1959-A sponsored by Senator Golden, which would allow retroactive cancellation of the automobile policy in the first sixty days where the payment turns out to be fraudulent; • S3545, Senator Seward, which proposes two additional consumer protection enhancements. “One proposal to relax the serious injury threshold, A2362 by Assemblyman Titone and S880 by Senator Bonacic, would not merely update the current def-

ROBERT EASTON, NYDFS

28 April 14, 2014 / INSURANCE ADVOCATE

ket of last resort, or residual market, for those drivers who are unable to obtain coverage from any auto carrier. This market, the New York Automobile Insurance Plan (NYAIP), currently has a historically low level of motor vehicles insured by it,” Melchionni said. “This is more evidence of a robust and competitive auto insurance market in New York.” In the DFS’ 2012 report, it was noted less than one percent of private passenger motor vehicles were insured under the NYAIP, and the number of vehicles insured under this plan had decreased by 20 percent at the end of 2012 compared with the previous year. Gary Henning emphasized the need for Assembly “to extend the insurance rating laws, including extension of those affecting automobile insurance.” The “2% law,” which will expire this June, allows for insurers to non-renew two percent of their books of auto insurance policies in any rating territory annually. Henning said the law would provide flexibility, which ultimately creates a healthy and competitive marketplace to benefit the consumer. “This law is critical for allowing insurers flexibility in managing their overall exposure in a territory and throughout the state. The flexibility this provides makes it more likely insurers will want to be in the New York automobile insurance market in the first place. If this law were to sunset, a policyholder would either have to break the law, fail to pay premium or be involved in numerous accidents before an insurer would be allowed to non-renew coverage for the policyholder,” Henning said. AIA stated that too many unnecessary medical services are being provided, inflating claim costs for no-fault. The 2014 Budget had provisions in it which would have addressed the issue, but failed to make it into the final version. “While AIA certainly understands the concerns of some of the other stakeholders regarding the breadth of these provisions, AIA believes acceptable and beneficial compromise language could have been worked out, language that would have further reduced no-fault fraud,” Henning said. “AIA was therefore extremely disappointed

Corbin touched upon the state’s minimum limits requirements, saying “Many of our members tell PIANY that they won’t even write policies at the current minimum limits because, in their opinion, the level is ridiculously low and irresponsible.

inition of ‘serious injury’ to reflect modern medical technology,” Melchionni said. NYIA opposes attempts to modify the current law-which governs the consumer’s choice to purchase supplementary uninsured and underinsured motorist coverage and changes in the consumer’s ability to choose the amount of coverage they want to purchase. They believe consumers are able to choose limits in the amount they feel best for their individual circumstances. “New York has an auto insurance mar-

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[ FEATURE ] the medical provider decertification provisions were dropped completely from the final state budget. AIA hope that as a result of this hearing and related roundtables, the Assembly will consider supporting these reforms.” The AIA urged the Assembly to pass A932, sponsored by Assemblyman Heastie, allowing insurers to investigate suspicious claims after the 30-day deadline, and would continue to subject any eventual payment of those claims to the 24 percent annual interest requirement. New York is the fourth most expensive state in the nation for auto insurance premiums, and the AIA believes expanding the verbal threshold would further increase insurance costs when considering increasing legislation. Henning closed with commenting on “the use of education and occupation as underwriting and rating tools. AIA cannot comment on the accuracy or veracity of the specifics of the recently released NYPIRG study. However, we can say generally that insurers use many underwriting and rating factors, two of which might be occupation and education, to assess risk presented by policyholders.” “The better an insurer can define risk characteristics, developing statistically relevant data for all different types of categories, the more accurately automobile insurance can be priced,” Henning said. Matthew Guilbault, the director of government and industry affairs for the Professional Insurance Agents of New York State, Inc. (PIANY) testified with PIA’s director of research, Dan Corbin. Guilbault said, “much of the testimony prepared for today was the result of a member poll that PIANY set out last week. In our poll, 111 of our most active members were asked a series of questions about the automobile insurance marketplace. These members hail from all across New York State, from Buffalo to Brooklyn, and represent small, medium and large agencies.” Referencing a February 2014 Quadrant Information Services survey, it was found for a 40-year-old single male in New York State, he will have an average premium of

Smith says if the underlying claims cost issues are not addressed, the costs of insurance cannot be reduced. “The New York Auto Insurance Plan, the last resort market for auto insurance and generally high risk drivers, is experiencing historically low numbers because the voluntary market is adequately servicing New York’s drivers.”

$1,173 with a $500 deductible on collision and comprehensive coverage. Compared to neighboring states such as New Jersey, Connecticut, and Massachusetts, our average premiums are lower. This survey calculated rates from six different large carriers in 10 zip codes per state, asking insurance agents their take on their respective state’s rate. “I am not aware of whether the zip codes in New York were evenly spread across the state of included in the five boroughs,” said Corbin. Speaking on the percentage of uninsured motorists in New York, Corbin spoke about a 2012 study conducted by the International Risk Management Institute. The study found the state ranks the lowest in the country at a five percent, compared to a nationwide average of 13.8 percent. Corbin touched upon the state’s minimum limits requirements, saying “Many of our members tell PIANY that they won’t even write policies at the current minimum limits because, in their opinion, the level is ridiculously low and irresponsible. Even a young adult new to the job market with no assets should have more than

JACK SMITH, IIABNY

$60,000 coverage for an injury and for property damage because it doesn’t take a very serious wreck to cause property damage or injuries that exceed those levels. The State of Maine’s requirement of a 50/100/25 minimum-limit policy currently sets the standards in the country.” “PIANY supports the changes embodied in A10784/S7787 of 2012,” Corbin said. “This legislation would have required automobile insurance policies to provide supplementary uninsured/underinsured motorist coverage equal to a policy’s bodily injury liability limits, unless the higher SUM limits are affirmatively rejected by the policyholder and that rejection is appropriately memorialized.” PIANY supports a reform of the nofault bill, calling for changes to laws and regulations to combat insurance fraud. The “necessary statutory changes” they support are: • Requiring use of medical guidelines for specific auto-related injuries to reduce over-treatment and unnecessary procedures; • Requiring that disputes be resolved by arbitration to speed up the resolution of claims and avoid the costs and uncertainty of a trial; • Permit those with claims for less than $5,000 to submit proof based on a doctor’s sworn affidavit instead of requiring physicians to appear in person; • Strengthen the penalty for acting as a runner and facilitating fraudulent transactions to a felony; continued on page 30

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• Raise the burden of proof for receipt of no-fault benefits by requiring the plaintiff to produce a witness with personal knowledge of the facts alleged in the complaint. “Now is the time to enact comprehensive and systematic reform of the no-fault system, while preserving the benefits that justified its adoption 36 years ago- reducing costs and delays in paying claims,” said Corbin. Jack Smith, regional director for Independent Insurance Agents & Brokers of New York (IIABNY), also testified at the hearing. The agency services more than 2,000 Personal Lines clients; about 40 percent of the client lists are personal lines clients and 60 percent are commercial clients, with the primary market area being the Hudson Valley. “The personal auto market is extremely competitive in New York State,” Smith said. “The pricing is high, but that is driven by claims costs including higher medical costs in our State. There are an adequate number of carriers competing for auto insurance business with new entrants coming in as well, which is a plus for consumers.” Smith says if the underlying claims cost issues are not addressed, the costs of insurance cannot be reduced. “The New York Auto Insurance Plan, the last resort market for auto insurance and generally high risk drivers, is experiencing historically low numbers because the voluntary market is adequately servicing New York’s drivers.” Smith said, “The more heavily populated areas of the state, including New York City and Buffalo, have a higher incidence of no-fault auto fraud resulting in much higher than average premiums for consumers in those areas. Personal auto premiums in the five boroughs of New York City can be four times higher than upstate premiums because fraud drives up the cost of auto insurance. No-fault auto fraud is a serious problem in our state and one that needs to be addressed with tighter laws and higher penalties for those who engage in fraudulent activities such as fake medical claims, staged accidents and 30 April 14, 2014 / INSURANCE ADVOCATE

“In 2012, return on new worth – a key indicator of automobile insurer profitability – for private passenger automobile insurance was 7.2 percent in New York, or about twice the national average of 3.5 percent. Yet New Yorkers continue to pay some of the highest insurance rates in the country.”

runner/steerer activity.” Smith said IIABNY supports the nofault reforms to crack down on medical fraud that the Governor and the Senate had in their budget plans. They also support the right for consumers to be informed about auto insurance so they can make a better-informed decision on what works for them. Bills introduced in both Houses last year, S5606 and A6727, required a choice of purchasing to be offered to the consumer, and that the availability of limits be equal to the limits of the bodily injury policy. “We regularly provide coverage options to our customers to tailor coverage to their specific needs. Offering a range of options for SUM coverage is beneficial to consumers. These bills have some procedural problems but we support the concept and are willing to work on a legislative solution that works for all parties,” concluded Smith. President of the New York State Trial Lawyers Association (NYSTLA), Robert Danzi, and Past-President Nicholas Timko testified that “Our members represent ordinary New Yorkers as they seek to obtain justice having suffered serious injuries or deaths of family members as a

result of an auto accident. They see firsthand the impact of auto accidents on families-not just the injuries but the ballooning medical bills, lost incomes and damaged lives that result.” “Our members also see the consequences of inadequate auto insurance-without proper insurance coverage, accident victims often must rely on charity or taxpayer-funded programs to pay medical costs and to provide basic necessities for their families. Given this unique perspective, NYSTLA has a strong interest in any efforts to amend or reform the insurance law as it relates to automobile insurance.” Danzi said, “This Committee has heard many suggestions that would limit the rights of consumers and accident victims, typically made in the name of addressing insurance and no-fault fraud to help cut rates. What they lack is hard evidence that changes to the law sought by the insurance industry that are necessary or that insurance rates are set at an appropriate level. While the Department of Financial Services receives some data used by insurers to set rates, much of that information is not available to the public, and in any case is aggregated data of limited value when considering policy changes.” “The need for greater transparency in rate setting is well-illustrated by recent reporting by the Daily News,” said Danzi. “Residents of one South Bronx precinct pay higher insurance rates based on the area’s high crime rate. The precinct’s crime statistics include crimes committed at the Rikers Island jail, bumping the overall crime rate up to 26 percent and the violent crime rate up 49 percent. Greater transparency within the insurance industry could have helped avoid the inherent unfairness of penalizing South Bronx residents because of artificially inflated crime statistics.” “Auto insurers are making a substantial profit in New York, as compared to other states,” Danzi continued. “In 2012, return on new worth – a key indicator of automobile insurer profitability – for private passenger automobile insurance was 7.2 percent in New York, or about twice the

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[ FEATURE ] national average of 3.5 percent. Yet New Yorkers continue to pay some of the highest insurance rates in the country.” “Transparency in rate setting is essential to allow the State and consumers to monitor the industry, ensure fair treatment, prevent price gouging, and assess policy proposals that would strip consumers of their rights. Assembly bill number A1132 would require that insurance companies should be required to reveal the hard data that is the basis for the rates they charge for a product that consumers are required to buy, and should be supported by this Committee,” Danzi explained. “Too often the only available recovery after an auto accident is this minimum level of coverage carried by the driver at fault. No matter how catastrophically injured person may be from an auto accident, the most they can recover at this minimum level is $25,000, or a mere $50,00- in case of death,” said Danzi. “Raising the minimum auto insurance limits, as proposed in Assembly bill A3306, will better protect low and middle-income New Yorkers, those least able to afford the consequences of a serious accident.” Timko said, “The legislature should also consider addressing problems caused by the Graves Amendment. This is a federal law that eliminated leasing and rental companies’ share of responsibility for accidents caused by the vehicles they own and profit from. Since the Amendment passed in August 2005 corporate rental and leasing

companies are exempted for injuries to resulting from the negligent operation of their vehicle, and so rental and leasing companies have no incentive to ensure that only safe and properly insured drivers take to the roads behind the wheels of their motor vehicles.” “The Graves Amendment provides that states can enact ‘financial responsibility’ laws that would undo some of the inequities of the federal law,” said Timko. “NYSTLA supports the Assembly bill number A3435 that would achieve his goal by requiring leasing and rental companies to obtain adequate levels of insurance for their vehicles. If leasing and rental companies are responsible for insurance coverage they will have an incentive to properly scrutinize the driving record of those leasing and renting their vehicles, helping to keep unsafe drivers off New York’s roads.” “Legislation that would require insurers to: promote responsible insurance coverage; educate consumers; and provide consumers with the option of purchasing SUM (Assembly bill A6727) and spousal liability coverage (Assembly bill A1055) at limits equal to their liability coverage, should be a priority,” said Timko. “Twenty-six other states have already adopted similar measures with regard to SUM insurance, and states like New Jersey have made spousal liability coverage automatic.” “Unfortunately, New York’s current law does not adequately protect policy holders from an unscrupulous insurance company

ASSEMBLYMAN WILL BARCLAY (R – PULASKI) AND ASSEMBLYMEMBER GARY FINCH (R – AUBURN)

that unreasonably delays or denies legitimate claims,” claimed Danzi. “If an accident victim fights back in court, the insurer need only pay what it should have paid in the first place, and no more. In the absence of any real consequences for such unfair claims practices, there is an overwhelming incentive to profit at the expense of consumers.” “Under current law, if an accident victim has not suffered a ‘serious injury’ they are limited to receiving compensation provided by no-fault coverage,” Danzi said. “Unfortunately, he law defining ‘serious injury’ has not kept pace with modern medicine. The current law was enacted long before many medical technologies like CT scans, MRIs, EMGs and other testing could readily identify man of the serious injuries stemming from auto accidents. For example, spinal, nerve, or ligament damage, and traumatic brain injuries which could not be detected at the same time the no-fault law was crafted, might not be considered ‘serious’ under the law’s present definitions.” “Among the many proposals aimed at tackling no-fault and insurance fraud proposed by the insurance industry, none take steps to address fraud by parties other than the consumer,” Danzi said. “For example, NYSTLA members all too often see abuse and even outright fraud in the use of nofault medical examinations.” The examples Danzi provided include: • Insurers demanding unnecessary examinations; • Examinations conducted by physicians in specialties other than those related to an accident victims injuries; • Examinations by physicians whose principal source of business is no-fault medical examinations on behalf of insurers, who therefore lack any true independence; • Physician fraud, including use of patterned, boilerplate and carrier-written medical report templates that can result in “canned” or wholly fictional reports. “Of the proposals this Committee has heard today from insurers, we must take exception to those that are tailored to increase insurers’ profits, seek to avoid paying valid claims, and would further strip continued on page 32

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insurance consumers and innocent injured accident victims of their rights,” Danzi said. “Under current law, an insurer who fails to pay an accident victim’s claim within 30 days of being provided proof of claim is precluded from denying that claim, unless the policy does not cover the individual or the particular claim,” said Danzi. “This longstanding rule is an entrenched part of the auto business in New York, and has been sanctioned by the New York Court of Appeals.” Last to testify at the hearing was Russ Haven, Legislative Counsel for the New York Public Research Group (NYPIRG). “Periodically- particularly when the investment climate is less hospitable- insurers say that despite best efforts they are stymied by wily fraudsters and laws that shield crooked health care providers, shady lawyers, and bogus victims.” “New York’s auto insurance companies appear to be quite healthy and profitable according to National Association of Insurance Commissioners (NAIC) data,” said Haven. “These industry claims of widespread fraud have not been subject to an independent audit nor has the extent of their fraud fighting efforts been publically examined.” “Related to claims of out-of-control fraud, insurers also have pushed to overhaul the state’s ‘prompt payment laws,’ which could ultimately hurt policyholders, passengers, and pedestrians who could lose access to qualified providers, not receive prompt treatment, be forced to pursue payment against carriers, or be stuck with unpaid bills for care received for legitimate injuries,” Haven said. “According to the most recent data available from NAIC, for 2012 New York auto liability insurance was more profitable than the national average. The NAIC 2012 profitability report slates that $10.7 billion in auto premiums were collected from New York private passenger policyholders in that year. Liability losses incurred were at 60.5 cents per premium dollar. The national average was 67.6,” Haven explained. “The 2012 Superstorm Sandy led to significant payouts for physical coverage, liability- the portion of the premium that includes no-fault and is purportedly targeted by fraudulent billing schemes, which 32 April 14, 2014 / INSURANCE ADVOCATE

really is the focus of the current debateappears quite stable in New York,” said Haven. “The way the insurance industry has framed the auto insurance fraud issue, it is largely a problem of staged accident rings working with bogus medical providers who are certified to bill under the state’s no-fault system. If you remove the so-called ‘medical mills’ from the equation, the scheme cannot function,” Haven said. “The legal authority to bill under the no-fault thus appears to be the linchpin in the auto fraud playbook. Get rid of the bad apple providers and the lion’s share of the fraud problem will go away.” “Unless this law is fundamentally and fatally flawed, we [NYPIRG] believe the Cuomo administration should use the current law to carry out its intended purpose and report back to the Legislature with any recommendations or strengthening the law,” said Haven. “If fraud is central to the insurance industry’s argument that current laws need to be changed, this needs to be documented in detail.” “Notwithstanding NYC Comptroller Bill Thompson’s Report, in 2008, the state enacted file and use ‘flex rating’ for no-fault, something the industry had long sought and consumer advocates long opposed,” Haven said. “The evidence from New York’s previous experiment with flex rating for auto insurance was that consumers did not benefit from rate reductions.” The “file and use” system for health care was repealed by the state in 2010, as it had not produced lower premiums; the law requires health care insurers to pay $.82 for each premium dollar. “Senate Insurance Chair Neil Breslin (D-Albany) said, ‘It makes them go to the Insurance Department to get approval for rates, as opposed to just filing a rate with the Insurance Department. And unfortunately, sometimes, the insurance companies have shown that they raise them a lot more if they’re left to their own devices,’” said Haven. “Assembly Majority Leader Joseph Morelle (D- Rochester) supported the repeal of automatic insurance rate increases for health insurers in an essay for Rochester’s Democrat & Chronicle newspaper dated February 7, 2010. ‘In the years since deregulation prevented the New York State Insurance Department from reviewing

proposed premium hikes- a process known as ‘prior approval’- rates have risen 81 percent, outstripping inflation and increases in real wages.’” “We [NYPIRG] believe the arguments made by the Chairs at the time, Senator Breslin and Majority Leader Morelle in favor of reinstatement of proper approval for health care insurance rate hikes applies with equal force to mandatory auto insurance coverage and that the state should repeal file and use ‘flex rating’ for auto insurance,” Haven said. “Pursuant to Insurance Law section 9910, New York auto policyholders pay $10 per annual policy and collectively some $115 million a year for a ‘Motor Vehicle Law Enforcement Fee.’ The insurers turn the money over to the Department of Financial Services,” said Haven. “Only the first $4.7 million of these funds goes to the Department of Criminal Justice Services for local auto theft and insurance fraud prevention. According to the Division of Budget, the rest of the monies go to State Police costs, including fraud prevention.” NYPIRG recommends reforms to: • Create an Office of Public Insurance Counsel to act as an independent advocate for consumer and small business policyholders. “We have projected in the past that such an office could save New York consumers at least $650 million a year.” • Level the playing field between insurers and consumers through a fair claims settlement law. Current New York law only requires insurers to pay what they would have been required to at the beginning of the process- this there’s typically no financial penalty for these tactics. Other states, such as California, give policyholders a private right of action and allow them to recover fully when insurers unreasonably withhold payment for valid claims. • Require DFS to let New York driver’s comparison shop online for auto insurance by establishing a DFS webpage allowing them to compare prices among carriers providing a requested coverage in their area. Provide DFS carrier complaint data as well as information on the financial health of the insurer. • Return New York to a prior approval

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[ FEATURE ] system and repeal flex rating. • Reform Regulation 68 to increase the amount of time injured drivers; passengers and pedestrians can file legitimate claims for medical care. • Protect consumers that purchase comprehensive and collision coverage by requiring insurers to provide prompt information on what the insurer would pay them if their car was declared a total loss and what sources are used to determine value, so the insured could gauge whether continuing these types of coverage is in their best interests. • Ensure that the Motor Vehicle Law Enforcement Fee funds fraud prevention and other policyholder protection and otherwise unfunded driver safety activities or eliminate this cost. “The hearing touched on a number of highs and lows of the automobile insurance market in the State of New York. It was uncovered that statistics surrounding rates and accidents are collected and analyzed so differently by various stakeholders that there is a need for the standardization of data. The need for greater independent consumer protections was also readily apparent,” said Cahill. “Most surprising was the lack of actual data on the impact fraud and waste have on rates. While no fraud should be tolerated, the question remains as to how much due process consumers should be denied. I look forward to addressing head-on the primary reasons for high rates to best help those in New York struggling to pay for car insurance.” “I am pleased that the Assembly Insurance Committee is having this hearing,” said Assemblyman Will Barclay (R – Pulaski) , Ranking Minority Member of the Assembly Insurance Committee. “Auto insurance rates have been rising in New York State. After hearing detailed testimony from the Department of Financial Services, industry experts, consumer groups and other stakeholders, I look forward to working with Chairman Cahill and my colleagues on the Insurance Committee to develop legislation that will effectuate affordable auto insurance.” “I am particularly interested in why people with health insurance need to duplicate that coverage in their auto policy and in how both insurers and consumers may work together to best handle small

ASSEMBLYMEMBER PHIL STECK (D – COLONIE, SCHENECTADY)

property damage claims in this State,” said Assemblymember Phil Steck (D – Colonie, Schenectady). “Due to the high cost of repair, almost any claim today will exceed the standard $500 deductible.” “The mere fact that New Yorkers endure some of the highest insurance rates in the nation is without a doubt troubling, however a recent report by NYPIRG shows that’s far from the only reason to be upset with insurance rates in the state. NYPIRG’s report shows that some of the state’s largest insurers are preying upon motorists who have less education, and work in non-professional jobs. The legislature must step in and right this wrong, by swiftly enacting changes to these unsettling, and unfair rate-setting practices in our state,” said Assemblymember N. Nick Perry (D – Kings County). “This hearing will prove to be a critical step in ensuring that auto insurance will be affordable for New Yorkers. It is important that we in the legislature work to reduce financial hardship, while keeping drivers safe,” said Assemblymember David Weprin (D - Fresh Meadows), who was unable to attend but had a staff representative present. “I would like to thank Chairman Kevin Cahill and ranking member Will Barclay for leading the most important Insurance Committee hearing. It is imperative that we enact the legislation necessary to keep insurance rates affordable for New Yorkers. Curbing the proliferation of fraudulent, no-fault claims will allow

insurance companies to pass along cost savings to motorists,” said Assemblymember Gar y Finch (R – Auburn) “We are pleased to participate in this important hearing,” said Robert Danzi, Esq., President of the New York State Trial Lawyers Association. “Assemblymember Cahill is focusing on the right questions how do we maintain the rights of consumers while keeping auto insurance affordable.” “We thank Chairman Cahill and the members of the Committee for providing the Department of Financial Services with the opportunity to participate in this hearing. We look forward to working with them on a number of critical issues moving forward, including rooting out no-fault fraud, better protecting consumers, and helping make sure auto insurance is affordable for New Yorkers,” said Benjamin Lawsky, Superintendent of the Department of Financial Services. Assemblymember Cahill and the Insurance Committee will be hosting regionalized round tables across the state in order to focus on localized issues pertaining to the high cost and other issues surrounding car insurance. [IA]

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[ FACE TO FACE ]

By Michael Loguercio

This Internet Thing of Ours

ecently, Symantec Corporation, whom we all know as the folks who build counterattack and virus protection software, released a study regarding cyber-attacks, and in their report they state that “we have only seen the tip of the iceberg” according to Property Casualty 360. The report discloses that Cyber Crime is growing rapidly, mostly because of the discovery by hackers of “The Internet of Things”, which is defined by Wikipedia as: The Internet of Things (IoT) refers to uniquely identifiable objects and their virtual representations in an Internet-like structure. The term Internet of Things was proposed by Kevin Ashton in 1999 though the concept has been discussed since at least 1991. The concept of the Internet of Things first became popular through the Auto-ID Center at MIT and related market analysis publications. Radio-frequency identification (RFID) was seen as a prerequisite for the Internet of Things in the early days. If all objects and people in daily life were equipped with identifiers, they could be manMichael Loguercio aged and inventoried by computers. Besides using RFID, the tagging of things may be achieved through such technologies as near field communication, barcodes, QR codes and digital watermarking. Equipping all objects in the world with minuscule identifying devices or machine-readable identifiers could transform daily life. For instance, business may no longer run out of stock or generate waste products, as involved parties would know which products are required and consumed. A person’s ability to interact with objects could be altered remotely based on immediate or present needs, in accordance with existing end-user agreements. For example, such technology could enable much more powerful control of content creators and owners over their creations by better applying copyright restrictions and digital restrictions management, so a customer buying a Blu-ray disc containing a movie could choose to pay a high price and be able to watch the movie for a whole year, pay a moderate price and have the right to watch the movie for a week, or pay a low fee every time she or he watches the movie. According to Gartner there will be nearly 26 billion devices on the Internet of Things by 2020. According to ABI Research more than 30 billion devices will be wirelessly connected to the Internet of Things (Internet of Everything) by 2020. Cisco created a dynamic “connections counter” to track the estimated number of connected things from July 2013 until July 2020 (methodology included). This concept, where devices connect to the internet/web via low-power radio, is the most active research area in IoT. The low power radios do not need to use Wi-Fi or Bluetooth. Lower power and lower cost alternatives are being explored under the category of Chirp Networks. As a result, breaches have not only become more common and prevalent, but also much larger than some that we have seen beforehand or even spoke about in my previous column. With the growth of mobile technology usage, hackers have found ways to infiltrate the Internet of Things and not only captured personal information 34 April 14, 2014 / INSURANCE ADVOCATE

data, but also hold it hostage in what is known as “ransom ware”. This annual report, known as the Internet Security Threat Report (ISTR), is compiled from over forty one million means of detecting hackers, and spans over 157 countries. Since Symantic began detecting viruses twenty years ago, they have identified over 60,000 weaknesses from 19,000 retailers. These breaches in cybercrime are attributed to a number of reasons, including our own fault via social media carelessness, which is even more heightened by mobile devices and the “Internet of Things” that we may not even realize are transmitting data in cyberspace such as our cars, appliances, and even medical devices. This gives a whole new meaning to the phrase. “If that toaster could talk…!” and “I’ve fallen and I can’t get up….but you probably already know that!” Once again, per Property Casualty 360, below are the top seven trends that Symantec has identified in its report: 1. 2013 was year of the mega breach. Total number of breaches was 62% greater than 2012, with 253 total breaches. Eight breaches each compromised more than 10 million identities. In comparison, in 2012, only one breach exposed more than 10 billion, and in 2011, only 5 were that size. More than 552 million identities were breached in 2013, putting credit card information, birth dates, government ID numbers, home addresses, medical records, phone numbers, financial information, email addresses, logins, passwords and other personal information into the criminal underground. Read related: Worldwide Cyber Breach Puts Information of Millions at Risk 2. Targeted attacks grow and evolve. Far from being dead, phishing is on the rise: the number of spear-phishing campaigns increased 91% in 2013, with campaigns running longer. Industries most at risk were mining, governments and manufacturing, with odds of being attack 1 in 2.7, 1 in 3.1 and 1 in 3.2, respectively. 3. Zero-day vulnerabilities and unpatched websites facilitated “watering-hole” attacks. Symantec uncovered 23 zero-day vulnerabilities (software holes unknown to the vendor) in 2013, a 61% increase over 2012. And even though the top five of these were patched on average within four days, Symantec detected more than 174,000 attacks within 30 days of the vulnerabilities being known. Legitimate websites with poor patch management practices are vulnerable to watering-hole attacks—so called because hackers target these websites to place malware and entrap victims. The Symantec report found that 77% of legitimate websites had exploitable vulnerabilities and 1 in 8 of all websites had a critical vulnerability. 4. The rise of ransomware. Ransomware scams—where the attacker pretends to be law enforcement and demands a fake fine of between $100 and $500—first appeared in 2012 and rapidly escalated, growing by 500% over 2013. Criminals have now dispensed with the law-enforcement pretense and simply demand money. The most prominent of these scams is Cryptolocker, which encrypts user files and demands a rancontinued on page 36

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[ FACE TO FACE ] continued from page 34

som for unencryption. With the ubiquity of online payment methods, this method of extortion is expected to grow in 2014 and small businesses and consumers are at highest risk. 5. Mobile is the new market for social media scams and malware. The ongoing increase of mobile devices is opening up a new frontier for fraud. Symantec’s Norton Report indicates that 38% of mobile users had experienced mobile cybercrime. And although lost or stolen devices are still the biggest risk, increased use of sensitive data on mobile devices is upping the ante: 52% of mobile users store sensitive ﬁles online, with 24% storing work and personal information in the same online storage accounts, and 21% share logins and passwords with families, putting both their personal data and their employers’ data at risk. And only 50% of these users take even basic security precautions. Read related: Top 10 “Shadow IT” Apps Downloaded by Employees—and the Risks Involved 6. Social media behavior: dumb and dumber. Social media sites are awash with risk. Fake offers such as free cell phone minutes accounted for the largest number attacks on Facebook users in 2013: 81% in 2013 compared to 56% in 2012. And although 12% of social media users say someone has hacked into their social network account, a quarter of them still share passwords with others and connect with people they don’t know. 7. Attackers are turning to the Internet of Things (IoT). With the Internet seeping into everyday devices, more opportunities are opening up for scammers. Baby monitors, security cameras and routers, smart televisions, cars and medical equipment were hacked in 2013. A bigger concern is attacks against consumer routers by computer worms like Linux.Darlloz. Controlling these devices can push victims to fake websites, usually to steal ﬁnancial information. The report also indicated some recommendations for best practices for business, such as: • Emphasize multiple, overlapping, and mutually supportive defensive systems, including regularly updated firewalls and gateway antivirus, intrusion detection or protective systems. • Regularly monitor for network incursion attempts, vulnerabilities and brand abuse. • Install the latest versions of endpoint antivirus software. • Be aggressive in updating and patching. • Ensure regular backups are available. • Ensure you have infection and incident response procedures in place. • Educate users on basic security protocols. Spring Fling is not only for college kids, but also for us regulars on the insurance convention world tours…with this month’s bus stop being Buffalo I Day…commonly referred to as the “largest one day insurance conference in the world”! The Insurance Club of Buffalo hosted its 61st annual Buffalo I Day on Thursday April 3rd, boasting 123 Exhibitors and close to 1,400 attendees once again making the event another huge success! As always, we were not disappointed by this year’s keynote speaker, who was introduced by Stuart Green, president of the Insurance 36 April 14, 2014 / INSURANCE ADVOCATE

Club, who appeared on stage wearing competition speed skates— apropos for the speaker who was none other than Olympic Champion Apolo Ohno! In a most inspiring speech, Apolo spoke of the determination and dedication that it takes to become an Olympic gold medal winner. The program’s afternoon session, titled “Fun & Feud”, included a presentation, and a sampling, of products from John Russo, owner of “Craft Brewery”, Hamburg Brewing Co. There was also a Family Feud style game which included willing insurance colleagues, as they tried to match wits. Followed by a reception and cocktail party, everyone who participated certainly enjoyed a terrific day of networking! Congratulations to the entire Buffalo I Day committee, including my friend Tony Kubera, for another very successful event! If you have never attended this show, make plans for next year’s! Speaking of champions, I have the pleasure of chairing the committee responsible for the Professional Insurance Agents of New York’s Long Island conference, and it will truly be my honor to introduce hockey great Bobby Nystrom as our keynote speaker on Thursday, May 1st at Crest Hollow Country Club in beautiful downtown Woodbury, NY. Although I spent many a “misspent youth’s” night sitting in the blue seats at Madison Square Garden, yelling at Nystrom (along with 17,000 of my closest blue-shirt fans) for all of the goals that he scored against my NY Rangers, Bob will surely be an exciting speaker (and he’s a great guy, too!) as he talks about what it takes to be a champion in anything that you do in life. Well, until we chat again in in two weeks, Ciao for now![IA] Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as an insurance technology professional and a licensed insurance broker. He is an active Past President of the Young Insurance Professionals of New York State, current ACT/AUGIE, Professional Insurance Agents of New York State, Independent Insurance Agents and Brokers of New York State, and Council of Insurance Brokers of Greater New York committee member. NY-YIP/PIA has honored Michael with a “Distinguished Service” award in 2001; “Insurance Professional of The Year” award in 2009; “Lifetime Achievement” award in 2012; and a “Special Service” award in 2013. In his community, Michael is the Immediate Past President and current member since 2004 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. He also served two terms on his Church’s vestry, and in 2013 he was awarded the SCOPE “Community Service” award for his dedication to the public. Michael is a regular Contributor to the Insurance Advocate since 2008, and may be contacted at 631-345-9359 or michael.loguercio@ezlynx.com.You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr.

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[ ON M Y RADAR ]

By Barry Zalma

No Excuse For Failure to Appoint Umpire

he Supreme Court of Alabama was asked, in Ex parte Tower Insurance Company of New York Inc., 1120228 (Ala. 08/23/2013), to grant a petition for a writ of mandamus filed by an insurance company, an independent adjusting firm,

lar issue in Rogers v. State Farm Fire and Casualty Co., 984 So.2d 382 (Ala. 2007); in that case it was the insureds that argued that the trial court had improperly ordered the parties to submit to the appraisal process set forth in their insurance policy. When

The burden rests on the petitioner to demonstrate that its petition presents such an exceptional case – that is, one in which an appeal is not an adequate remedy. The insurer petitioners failed to do so and the appointment of an umpire and appraisers will establish the amount of loss. Barry Zalma

and an adjuster employed by that firm (collectively “the petitioners”) directing the Cullman Circuit Court to set aside its order appointing an umpire to resolve a dispute between the insurance company and its insured concerning a claim for damage to the roof of the insured’s commercial property. The insured had moved the trial court to appoint an umpire pursuant to an appraisal clause in its insurance policy designed to resolve disputes in the event the insurer and insured “disagree on the value of the property or the amount of loss.” The insurance company had previously declined to follow the procedure set forth in the appraisal clause because, it argued, its dispute with the insured was not over “the amount of the loss” but whether the alleged loss was, in fact, a covered loss in Ex parte Tower Insurance Company of New York Inc., 1120228 (Ala. 08/23/2013). The Alabama Supreme Court refused to issue an opinion and simply refused the petition. One justice wrote a concurring opinion that is informative to all insurers faced with a demand for appraisal when the insurer believes the only issue was a dispute over the coverage and not the amount of the loss. The Supreme Court considered a simi40 April 14, 2014 / INSURANCE ADVOCATE

the trial court subsequently entered a judgment in accordance with its appointed umpire’s findings, the insureds appealed to this Court, arguing that the trial court had erred in ordering them to submit to the appraisal process because, they argued, the gravamen of their dispute was whether the alleged loss was a covered loss. In reversing the trial court’s judgment, we stated: “Having considered the holding of other jurisdictions regarding the scope of an appraiser’s rights and duties under an appraisal clause in an insurance policy, we conclude that the more persuasive authority is the authority holding that an appraiser’s duty is limited to determining the ‘amount of loss’ – the monetary value of the property damage – and that appraisers are not vested with the authority to decide questions of coverage and liability; we thus adopt that holding as our rule of law. Questions of coverage and liability should be decided only by the courts, not appraisers.” The Supreme Court found no ambiguity in the term ‘the amount of loss’ as used in the appraisal clause in the Rogerses’ homeowner’s policy that would

permit an appraisal to include questions of coverage and liability. Rogers supports the general argument made by the petitioners in this case that disputes regarding the scope of insurance coverage should not be decided by appraisers or umpires in proceedings conducted pursuant to an appraisal clause in an insurance policy; rather, those proceedings should be used only to establish the amount of loss when both the insurer and the insured agree on what constitutes the covered loss. In this case it was unnecessary to examine the alleged facts to determine whether the dispute is truly one of coverage or one of value because the petitioners have not established that they are entitled to mandamus relief. Mandamus is a drastic and extraordinary writ that will be issued only when, among other things, the petitioner has no other adequate remedy. The insurer petitioners cited no authority and have made no argument establishing that mandamus relief is appropriate in this case. For all that appears, the insurer petitioners may obtain relief, if they are ultimately entitled to it, via the normal appellate process – not unlike the appellants in Rogers, the case upon which the petitioners primarily rely. The burden rests on the petitioner to demonstrate that its petition presents such an exceptional case – that is, one in which an appeal is not an adequate remedy. The insurer petitioners failed to do so and the appointment of an umpire and appraisers will establish the amount of loss.

ZALMA OPINION Appraisal is designed to establish only the amount of loss. The Umpire and appraisers know, or will be told by the parties, the limitation on their duties to determine only one thing, the amount of loss. They know, or will be told, that they must limit their award to the amount of loss and should never make any decision regarding coverage issues. If, for some strange reason, the appraisers and umpire violate their duty and resolve coverage issues their award will be set aside by a trial court. The insurer

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[ ON M Y RADAR ] petitioners did not provide the court with facts needed to receive a writ of mandate nor did they present any evidence that they would lose their right to question any award of appraisers in a trial court or an appellate court if the appraisers exceeded their responsibility. Appraisal is supposed to help resolve a claim quickly and easily without any dispute over coverage limitations. [IA] Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. Mr. Zalma recently published the ebooks, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013 , “Zalma on California Claims Regulations – 2013 ; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/ Getting-the-Whole-Truth_p_254.html. Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insuranceclaims-a-comprehensive-guide-online. Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv or at the bottom of the home page of his website at http://www.zalma.com.

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[ TECH TALK ]

By John Sarich, VUE Software

5 Tech Trends Revolutionizing the Insurance Industry

rom property & casualty to healthcare, big technology changes are coming for the insurance industry. With the onset of the Affordable Care Act, a whole new world of required technology

in a geographic area. Cybersecurity: The need for cybersecurity became apparent with Target’s recent massive security breach. Although healthcare has made security of patient informa-

Mobility: Customer service via handheld devices will be important and cost effective if the security issue is resolved and the information that can be accessed by the member is accurate.

on the plan, the MLR will either be 80 or 85 percent. If a MLR is set at 85 percent, then all of the allowable administrative expenses of the carrier, including agent commission, is 15 percent. The advisor compensation from a small group with 100 employees is going to go from roughly $6,000 to less than $1,000 per year. Accounting for all of those small commissions that will show up on the monthly account is going to be more than the typical Excel user in the Accounting Department will be able to manage. Software that can reconcile and accurately forecast commission revenue is going to be essential in the wake of PPACA.[IA]

John Sarich

has become necessary for health insurers. And while property & casualty is typically reluctant to adopt new technology, the industry is now on the front-line of societal and business change. Both sectors must develop and adopt new technology to meet the ever-changing needs of the insurance marketplace. Here are five technology trends that are revolutionizing insurance – from healthcare to property & casualty: Aerial and Digital Imaging: Aerial photographs of houses, business, terrain, roads, and so on are changing the way we handling property & casualty claims. The days of climbing up on a roof to view it and to measure the roof to ascertain cost of replacement or repair are soon to be over. This technology is also useful in underwriting to determine, for example, the precise location and dimensions of all of the buildings on a farm. Obtaining an image of a farm and cropland gives an underwriter the information that they require in assessing the risk, and can prove invaluable at claim time. In addition to looking at roofs and other property, it could also be used to prove that there is in fact a building or a business at a location that is near a flood zone. Another benefit of this technology is that it can provide geocodes for all of the properties that an insurer has in its portfolio which can be a useful tool in assessing property exposure 42 April 14, 2014 / INSURANCE ADVOCATE

tion a top of mind issue, handling millions of individual financial transactions everyday with the onset of the Affordable Care Act will push the limits of the industry’s current financial and accounting processes. Most non-health insurance companies are familiar with cybersecurity issues and have decades of experience in managing the security of customer information on a very large scale. But, health insurance companies simply don’t have that proven experience and will need to acquire it quickly. Mobility: Customer service via handheld devices will be important and cost effective if the security issue is resolved and the information that can be accessed by the member is accurate. Carriers have the budget and the resources to enable, via customer portals, access to information for self service. Larger advisory firms will also find that their customers will prefer to selfserve when it is feasible. However, the advisory firm will not be able to provide claims or other information that is the purview of the carrier. Customers will expect to be able to call, text or email their advisor to get questions answered in a timely manner. Compensation Management Software: A common concern for healthcare advisors is how and when they will be paid. The Affordable Care Act puts agent commissions and compensation in the medical loss ratio formula. Depending

John Sarich brings over 25 years of insurance industry experience to VUE Software. As vice president of strategy, he uses his extensive knowledge of insurance operations, information technology (IT) systems, sales and marketing to develop and define operational strategies for the company’s sales and marketing initiatives. Mr. Sarich has senior executive experience in health, life, and property and casualty (P&C) insurance and has served at brokerage firms where he captured substantial revenue gains and made dramatic increases in operational efficiencies.

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[ GUEST EDITORIAL ] By Diane Katz, Thomas A . Roe Institute

Clumsy Regulation Puts Insurance at Risk

he Senate Banking Committee convened this week to examine recent moves by federal regulators against insurance companies. There exists considerable confusion on and off the Hill about Washington’s place in what has always been the states’ regulatory domain—confusion produced by lawmakers’ careless crafting of the Dodd–Frank statute. Absent a congressional fix, unwarranted regulatory actions threaten to disrupt the insurance industry, with costly consequences to consumers and the economy. Targeting Insurers. Insurance was regulated solely by states prior to 2010. 1 Thereafter, Dodd–Frank spawned a Federal Insurance Office within the Department of the Treasury, as well as new rules on reinsurance and specialty lines. The act also established a Financial Stability Oversight Council2 (FSOC) tasked with, among other things, designating for heightened regulation any “nonbank finan-

44 April 14, 2014 / INSURANCE ADVOCATE

cial companies” whose failure could supposedly present systemic risk to the economy.3 This enhanced federal regulation of insurers, asset managers, and other socalled nonbanks was intended to shield taxpayers from any more of the multibillion-dollar bailouts that resulted from the 2008 financial crisis. In reality, the new regime further entrenches the dubious notion that some firms are “too big to fail,” thereby setting the expectation of future bailouts. The insurance industry is widely regarded as blameless for the housing bubble, its burst, and the ensuing economic calamity.4 Making it a regulatory target exposes the degree to which both Congress and federal regulators have misinterpreted the real causes of the crisis. The first nonbanks singled out by the council have all been insurers, including American International Group (AIG),5 GE

Capital, and Prudential Financial. All three are sizable enterprises, to be sure. But size alone is not a reliable predictor of risk; a big firm may fail without systemic consequences. Indeed, “too big to fail” is more of a political doctrine than an economic one. Business failure is both unavoidable and necessary; it rids markets of inefficiency and creates opportunities for innovation. In the absence of objective criteria, the screening process for systemic importance has been left largely to the whims of the council, to whom Congress delegat ed unconstrained powers. Insurers are understandably concerned about falling under the regulatory control of the Federal Reserve Board. Their designation as so-called systemically important institutions subjects them to costly and intrusive regulation, including data sharing, stress testing, and copious reporting.6 And the Fed’s structure as a self-

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[ GUEST OPINION ] financing entity deprives those it regulates from direct redress through Congress. The Collins Amendment. Of particular concern is the so-called Collins Amendment, which Fed officials interpret as requiring capital and leverage requirements on insurers designated as systemically important. As currently written, the requirements are “bank-centric” and thus conflict with the principles of insurance investment. (The differences between the two industries are one of the reasons they have been regulated differently for decades.) Capital requirements for banks are designed to maintain a cushion against losses that may result from short-term liabilities. But unlike bank deposits, there is no real risk of a “run” on insurance company assets. Insurance liabilities are intended to be “illiquid.” In the event of insurer insolvency, loss payments come due only over the course of years. Insurers engage in long-term investment to complement these long-term liabilities and also rely on time-tested actuarial science to determine the level of adequate reserves. Whether the Fed has the authority to tailor a more relevant set of standards for insurers is a matter of debate. Fed chairwoman Janet Yellen has acknowledged that the banking standards are ill-suited to the insurance industry but maintains that the statute restricts the flexibility of the Fed to design more appropriate requirements.7 In contrast, Senator Susan Collins (R– ME), who authored the amendment, argues that Congress never intended for regulators to apply bank-centric capital standards to insurance entities, which are already regulated by the states.8 To “clarify” the issue for the Fed, Collins has introduced legislation to make plain that the Federal Reserve is not required to impose the capital requirements upon insurers so long as they are regulated at the state level. There is no shortage of regulatory oversight nor any reason for the Fed to regulate the insurance industry. Each state oversees a guaranty fund financed by insurers to cover the claims of insolvent firms. State regulators have also established proven resolution procedures in the event of insurer insolvency. Ironically, the efforts of federal regulators to usurp states’ oversight could actu-

[ CLASSIFIEDS ]

ally destabilize the industry rather than reinforce it. A too-big-to-fail designation may erode company discipline under the assumption that the government will remedy future problems. There is also concern that distinguishing an insurer as systemically important will give an unfair advantage to firms that are regarded as protected by the federal government. The current debate in Congress is fixed for the moment on the Collins Amendment. The real problem, however, is the council’s designation of insurers as systemically important. Under any plausible set of criteria, traditional insurance products, as long-term liabilities backed by long-term investments, cannot pose a systemic risk to the nation’s economy. The best remedy, therefore, is legislation to bar the council from going after insurers. Consumers, of course, will ultimately bear the costs of this unnecessary regulation. But the intangible costs may well exceed the billions of dollars in higher premiums that the regulatory burden would cause. Among the many flaws of Dodd– Frank is federal interference in states’ regulation of insurance. The federal government already wields punishing control of the U.S. economy and Americans’ lives. [IA]

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1. States collaborate on uniform standards through the National Association of Insurance Commissioners. 2. The FSOC is composed of 15 members—10 voting seats and five nonvoting positions. The 10 voting seats are filled by the heads of nine federal agencies, including the Treasury Secretary and the chairman of the Federal Reserve, plus one presidential appointee. The five nonvoting slots are occupied by two federal agency heads and three state regulatory officials. 3. The statute also singles out bank holding companies with assets exceeding $50 billion for enhanced supervision by the Federal Reserve Board. 4. The term “life insurance” appears only once in the entire 663-page analysis of the Financial Crisis Inquiry Report. Steven A. Kandarian, chairman, president, and CEO of MetLife, comments at the Capital Markets Summit, April 10, 2013, https://www. metlife.com/assets/cao/pr/CapitalMarkets-Summit-Remarks-FINAL.pdf (accessed March 18, 2014). 5. The taxpayer bailout of AIG was unrelated to its insurance business. The losses stemmed from its Financial Products division, which engaged in credit default swaps on subprime mortgages.

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6. Deloitte Center for Regulatory Strategies, “SIFI Designation and Its Potential Impact on Nonbank Financial Companies,” http://www.deloitte.com /assets/Dcom-UnitedStates/Local%20Assets/Documents/us_aers_grr_c rs_SIFI%20Designation%20%20_0313.pdf (accessed March 18, 2014). 7. Cheyenne Hopkins, “Insurers Urge Lawmakers Not to Impose Bank Capital Requirements on Industry,” Insurance Journal, March 11, 2014, http://www.insurancejournal.com/news/national/2014/03/11/322901.htm (accessed March 18, 2014). 8. News release, “Finding the Right Capital Regulations for Insurers,” office of Senator Susan Collins (R–ME), March 11, 2014, http://www.collins.senate.gov/ public/index.cfm/2014/3/finding-theright-capital-regulations-for-insurers (accessed March 18, 2014).

INSURANCE ADVOCATE / April 14, 2014 45

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[ GUEST OPINION ]

By Elizabeth Lee Vliet, M.D.

Top 9 Ways Government Attacks American Seniors

haos, cost increases, and turmoil reign since Obamacare took effect. Hidden changes drastically transform Medicare, affecting your ability to get needed medical care—even if you pay out of pocket. Here is my list of the Top 9 government attacks on American seniors: 1. CMS proposed a 678-page rule (1-6-2014) requiring enrollment in Medicare for all prescribers of drugs covered under Part D Medicare. Currently, medication Elizabeth Lee Vliet, M.D. prescribers only need to have an active state license permitting prescribing. CMS is restricting Medicare beneficiaries’ ability to use their benefits if they see an independent physician outside “the system.” Independent physicians can see patients but cannot order anything for them. It’s like telling an auto mechanic that he can fix cars but he can’t use any tools. Even Doctors enrolled in Medicare risk having their enrollment revoked if, in the eyes of the government bureaucrats, they “fail to meet Medicare requirements.” The requirements change almost daily, and Medicare rules are often subjectively interpreted, so this means doctors may avoid prescribing something YOU need rather than risk a Medicare sanction and losing income. 2. Hospitals increasingly are classifying hospitalized Medicare patients as being “under observation,” rather than admitting them as “in patients,” not telling them this means thousands of dollars in out-of-pocket costs. Only “inpatient” status is covered under Medicare Part A. “Observation” status comes under Part B. After discharge, patients learn about exorbitant hospital bills and increased co-payments for medications, procedures, and tests. Worse, without an inpatient stay, rehabilitation services and skilled nursing care will not be covered by Medicare, hitting unsuspecting patients with huge added medical bills. 46 April 14, 2014 / INSURANCE ADVOCATE

3. Obamacare’s new Medicare rules deny payment if a hospital patient is readmitted within 30 days of discharge. This is particularly damaging to patients with chronic lung disease, congestive heart failure, diabetic coma, and other such medical problems needing brief readmission to stabilize life-threatening situations. If not re-admitted when medically needed, patients may die. Catch-22 happens if they are readmitted to hospital “under observation,” then get hit with unexpected exorbitant hospital bills. 4. In 2012, Obamacare rules forced hospitals contracted with Medicare to do FEWER surgeries for Medicare patients to be paid MORE. If employed by the hospital, doctors may not tell you this reason behind failing to suggest a surgery that could benefit you. 5. Other than government-determined copayments, Medicare patients are not legally allowed to pay cash out of pocket for needed “covered” services if they see a Medicare-contracted physician. Patients must find a physician who has legally opted out of Medicare to be able to pay cash for a service, say one that is not available at the Medicare-allowed price—or to keep their medical records from being sent to the federal government medical database. 6. Medicare patients are likely the ones hit harder by the new Obamacare 2.3% medical device tax that inflates the cost of pacemakers, stents, knee/hip/shoulder replacement devices, prosthetic limbs, etc. 7. Obamacare’s new direct Medicare taxes also hit retirees harder: a 3.8% tax on unearned income (dividends, rental income, capital gains), and a 0.9% surtax (for those with incomes above $200,000 individual or $250,000 family), added to existing 1.45% Medicare payroll tax. 8. Reduced payments to cancer, heart/lung, and surgical specialists typically caring for older patients. Medicare fee cuts to these specialists

can result in payments below the cost of staying in business, so seniors lose access to more doctors. 9. Draconian $716 billion direct cuts from Medicare attack seniors in serious ways from 2013 – 2022: (Source: CBO) • $260 billion from hospital services budget • $156 billion from Medicare Advantage • $66 billion from home health • $39 billion from skilled nursing • $17 billion from hospice care • $145 billion from DHS (Disproportionate Share Hospital) payments to hospitals that serve a large number of low-income patients • $33 billion from all other services Increases in out-of-pocket costs and higher taxes are a huge burden on seniors on fixed income. Changes in the rules and regulations can be even more significant, even life-threatening, when they lead to covert denial of medical care. Who would have thought after a lifetime of service to our country in homes, jobs, and communities, seniors would be attacked by their own government with many threats to their savings and lives in retirement? [IA] Dr. Vliet is a preventive and climacteric medicine specialist with medical practices in Tucson AZ and Dallas TX that take an integrated approach to evaluation and treatment of women and men with complex medical and hormonal problems. Dr. Vliet is also CEO of International Health Strategies, SpA, a global medical consulting company based in Santiago, Chile whose mission is medical freedom and privacy while preserving the Oath of Hippocrates focus on individual patients. Dr. Vliet is a past Director of the Association of American Physicians and Surgeons (AAPS). She received her M.D. degree and internship in Internal Medicine at Eastern Virginia Medical School, and completed specialty training at Johns Hopkins Hospital. She earned her B.S. and Master’s degrees from the College of William and Mary in Virginia.

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