June 9, 2014 by C Acunto

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VOLUME 125, NUMBER 11 / June 9, 2014

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Contents

June 9, 2014 | volume 125 number 11

[COVER STORY ] 16

Agents’ E&O: “Voss” Decision Raises the Bar

[FEATURES] 4

Foreword: Capital Ideas Steve Acunto, Publisher

Insight: Regulatory Paranoia Peter H. Bickford

Exposures and Coverages: Certiﬁcates of Insurance in the News Again Jerome Trupin, CPCU

Face to Face: No One Wants a Satisﬁed Customer! Michael Loguercio

In the Associations: PIA-endorsed Floodbroker.com Now Offered to PIA Members

On the Level: Are We Our Own Worst Enemy? Jamie Deapo

Guest Editorial: Four Factors that Will Grow Your Agency Chris Paradiso

On My Radar: When an Insurer Must Interplead Funds Barry Zalma

Looking Back: May 1989

Courtside: Court of Appeals: City Liable for Permitting Bicyclist to Enter Road That Was Closed for Repairs Lawrence Rogak

Classiﬁeds

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[ FORE WORD ]

Steve Acunto

Capital Ideas

hen people talk about the changes in the industry on the street level, their reasoning and their arguments are easily verifiable through experience and easy analysis, whether it’s technology or disintermediation or some other current topic. The real changes however are coming at the top of the food chain. New money sources are changing the expectations and the outlook for insurance itself. The Casualty and Actuarial society sounded off on this, stating that “reinsurers and the entire property/casualty industry need to evolve as waves of capital reshape their business model.” Read that again, please. According to the society, reinsurers face a growing threat from the capital markets— hedge funds, pensions and others that have found new ways to do what reinsurers do. Socalled “alternative capital” is driving reinsurance prices lower, especially the cost of reinsuring losses from Florida hurricanes. There are signs alternative capital will seep into other areas of property/casualty insurance and reinsurance. The analysts did not always agree on how to react to the trend. Alan Zimmermann, managing director of Assured Research, and Matthew C. Mosher, senior vice president of rating services for A.M. Best Company and a Fellow of the Casualty Actuarial Society, believed the industry needs to move on to new opportunities. Meyer Shields, managing director at Keefe, Bruyette and Woods and a Fellow of the Casualty Actuarial Society, counseled a more modest approach, such as probing carefully to find profitable niches. “We’re not in the business of solving the world’s problems, we’re in the business of increasing the value for shareholders,” he said. The new capital has emerged in recent years, but its start harkened back at least two decades to Hurricane Andrew, which ravaged the Miami area in 1992. Today, Zimmermann said, Andrew doesn’t seem like it would have been so important in its day. The insured losses from the storm, $23 billion in today’s dollars, pale in comparison to some more recent events, like the $47 billion in inflation-adjusted losses from Hurricane Katrina. But Andrew’s losses were four times greater than anything that preceded it and far more than anyone predicted. The storm shook the industry. Perhaps the biggest change it brought was a new degree of acceptance of computer modeling. The computer models made catastrophe risk, once the uber-specialty of insurers and reinsurers, easier for others to understand and price. Zimmermann recalled the powerhouse reinsurers from those pre-Andrew days: “They were awesome behemoths, whose size, customer base and underwriting depth made them seem like impregnable castles surrounded by the Hudson. But those models have been honed, and today capital market investors rely heavily on them as they invest in the property/casualty space. The dominance of reinsurers has ebbed. There are a lot more companies,” Zimmermann said. “Now it’s more like a mobile home park surrounded by a creek.” For the long run, reinsurers have responded slowly, Zimmermann said, as have most property/casualty insurers. They are trying to insure an industrialized America that increasingly does not exist. While approaching it from slightly different angles, Zimmermann and Mosher agreed that the industry needs to embrace new risks, like cyber liability. Zimmermann, as a company analyst, sees growth as a way for insurers to generate profits. As a rating agency analyst, Mosher sees developing new business as a better deployment of capital than underwriting current business unprofitably. While dissenting, Shields agreed that companies need to face the changes that are happening and find ways to benefit. It can take time, he said, to find underwriters who understand new lines of business. “Capital is fungible,” Shields said. “Underwriting discipline is not.” The analysts also discussed how the industry has benefited from a decade of low inflation. Standard reserving methods have an underlying rate of inflation built into them; low inflation has allowed companies to improve earnings by releasing reserves from older years continued on page 35

4 June 9, 2014 / INSURANCE ADVOCATE

VOLUME 125, NUMBER 11 JUNE 9, 2014

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 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 .

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[ INSIGHT ]

By Peter H. Bickford

Regulatory Paranoia

t started over a year ago, in a speech before a prestigious conference on the state of the U.S. and world economies, when New York’s Superintendent of Financial Services first raised the warning signs against private equity firms “becoming active in the acquisition of insurance companies” because “these private equity

or National level, the impatient New York regulators (as is often the case) have now taken steps to refine and formalize a number of the additional requirements for certain purchasers through a proposed amendment to the regulation governing acquisitions and changes in control of insurers.

…the impatient New York regulators (as is often the case) have now taken steps to refine and formalize a number of the additional requirements for certain purchasers through a proposed amendment to the regulation governing acquisitions and changes in control of insurers. Peter H. Bickford

firms are more short-term focused – when [insurance] is a business that’s all about the long haul.” Since issuing this warning shot, the issue of hedge funds and private equity firms investing in the insurance business has become a topic of significant discussion and some action. The New York regulators, for instance, imposed increased capital requirements and scrutiny on the 2013 acquisitions by private equity firms of two insurance company issuers of fixed and variable annuity products. These additional requirements, all consented to by the purchasers, included the establishment of a trust for the benefit of policyholders. As a basis for these additional requirements, the NY regulators used a statutory catchall provision allowing the Superintendent to require submission of “such information as he deems necessary . . . as a condition of approval” of an acquisition or change in control of an insurer. Following suit (as is often the case) the National Association of Insurance Commissioners (NAIC) established a working group late last year to study whether acquisitions of insurers by private equity and similar firms required heightened scrutiny. Rather than wait for or participate in the conversation at the NAIC

Many of the additions to the proposed regulation (which may be final by the time you read this column) are to reflect the changing world of investment over the years. For instance, the amended regulation adds general partners and managing members of limited partnerships, limited liability companies or similar entities – entities that did not exist when the existing law and regulations were first conceived to the list of entities or individuals that are required to disclose detailed information. The amended regulation also specifically requires disclosure of materials used to solicit investors, including any offering memoranda or disclosure statements. Existing requirements are also expanded. For instance, the existing discretionary requirement for a detailed plan of operations is now a specific requirement including five-year financial projections. Also, the required disclosure of future plans to liquidate, sell or merge the insurer is expanded to include future plans to declare dividends or change the insurer’s investment portfolio, and no changes can be made in these plans without approval of the regulators. It is here where the amended regulation starts to deviate from establishing criteria for the acquisition of an

insurer to a questionable “off-the-books” regulatory supervision of future conduct. For instance, the new regulation requires the filing of new five-year projections if at any time within five years of acquisition the company enters into a reinsurance agreement, investment arrangement or asset transaction with a controlled or controlling entity. While these might be appropriate signals for regulatory review or control, as presented here they seem to be expanding regulatory control over certain purchasers of insurance companies through the initial approval process inconsistent with or outside the statutory regulatory framework. Not only does this undermine the finality of a purchase with the threat of future revocation, it also raises the question of exceeding statutory authority. One of the more interesting examples of the reach of the new regulation is the imposition of a trust requirement on purchasers of life insurers. Any purchaser of a controlling interest in a life insurer must establish a trust account “in an amount and for a duration to be determined” by the superintendent if “absent such action, the acquisition is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders.” Although limited to life insurers at this time, the “Regulatory Impact Statement” published in the State Register makes it clear that “[t]he Superintendent always had, and retains, the discretion to condition an acquisition, in appropriate circumstances as needed, on the fulfillment of additional requirements, including the use of a trust or other financial backstop where a non-life insurer is being acquired.” In other words, the regulators can ask for anything they want whether specified in the regulation or not. It is likely that the NY regulators in their insecurity and paranoia may simply be seeking to codify the requirements imposed on the two acquisitions of annuity issuers by private equity firms in 2013. The effect of the regulation, however, is much broader and could have significant long-term impact on the ability of New York insurers to obtain needed capital in continued on page 8

6 June 9, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ] of such trusts into an area where they simply were not intended to fit. Historically, trust agreements were used to secure credit for reinsurance cessions to alien reinsurers by ensuring access to assets within the US, or as a basis for approval or “white listing” of alien surplus lines carriers by – again – ensuring access in the US to assets in the event claims are not timely paid. Using trusts as supplemental capitalization tools for the establishment or operations of domestic companies in their home state

continued from page 6

the future. Also, the fact that two entities, intent on closing a deal, were willing to accept the imposition of future controls over their ownership, should not be considered as “precedent” to justify regulatory rather than legislative codification of these controls. Particularly troubling is the trust requirement: an expansion of the purpose

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Policy Claims Reinsurance

The trust requirement in the new regulation begs the question: if the regulator deems that an acquisition “is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders” without a trust agreement, why approve the acquisition at all? Or why not simply insist on a greater capital base?

was not contemplated – until now! The trust requirement in the new regulation begs the question: if the regulator deems that an acquisition “is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders” without a trust agreement, why approve the acquisition at all? Or why not simply insist on a greater capital base? Our insurance laws are constructed and designed for the proper conduct of the business of insurance regardless of ownership. Why then must the rules for the future conduct of business be dependent on the nature of ownership? By imposing these new regulatory controls on the acquisition of insurers, not only is the DFS perpetuating its insecurity and paranoia over certain legitimate capital sources, but it is also establishing a dangerous precedent for future regulatory supervision of the day-to-day operations of insurers.[IA]

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[ EXPOSURES AND COVERAGES ]

By Jerome Trupin, CPCU

Certificates of Insurance in the News Again

ertificates of insurance are a sore point with both those who ask for them and those who have to provide them. On the one hand, the requests sometimes ask for the impossible and the other, the certificates often don’t enable the certificate-holder to detect serious gaps in coverage. Agent associations and others have been fighting the first part of the problem by pushing for state administrative or legislative action to make it illegal to ask for expansion of coverage via a certificate of insurance. Risk managers have been pushing for more information on what coverage is provided by the policies underlying the certificate of insurance. There are new developments on both fronts. A recent change in Delaware gives producers in that state protection from the sometimes overreaching requirements imposed by some contracts. Its legislature just passed a law championed by the Delaware IABA making it unlawful to: • Request a certificate that does not accurately reflect the underlying policy; • Issue a false or misleading certificate or one that purports to alter, amend or extend the coverage provided by the insurance policy; • Use a certificate to warrant that a policy complies with the insurance or indemnification requests of a contract.1 The most interesting feature of this law is that it makes it unlawful to request or issue an inaccurate certificate. A few other states have similar laws, but in most states the insurance departments only bar insurers or producers from misrepresenting or altering coverage in a certificate of insurance. Without legislative authority, the departments don’t have the power to make requesting such changes illegal.

“State agencies frequently require…certificates of insurance that convey detailed information sufficient to ensure that their insurance policies meet the specific liability and other coverage requirements under a given State contract.…”

Responding that it’s illegal for the client to request and the producer to comply is a better argument against providing certificates with expansive wording than just saying it’s illegal for the producer to do it. Under Delaware law, not only would the agent be violating the law, but so would the owner or contractor who requested it. In their 2013 legislative sessions, the New York Assembly and Senate passed legislation that would have been even more forceful than Delaware’s. It would have outlawed demands for wording that would: • change the policies; • require insurance producers to certify coverage; • use certificates as warrantees of coverage; and • require certificates that misstate coverage.2 However, Governor Cuomo vetoed the bill. In his veto message he wrote: “State agencies frequently require…certificates of insurance that convey detailed information sufficient to ensure that their insurance continued on page 12

1 Young Ha “Delaware’s New Legislation Adds Teeth to Certificate of Insurance Regulations,” Insurance Journal, March 27, 2014, http://www.insurancejournal.com/news/east/2014/03/27/324525.htm (accessed May 17, 2014) 2 “PIANY, DFS Discuss Legislation to Address Certificates of Insurance Abuse”, PIA Professional Agents Bulletin, January 23, 2014. http://www.pia.org/COMM/news/template.php?s=&nid=7891 (accessed May 30, 2014)

10 June 9, 2014 / INSURANCE ADVOCATE

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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Spread the word

Don’t be shy, tell your good stories and spread the word about the great work of the insurance industry. Financial Backbone of Communities Insurance provides New Yorkers with financial security and enables people to live life to the fullest. People would not be able to own a home, drive a car or start a business without insurance. In 2012 alone property and casualty companies paid $32.4 billion in claims. Giving Back Insurance companies and agents are dedicated to serving their communities. The industry donates financially to a myriad of worthy causes with just one example of these efforts being the Insurance Industry Charitable Foundation providing more than $21 million in community grants.Even more importantly, employees dedicate their time to help those in need— whether it’s Meals on Wheels, flood recovery efforts, building a playground or encouraging greater safety—the industry is always looking to make a difference. Economic Driver The industry is a major contributor to New York’s economy contributing $41.6 billion to the gross state product (GSP) in 2011, accounting for 3.6 percent of the GSP. In 2012, the industry provided 190,027 jobs in New York, paid premium taxes totaling $1.3 billion, and held more than $19.3 billion in municipal bonds.

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[ EXPOSURES AND COVERAGES ] continued from page 10

policies meet the specific liability and other coverage requirements under a given State contract. The standardized forms mandated in this bill, however, are generic in nature and will not convey such detailed policy coverage information.” At the moment, various opinion letters issued by the New York Department of Financial Services and its predecessors ban producers from amending or altering certificates. For example, the NY Insurance Department Office of General Counsel wrote in an opinion letter issued 1/31/11 that: “A licensed insurance agent or broker may not complete a certificate of insurance that effectively amends, expands, or otherwise alters the terms of the applicable insurance policy.”3 This has placed producers in a terrible position. Various state agencies and others contractually require certificates of insurance with wording that the producer is barred from providing. Often the producer’s client can’t get a job and/or get paid for work done without the certificate. To the client, the producer is the stumbling block. And if another producer is willing to flout the law, there goes the producer’s client. The situation in our neighboring states, NJ, CT, MA, and PA is similar. Either by law or by ruling, the insurance departments in those states bar producers from changing certificates, but do not bar others from demanding it.4 From a risk management perspective, to protect themselves and their insurance claims record, property owners, governmental bodies, and general contractors insert provisions in their contracts requiring contractors to carry specific insurance, to add the party retaining them as an additional insured and to hold that party harmless from claims and lawsuits. Unfortunately insurance policies issued

To make such lawsuits even more vexatious, NY Labor Law sections 240 and 241 impose absolute liability in certain situations on owners or general contractors even though the owners or general contractors had little real control over the work.

to many New York contractors have severe limitations of coverage that greatly reduce the coverage, but those limitations aren’t shown on the certificates. There have been numerous decisions by New York courts enforcing exclusions that are not standard ISO exclusions even though the ACORD5 certificate of insurance didn’t show that information. A case in point is Bayport Construction Corp. v BHS Insurance Agency, decided May 7, 2014. Bayport had contracted with Kiska Group, Ltd. to have work done at its construction project in Brooklyn. Jose Orellana, a Kiska employee, was injured on the job. An injured employee can’t sue his employer, but he can sue anyone else who may be involved in the work and liability awards can far exceed workers compensation payments. To make such lawsuits even more vexatious, NY Labor Law sections 240 and 241 impose absolute liability in certain situations on owners or general contractors even though the owners or general contractors had little real control over the work. Absolute liability leaves the owner or general contractor with few defenses. The argument comes down to how much

the injured party is to be paid. When Orellana sued Bayport, Kiska’s insurance company argued that the policy excluded claims by the employee of any (emphasis added) insured. Because Bayport, as an additional insured, was an insured along with Kiska on Kiska’s policy, the insurer denied Bayport’s demand for coverage. Bayport thereupon sued the agency that issued the certificate. The court ruled that Bayport was out of luck.6 The agent was out of luck also. Winning an E&O case is a Pyrrhic victory. A solution for both problems may be in sight. ACORD has developed a new form, New York Certificate of Liability Insurance Addendum 855 NY (2014/05), hereafter “855 NY,” which enables the certificate preparer to list some of the unusual provisions in the policy. At present, most certificate-holders never discover these provisions until it’s too late—the insurance company has rejected the claim. (To avoid problems, some firms demand copies of policies in addition to certificates of insurance, but checking a policy is a labor intensive task requiring specialized knowledge.) Here are brief details on some of the items in the form: • Is the insurer admitted in New York, or is it an excess line insurer? If admitted, is the policy written in New York’s free trade zone? • Is the commercial general liability policy the ISO form, a modification of that form, or some other proprietary form? • What is the form number of the additional insured endorsement on the policy? • Does the CGL policy insure the additional insured on a primary and noncontributory basis? Is that the case for the excess or umbrella liability coverage? continued on page 14

3 State of New York Insurance Department, the Office of General Counsel opinion January 31, 2011, representing the position of the New York State Insurance Department. http://www.dfs.ny.gov/insurance/ogco2011/rg110108.htm (accessed 5/30/14) 4 State of New Jersey Department of Banking and Insurance Bulletin Number 11-04 February 28, 2011, Connecticut Bulletin S-14 November 9, 2010, Joseph G. Murphy (MA), Commissioner of Insurance Bulletin 2011-07; Certificates of Insurance, Evidence of Coverage Forms and Binders, Property and Casualty Insurance Companies and Producers Issuing Certificates of Insurance in Pennsylvania; Notice No. 2009-02 February 14, 2009 5 ACORD (Association for Cooperative Operations Research and Development) is a nonprofit organization serving the insurance and related industries. Among other activities, ACORD facilitates the development of standards and standard forms. 6 Bayport Construction Corp. v. BHS Insurance Agency, et al., Supreme Court of the State of New York, Appellate Division: Second Judicial Department D41462 5/7/14 (The insurance company first said that the policy had been cancelled, but that argument fell by the wayside in view of the exclusion.) 7 “Here Comes the N.Y. Twist on Certificates of Insurance” Ask Tim, April 23, 2014, http://insurancegeek.typepad.com/ask_tim/2014/04/here-comes-the-nytwist-on-certificates-of-insurance.html (accessed 5/30/14)

12 June 9, 2014 / INSURANCE ADVOCATE

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[ EXPOSURES AND COVERAGES ] continued from page 12

• Does it cover the additional insured for injuries to employees of the named insured or subcontractors? • Does the CGL policy restrict or exclude coverage for: - Certain specific operations? - Contractual liability by altering the definition of “insured contract”? - Earth movement; excavation; explosion; collapse; underground property damage? - Suits by one insured against another? - Property damage to work performed by subcontractors? • Does it remove or modify the “insured contract” exception to the employer’s liability exclusion? (Removing or modifying the exception reduces coverage.) • Does the CGL policy guarantee advance notice to the certificate holder if the insurer cancels it?7 Those who require certificates of insurance for general liability coverage in New York should stipulate that the 855 NY form accompany the certificates. It’s also a good checklist of other items to include in the insurance requirements section of a contract. (If you don’t have a copy of 855 NY, it’s available from ACORD at Acord.org.) Clients should add a contractual requirement for those items they feel are important. The completed 855 NY form that accompanies a certificate must be examined to see if there are any critical items that need attention. That will be work—but it’s less than checking an entire policy. I’m preparing a checklist for our clients. If you’d like a copy, email me at jtrupin@aol.com. The coalition that developed 855 NY, which includes producer and industry organizations, representatives of governmental units that request certificates and others has continued to press for action. The new 855 NY form, which was in the

For another, there’s the basic problem with relying on certificates of insurance: the certificates clearly say that they do not “amend, extend or alter the coverage afforded by the policies” shown in the certificates. 855 NY contains similar language. So, if there’s no coverage in the policy, it doesn’t matter what the certificate says.

works before the veto, appears to meet the Governor’s objections. As of this writing (6/2/14), new legislation making it illegal to request expansion of coverage via a certificate of insurance has passed the NY State Senate and is working its way through the Assembly. Supporters of the legislation are hopeful that it will pass and be signed by the Governor.8 This won’t close all the gaps for risk managers. For one thing, there can be errors or fraud in the preparation of the 855 NY form—producers’ staff-members don’t always have sufficient skills to accurately prepare the certificate. For another, there’s the basic problem with relying on certificates of insurance: the certificates clearly say that they do not “amend, extend or alter the coverage afforded by the policies” shown in the certificates. 855 NY contains similar language. So, if there’s no coverage in the policy, it doesn’t matter what the certificate says. When the certificate is prepared by a broker, New York courts, particularly in the First and Second Judicial Departments (New York City boroughs plus Nassau, Westchester, and Suffolk, Rockland, Orange, Dutchess, and Putnam), will usually refuse to enforce coverage shown in

the certificate if the coverage is not included in the policy. When the certificate is prepared by the insurance company or its agent, courts will sometimes enforce the certificate, particularly in the Third and Fourth Judicial Departments (upstate New York counties).9 The use of the new 855 NY form may change the equation and cause courts to impose more responsibility on a broker or agent who misstates coverage. We shall see. From a risk manager’s point of view it may not be a perfect solution, but it’s a great improvement. 855 NY gives risk managers a chance to examine key points in the coverage they’ve been provided without the need to obtain and review entire policies. They should require it by contract and insist that it accompany the certificate of insurance. A law barring requests to amend coverage via the certificate of insurance will be welcome relief for producers. It won’t solve all their problems either. For one thing, governmental agencies will still be allowed to use their own certificate forms although it’s hoped that they will accept the 855 NY form instead. For another, certificate-holders may refuse to accept the certificate because that the 855 NY form indicates that the policy doesn’t meet the requirements of the contract between the certificate-holder and the insured. That may offer the producer the opportunity to tell his or her insured that better coverage is available at a higher premium. We’ll have to see how this plays out, but at the moment it looks like a fair tradeoff.[IA]

8 Based on a discussion with Tim Dodge, AU, ARM, CPCU Asst VP of Research IIABNY 6/2/14, however, I’m responsible for this interpretation. 9 Thomas Bower, “Certificates of Insurance: What Every New York Risk and Insurance Professional Needs to Know,” http://www.sacslaw.com /CM/Articles/Articles29.asp (accessed 5/30/14)

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[ COVER ]

E&O: “Voss” Decision Rai Court of Appeals 4-3 “Voss” decision:

Agents’ and Brokers’ Liability Heightened as a Result of “Special Relationship” Decision With Sandy claims looming over the heads of many Long Island and New Jersey agents, carriers and residents, the New York State Court of Appeals has heightened insurance brokers’ liability to their clients for the possible failure to recommend sufficient, proper coverage for their property. The upshot of what is now termed “the Voss decision” may be far-reaching for agents and brokers and their errors and omissions insurers. In Voss v Netherlands et al, the Court of Appeals ruled that a “question of fact” exists as to the liability of an insurance broker in the recommending of an insurance policy or cover. This means that juries in the future must determine whether or not a “special relationship” in fact existed between the broker and client / insured. Under New York law, a broker has been limited to the obligation of obtaining the coverage requested by the insurer or to provide advice to the insurer that the broker is unable to secure the desired coverage, but not to offer coverage advice or analysis 16 June 9, 2014 / INSURANCE ADVOCATE

except in the case of a “special relationship” between the broker and client. In rendering its decision, the Court expanded the agent’s exposure and indicated that the fact of a “special relationship” would need to be decided as a matter of fact by juries before a summary judgment favoring the agent could be granted. The “special relationship” until now could be evidenced by one of the standards outlined in a 1977 case, Murphy v Kuhn. It holds that a special relationship exists if the broker receives compensation from the client other than commission, such as a service fee or retainer; if there was any discussion between the broker, and the client concerning the coverage, with the client depending upon the advice, experience, and expertise of the broker or if there is a history of the relationship between the client and the broker that would imply that the advice of the broker was being relied upon for the client’s decision. In the Voss case, decided in February of continued on page 18

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aises the Bar for Agents The Decision… GRAFFEO,J.: The primary question before us is in this insurance dispute is whether a special relationship existed between the insureds and their insurance broker. Under the circumstances of this case, we conclude that the broker failed to meet its burden justifying summary judgment and [*2]dismissal of the complaint is not warranted. This action arises out of property damage and the consequent business interruption sustained by plaintiff-insureds as a result of water damage that occurred following three separate roof breaches in 2007 and 2008. Plaintiffs are Deborah Voss and three business entities owned and controlled by her: Prop-Co, LLC; Classi People, Inc. d/b/a Sertino’s Café; and Dream People, Inc. d/b/a Shiver Model. The water damage occurred in a commercial building owned by Prop-Co at 105 First Street in Liverpool, New York, where Voss operated her businesses. The only defendant on this appeal is CH Insurance Brokerage Services Co., Inc. (CHI), plaintiffs’ insurance broker. Voss began her relationship with CHI in 2004, before the purchase of the 105 First Street property. At that time, Voss operated two modeling agencies, Shiver Model and another entity, at 7145 Henry Clay Boulevard in Liverpool. Voss met with a representative of CHI, Joe Convertino, Jr., to discuss insurance coverage for the premises and her two companies. At the initial meeting, they discussed property insurance, professional

liability coverage and business interruption insurance [FN1]. Convertino asked Voss to disclose sales figures and other pertinent information to enable him to calculate an appropriate level of business interruption coverage for her companies. According to Voss, Convertino also represented that CHI would reassess and revisit the coverage needs as her businesses grew. At a follow-up meeting, Convertino recommended a comprehensive policy with defendant The Netherlands Insurance Company (formerly Peerless Insurance Company) that afforded, as relevant here, $75,000 per incident in coverage for business interruption losses. When Voss questioned whether the $75,000 limit was adequate, Convertino allegedly assured her that it would suffice based on the condition of the building as well as the size of her businesses. According to Voss, Convertino also averred that he calculated the level of coverage at a threshold level and reemphasized that, each year, CHI “would take it up as the business evolved.” As a result, Voss accepted Convertino’s recommendations and paid the premium for the Netherlands policy. No claims under the Netherlands policy were made while the businesses were located at Henry Clay Boulevard. In April 2006, Prop-Co purchased the 105 First Street premises. The new building had two stories and contained more than twice the square footage of the previous [*3]location. Voss decided to move Shiver Model to the second floor and planned to

open two new businesses in the same building Sertino’s Café and the Glass Terrace, a catering and banquet business [FN2]. After Voss discussed the move and the new business arrangements with Convertino, CHI renewed the Netherlands policy with the same $75,000 business interruption limit for the new location and entities. Sertino’s Café opened in the fall of 2006 and, by early 2007, Shiver Model had moved to 105 First Street and the Glass Terrace was in operation. The first loss occurred in March 2007, when Voss arrived at work and discovered multiple leaks in the roof with dripping water. The damage disrupted her business operations and a roofing contractor, defendant D.R. Casey Construction Corporation, was retained to replace the roof. The following month the new roof failed, resulting in far more extensive water damage to both floors of the premises. All three businesses were required to close for various periods of time. Netherlands treated these two roof breaches as separate occurrences under the business interruption policy (for a maximum potential of $150,000 in coverage) but, according to Voss, delayed making any payments. Apparently, plaintiffs ultimately recouped only $3,197 for the first loss and $30,000 for the second loss. Meanwhile, in the midst of dealing with the roofing issues in the spring of 2007, Voss met with another CHI representative, continued on page 18

Footnote 1: The purpose of business interruption insurance “is to compensate an insured for losses stemming from an interruption of normal business operations due to damage or destruction of property from a covered hazard, thus preserving the continuity of the insured’s business earnings by placing the insured in the position that it would have occupied if there had been no interruption” (11 Couch on Insurance 3d § 167:9 [footnotes omitted]). Footnote 2: Voss shut down her other modeling agency some time before the 2006 move to the new building.

INSURANCE ADVOCATE / June 9, 2014 17

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this year, the Court of Appeals reversed two lower court decisions which granted summary judgment to the defendant broker, dismissing a negligence claim against the broker. The higher court ruled that “question of fact” does exist as to the extent of involvement and therefore liability of the broker. In the present case, the plaintiff, a modeling business owner, obtained property coverage and business interruption insurance beginning in 2004. According to the plaintiff’s testimony, the broker asked for sales figures and other information to determine the amount of coverage appropriate for the client. The broker recommended $75,000 in coverage and assured the plaintiff it was adequate. According to the plaintiff, the broker told her that he would review the coverage annually as the plaintiff’s business grew. Two years after the original coverage was placed, she relocated premises. The broker renewed the business interruption policy with the same limits at the new, larger location. One year after the move, the insured had its first loss for roof damage and leaks from dripping water. After this loss, the insurance company lowered the plaintiff’s business interruption limits to $30,000 from $75,000. The insured questioned the broker who replied “we will look at it”. No changes took place and four months after the first loss more water damage occurred and six months later a third water leakage resulted in the claim that the court considered. The client sued the broker for negligence and sued the insurer, but the issue before the court at present was only the broker’s liability. The business owner’s claim was based on the broker’s alleged failure to procure sufficient business interruption coverage. According to the court the broker’s commitment to review the coverage annually, that is, to give her advice in the future was found to be sufficient to deny summary judgment

to the broker so that the insured would be able to demonstrate that a special relationship existed and that the broker, who moved for summary judgment, would now have the burden of proving that no special relationship existed. The court also held that, even though the insured client admitted that they were of aware of the business limits and of the reduction in coverage, this does not defeat the claim since the claim is based upon the “special relationship”. It was deemed wholly irrelevant whether the plaintiffs were aware of the limits.. The decision moves New York closer to the standards of other states with regard to brokers exposure to their customers. In New Jersey, for example, the following is the modicum governing the relationship between broker and client: “One who holds himself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, below holds him to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He is expected to possess reasonable knowledge of the types of policies, the different terms and the different coverage available in the area in which his principal seeks to be protected. If he neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he undertook to supply, because of his failure to exercise the requisite skill or diligence, he becomes liable to his principal for the loss sustained thereby”. New York agents and brokers will find it more difficult to obtain summary judgments dismissing E & O complaints once a customer alleges a “special relationship”. This may also mean that E & O cases will now be urged toward earlier settlement under this new, pro-consumer standard. SA

The Decision… continued from page 17

Carrie Allen, to discuss the renewal of the Netherlands policy. When Voss received a proposal indicating that the business interruption coverage would be reduced from $75,000 to $30,000, she asserts that she questioned Allen about the reduction and Allen’s response was that she “would take a look at it.” Voss did not follow up, however, because she was preoccupied with the

building’s extensive property damage. When the Netherlands policy was renewed in April 2007, it reflected a per occurrence limit of $30,000 in business interruption coverage. In August 2007, Sertino’s Café was closed and Voss opened a new dining establishment, Bistro 105, in its place. In February 2008, the roof failed a third time, causing significant damage to the premises and further disrupting Voss’s businesses [FN3]. In May 2008, while the insurance claims stemming from the third

loss were still pending, plaintiffs commenced this action against CHI, Netherlands and D.R. Casey, the roofing contractor [FN4]. As relevant to this appeal, plaintiffs alleged [*4]that a special relationship existed with CHI and that CHI had negligently secured inadequate levels of business interruption insurance for all three losses.[FN5] Following discovery, CHI moved for

Footnote 3: Apparently, there was water damage to both floors of the premises, causing closure of the restaurant business for two months. Footnote 4: According to plaintiffs, Netherlands has yet to make any business interruption payment for the third loss. Footnote 5: Plaintiffs’ claims against Netherlands and D.R. Casey remain pending and are not at issue on this appeal.

18 June 9, 2014 / INSURANCE ADVOCATE

continued on page 20

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summary judgment dismissing the complaint. CHI advanced three arguments in favor of dismissal. First, CHI asserted that no special relationship was created and, in the absence of a specific request by the insureds for coverage that went unfulfilled, CHI could not be held liable for failing to recommend or obtain higher limits. Second, it contended that the negligence claim failed based on Voss’s admission that she had received the policies and was fully aware of the $75,000 policy limit that applied to the first two losses and the $30,000 policy limit in effect at the time of the third loss. Third, CHI claimed that, even if a special relationship existed, any breach of its duty to plaintiffs was not the proximate cause of their injuries. Instead, plaintiffs’ damages occurred because Netherlands failed to timely pay the policy limits. Supreme Court granted CHI’s motion and dismissed the complaint, agreeing with each of CHI’s contentions. The Appellate Division, with one Justice dissenting, affirmed (96 AD3d 1543 [4th Dept 2012]). The majority disagreed with Supreme Court on the special relationship issue, finding that CHI had failed to meet its burden of demonstrating the absence of a special relationship. Nevertheless, the majority concurred with the other two rationales and upheld Supreme Court’s dismissal. The dissent agreed with the majority that a question of fact existed on the special relationship issue but sided with plaintiffs on the other two questions. The dissent reasoned that, assuming a special relationship existed, it was irrelevant whether plaintiffs were aware of the policy limits and that the proximate cause issue could not be decided as a matter of law on this record. We granted plaintiffs leave to appeal (20 NY3d 860 [2013]), and now reverse. As a threshold matter, CHI asserts that we need not address the alternative bases upon which the Appellate Division upheld the dismissal of the complaint because, contrary to the conclusion reached by both the majority and the dissent at the Appellate Division, the record does not support the existence of a special relationship between CHI and plaintiffs. CHI contends that, even 20 June 9, 2014 / INSURANCE ADVOCATE

no continuing duty to advise, guide or direct a client to obtain additional coverage” (American Bldg. Supply Corp. v Petrocelli Group, Inc., 19 NY3d 730, 735 [2012] [internal quotation marks and citation omitted]). Hence, in the ordinary broker-client setting, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured. Plaintiffs in this case do not allege that they specifically requested higher business interruption policy limits and have not proceeded against CHI under this common-law theory of liability. Rather, their claim hinges on the existence of a special relationship. Where a special relationship develops between the broker and client, we have also indicated that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage (see Hoffend & Sons, Inc. v Rose & Kiernan, Inc., 7 NY3d 152, 158 [2006]; Murphy v Kuhn, 90 NY2d 266, 272-273 [1997]). In Murphy, we recognized that “particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law” and that the question of whether such additional responsibilities should be “given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis” (Murphy, 90 NY2d at 272). We identified three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on” (id. [citations omitted]).

Where a special relationship develops between the broker and client, we have also indicated that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage.

read in the light most favorable to the nonmoving party here, plaintiffs the evidence confirms only the existence of an ordinary broker-client relationship. Plaintiffs counter that the Appellate Division correctly determined that CHI failed to meet its initial burden of tendering proof that no special relationship arose between them. On a motion for summary judgment, the moving party (here, CHI) has the burden to establish “a prima facie showing of entitlement to judgment as a matter of law, tendering [*5]sufficient evidence to demonstrate the absence of any material issues of fact” (Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986]). If the moving party fails to meet this initial burden, summary judgment must be denied “regardless of the sufficiency of the opposing papers” (Vega v Restani Constr. Corp., 18 NY3d 499, 503 [2012] [internal quotation marks, citation and emphasis omitted]). In other words, the burden does not shift to the nonmoving party to persuade the court against summary judgment. We agree with the Appellate Division that CHI failed to meet its threshold burden on the special relationship issue. As a general principle, insurance brokers “have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have

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[ COVER ] Here, the proof submitted by CHI in support of its summary judgment motion [*6]principally, Voss’s deposition testimony did not satisfy its initial burden of establishing the absence of a material issue of fact as to the existence of a special relationship. To the contrary, viewed in the light most favorable to plaintiffs, the evidence suggests that “there was some interaction regarding a question of [business interruption] coverage, with the insured relying on the expertise of the agent” (id.). Voss testified that she and Convertino discussed business interruption insurance from the inception of their business relationship. She asserts that he requested sales figures and other relevant data in order to calculate the proper level of coverage. When Convertino later returned with a proposal that included $75,000 in business interruption insurance, Voss avers that she questioned that amount and that Convertino assured her that it was adequate based on his review of her business finances as well as the layout of the building. Moreover, although the $75,000 per occurrence limit was originally placed in 2004, before plaintiffs moved to 105 First Street and expanded their businesses to include a restaurant and catering operation, Voss testified that Convertino repeatedly pledged that CHI would review coverage annually and recommend adjustments as her businesses grew. Under these circumstances, we conclude that the complaint cannot be dismissed on the basis that no special relationship arose between the parties. In doing so, we reiterate that special relationships in the insurance brokerage context are the exception, not the norm, and we emphasize that it remains to be determined whether a special relationship existed here. To prevail on their claim, plaintiffs bear the ultimate burden of proving that a special relationship did in fact arise and that they relied on CHI’s expertise in calculating the proper level of business interruption coverage during the relevant time frames.[FN6]

…we conclude that the complaint cannot be dismissed on the basis that no special relationship arose between the parties. In doing so, we reiterate that special relationships in the insurance brokerage context are the exception, not the norm, and we emphasize that it remains to be determined whether a special relationship existed here.

We now turn briefly to the two grounds that nevertheless warranted dismissal in the Appellate Division majority’s view. As to the first, we agree with plaintiffs that Voss’s awareness of the business interruption limits of $75,000 and $30,000 during the relevant policy years does not defeat her cause of action as a matter of law (see generally American Bldg. Supply Corp., 19 NY3d at 736-737). Plaintiffs’ claim, predicated on the alleged special relationship with CHI, is that CHI was negligent in failing to recommend higher limits and that plaintiffs relied on CHI in setting the allegedly deficient coverage amounts. Contrary to CHI’s assertion, it is wholly [*7]irrelevant whether plaintiffs were aware of the limits that were actually procured. As to the second ground for dismissing

the complaint, the Appellate Division majority concluded that any negligence on CHI’s part in failing to advise plaintiffs to procure more business interruption coverage was not the proximate cause of plaintiffs’ losses; rather, it was Netherlands’ failure to timely pay the claims. But questions of proximate cause and foreseeability should generally be resolved by the factfinder (see Derdiarian v Felix Contr. Corp., 51 NY2d 308, 315 [1980]; see also Mirand v City of New York, 84 NY2d 44, 51 [1994] [“Proximate cause is a question of fact for the jury where varying inferences are possible.”]). Accordingly, the order of the Appellate Division should be reversed, with costs, and the motion of defendant CH Insurance Brokerage Services Co., Inc. for summary judgment denied. SMITH, J. (dissenting): I agree with the majority that the case turns on the “special relationship” issue. I think, however, that the record conclusively establishes that any such relationship between plaintiffs and their insurance agent, CHI, had ceased to exist by the time of the events in question. Thus I would hold that the courts below properly granted summary judgment dismissing the complaint as against CHI. As the majority acknowledges, an insurance agent is ordinarily under no duty to give its client advice on what insurance coverage is appropriate (Murphy v Kuhn, 90 NY2d 266, 270 [1997]; Hoffend & Sons, Inc. v Rose & Kiernan, Inc., 7 NY3d 152, 156158 [2006]). An exception exists where there is a special relationship, but to establish such a relationship requires a “high level” of proof (Murphy, 90 NY2d at 271). Where the agent is not separately compensated for its advice, the insured must prove some “interaction” or “course of dealing” with the agent sufficontinued on page 22

Footnote 6: The dissent agrees that a special relationship may have begun in 2004 but concludes that, even if it did, it ceased to exist sometime before the placement of insurance for the time periods encompassing the three losses. In particular, the dissent cites an interaction between Voss and CHI’s Allen suggesting a breakdown of the relationship. But that conversation did not take place until 2007, during the renewal phase for the final relevant policy period, and we cannot agree that, on this record, the special relationship issue can be resolved against plaintiffs as a matter of law.

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cient to show that the insured was relying on the agent’s expertise in choosing insurance (id. at 272). Here, if the issue were whether Voss’s relationship with CHI was “special” at its inception in 2004, I would agree that summary judgment should be denied. According to plaintiff Deborah Voss’s testimony, CHI’s representative, Joe Convertino, obtained detailed information about Voss’s business and made a recommendation to her about what coverage to purchase. If that advice had been negligently given, and plaintiffs had suffered loss as a result, they might well have had a claim. But plaintiffs do not assert, and there is no evidence, that anything was wrong with the advice Convertino gave in 2004, or that plaintiffs suffered any loss while the policy they purchased in 2004 was in force. It is true that, according to Voss, Convertino said in 2004 that CHI would continue giving her advice in future years, “as the business evolved.” It is quite clear from the record, however, that to Voss’s frustration that did not happen. The first of the losses at issue in this lawsuit took place in 2007. By then, the nature of Voss’s businesses had changed [*8]and she had moved them to a new location. She knew, according to her own testimony, that the coverage

But its fault was simply in failing to do what we held in Murphy agents are not required to do: “to advise, guide or direct a client” in acquiring insurance coverage. she had bought in 2004 might not be right for the new situation, and she wanted advice from CHI on what the new situation required, but she got none. Voss testified that she told another CHI representative, Carrie Allen, that she wanted CHI “to look at the business income the way they looked at it right from the start to give me adequate business coverage for the businesses that were operating, the same way Joe did” but Allen never complied with the request. Thus plaintiffs clearly were not relying on advice from CHI at the time the insurance coverage that plaintiffs now complain of was acquired. Plaintiffs seem to be contending in substance that they can sue CHI because it did not follow through on Convertino’s

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promise in 2004 to keep looking at and advising them about their insurance coverage. But CHI had no duty to follow through. It is not and could not be claimed that Convertino’s promise was legally binding. It would be different if plaintiffs had hired CHI to give advice and paid it for doing so; Murphy says that a “duty of advisement” may exist where “the agent receives compensation for consultation apart from payment of the premiums” (90 NY2d at 272). But there is no authority for finding a special relationship based on a gratuitous promise to consult, where no consultation takes place. It is true that, if Voss has described the facts accurately, CHI should not get a high mark for client service. But its fault was simply in failing to do what we held in Murphy agents are not required to do: “to advise, guide or direct a client” in acquiring insurance coverage (90 NY2d at 273). Neither CHI’s provision of advice in 2004 nor its expression of willingness to do so in the future could create a continuing duty of the kind that Murphy makes clear does not ordinarily exist. There are sound policy reasons for the narrow view that Murphy and our other cases take of an insurance agent’s duty to its client. Agents are not insurance companies and do not earn premium income. They earn, ordinarily, relatively modest commissions for bringing insurers and insureds together. It is natural for a client that has suffered a loss not covered by its insurance to blame its insurance agent; and if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back-up insurer, a result neither sensible nor fair. In this case, I think the majority has taken an unjustifiable step in that direction, and I therefore dissent. * * * * * * * * * * * * * * * * * Order reversed, with costs, and defendant CH Insurance Brokerage Services, Co., Inc.’s motion for summary judgment denied. Opinion by Judge Graffeo. Chief Judge Lippman and Judges Rivera and Abdus-Salaam concur. Judge Smith dissents and votes to affirm in an opinion in which Judges Read and Pigott concur. [*9] Decided February 25, 2014. [IA]

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[ FACE TO FACE ]

By Michael Loguercio

No One Wants a Satisfied Customer!

ears ago I read a wonderful book by legendary author Jeffery Gitomer, titled: “Customer Satisfaction Is Worthless, Customer Loyalty Is Priceless: How to Make Customers Love You, Keep Them Coming Back and Tell Everyone They Know” …and how true this is! Whenever I speak with an agency, one of the first questions that I ask them is “What makes you different than the agency across the street?” and guess what I immediately hear almost every time: “Our customer service is the best, and our customers are all satisfied!” Well, that’s great, Michael Loguercio as I am sure that your customers are very “satisfied”, but is purely being satisfied going to keep them renewing with you every year, and more importantly are they going to tell a friend about your firm? Most likely not… so what do you need to do in order to make this happen? Let’s take a look… Keep in mind that it costs your agency about seven times more to acquire a new customer than it costs to retain what you currently have… and speaking of retention, most agents with whom I speak also brag about having a 90% retention rate. Well that’s all well and good, except that you now have to work 10% harder just to break even from last year, which you worked harder than the year before, and the year before that. In addition, that’s assuming that none of your carriers have cut or restructured your commission plan…and we all know how often that “never” happens! Having a “satisfied” customer means exactly that: that they have just what they need to not go out and talk poorly about your organization. Statistics indicate that a “satisfied” customer will tell 1 person about your business, where an unsatisfied person will tell five. With the difference between satisfied and unsatisfied being about the length of a chip shot on a par three, there isn’t much room for forgiveness in the event of an errant shot. I can walk into a fast food restaurant, in need of a meal, eat till I’m 24 June 9, 2014 / INSURANCE ADVOCATE

bursting, and walk out “satisfied”…even though the value of that meal may not be what I need from a nutritional standpoint. However, I can walk into a five star restaurant, be treated so special that I feel like I’m a VIP, have a conversation about my choices to see which entrée best fits my needs, and walk out feeling like that was the best meal I ever ate. Chances are I will share that wonderful experience with quite a few folks, versus the meal that I had at the fast food restaurant. Both gave me what I need…but the latter made me “feel special’. So how do you take a satisfied customer and bring them over to a loyal customer? Easy! In all the years that I have facilitated and managed sales teams, as a leader there is one thing that I have stressed with my team members more than anything: and that is “owning the relationship” with our customer. That’s how you convert a client from a “satisfied customer” to a “loyal customer”. It’s simply all about “owning the relationship”…and we all know that the business of insurance is all about relationships…or else everyone might as well make a 15 minute phone call and not even bother to visit your agency. How do you own the relationship? Very simple: make them feel special, especially in front of their friends and relatives. THAT’S how you get a referral…THAT’S how you increase retention… THAT’S how you impact your bottom line in a positive fashion! So, how do you make someone feel special, and “own the relationship?” There are many ways that you can do this, so let’s touch upon just a few “personal tips” this time, and we will revisit this once again at a later date. 1) Everyone wants to feel like “they’re known”. So call folks by their name, and know how to pronounce it. Know their family members’ names. Remember your clients, and recognize them when they walk in the door. It worked at “Cheers”, and we all know that show was on the air for quite some time! 2) Remember that commercial that said “Reach out and touch someone”? Don’t wait until it’s time to deliver a

claim check, or remind them about a premium that is due. Give a call to say, “Hello, how’s it going?” Take note of life events that may be pending, or past, and call to congratulate or offer assistance. Through the use of your EZLynx Management System, you can easily manage this process….give us a call and we will explain how. 3) Be genuinely warm and gracious to folks, and be appreciative that they came to visit you. Walk around from behind the desk to greet a visitor. Welcome them by offering a beverage, and perhaps if your office environment permits sit in the seat adjacent to them…as opposed to across the desk. Upon their departure, genuinely thank them, and advise them where the restroom is. Make them feel at home when they come to visit. 4) Nowadays everyone is texting and emailing, as opposed to calling…or even writing. Something that I try to do is to send a handwritten note to everyone that I meet with. Sure, it takes a few minutes, and there are costs involved…but think of the last time that you gave someone a gift at a party, and a week later you received a simple handwritten note thanking you by name for the lovely gift. I’ll bet that you picked up the phone to call and thank them for the thank you note! It makes a difference. 5) Ask for a referral. Think about what makes someone feel good about themself: helping others. Did you ever see someone you know in a situation, and you knew someone who could help? What did you do? You gave them the name of your buddy who could assist in the predicament. Everyone wants to feel like they are the person whom others go to when they need advice…the “I know a guy” feeling. If you helped out your customer, and they are “loyal” to you, by simply asking if they know of anyone who you may also be of assistance to, you will get referrals. Try it! One last note certainly worth discussing, is that what I mentioned above is

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[ FAC E TO FACE ] not difficult, and eventually it will make a difference in your bottom line. Perhaps you are already doing some of the what I have mentioned, or maybe you do something else to own the relationship. If so, please share these suggestions with me as I would love to hear from you! So until next time when we will be talking about the PIA of NY and NJ conference in Atlantic City, NJ, thanks for visiting… and “it’s the last door on the right!” 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 magazine since 2008, and may be contacted at 631345-9359 or michael.loguercio@ezl ynx.com.

IN THE MATTER OF THE LIQUIDATION OF REALM NATIONAL INSURANCE COMPANY Supreme Court County of New York Index No.: 401876/05 NOTICE Pursuant to an order of the Supreme Court of the State of New York, County of New York, entered on March 15, 2005 (“Liquidation Order”), the Superintendent of Insurance of the State of New York and his successors in office were appointed as liquidator (“Liquidator”) of Realm National Insurance Company (“Realm”) and, as such, has been directed to take possession of Realm’s property, liquidate its business and affairs, and dissolve its corporate charter pursuant to Article 74 of the New York Insurance Law (“Insurance Law”). The Superintendent of Financial Services of the State of New York has now succeeded the Superintendent of Insurance as Liquidator of Realm. The Liquidator has, pursuant to Insurance Law Article 74, appointed Scott D. Fischer, Acting Special Deputy Superintendent (“Acting Special Deputy”), as his agent to liquidate the business of Realm. The Acting Special Deputy carries out his duties through the New York Liquidation Bureau, 110 William Street, New York, New York 10038. PLEASE TAKE NOTICE that the Supreme Court of the State of New York, County of New York, has issued an order, ordered April 1, 2014, (1) establishing July 31, 2014, as the cut-off date, the final date by which the Liquidator must actually receive in respect of any claim presented prior to January 31, 2014 (the “Bar Date” established in the proceeding by order of the Court entered on November 15, 2013) any and all evidence demonstrating (a) that such claim has been liquidated and (b) that there has been actual loss and/or payment in respect of such claim; and (2) barring and discharging all claims, other than claims for administrative expenses reported after the Bar Date. Requests for further information should be directed to the New York Liquidation Bureau, Creditor and Ancillary Operations Division, at (212) 341-6588. Dated: May 9, 2014 Benjamin M. Lawsky Superintendent of Financial Services of the State of New York as Liquidator of Realm National Insurance Company INSURANCE ADVOCATE / June 9, 2014 25

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[ IN THE ASSOCIATIONS ]

PIA-endorsed Floodbroker.com Now Offered to PIA Members

or 23 years, Evan Spindelman has sold insurance. During that time, he has seen for himself the gap that exists between what insureds think their homeowners policies cover and what the policies actually include. “So, I became sort of a flood expert,” says Spindelman. He didn’t want to be trapped as so many agents have found themselves after Hurricanes Irene, Lee and Sandy. “You don’t want to be the agent taking a call from a desperate insured seeing whether they have flood coverage in such a circumstance.” The second thing agents really don’t want: To defend against an errors-and-omissions lawsuit. The customer-policy content disconnect is exacerbated by the fact that floods can—and do—happen anywhere. In fact, over the span of a 25-year mortgage, says Spindelman, homeowners have a 4 percent risk of flood damage, as compared to .04 percent risk of fire, and each claim can carry deductibles that start at $2,500. This leads to an increased danger of costly E&O litigation. And, if an agency has a concentration of customers in an area that happens to be hit by a flood event, it is likely to be exposed to dozens of claims—not just one or two. “The errors-and-omissions exposure created by not offering a particular coverage haunts every agent. It is a well-established fact that following a hurricane, not offering flood insurance to your clients is a leading cause of E&O claims,” Spindelman says. “Groundless or not, E&O claims are real and have a detrimental effect on all parties concerned. The highhazard zoned properties will be far more likely to have some form of flood insurance due to bank insistence. While Floodbroker.com rates many high-hazard flood risk properties (even those that require elevation certificates), the program 26 June 9, 2014 / INSURANCE ADVOCATE

“We identified Floodbroker.com as a valuable resource to help agents sell coverage and provide them with important documentation and defense should an unfortunate E&O claim arise after disaster strikes.” - Mark LaLonde, CPIA, CIC, AAI PIA Management Services President and CEO

serves a significant market segment of property owners who are not obliged by a bank to buy flood coverage as well.” As a PIA member, Spindelman knew his association would be the most appropriate partner to bring this important product to agents who need it. “The first reason is that I know PIA’s primary concern is to help agents run and protect their businesses. Floodbroker.com and PIA have the same mission,” he says. “Secondly, the association is an efficient marketing partner that has the infrastructure, staff and wherewithal to get this product into the hands of customers that need it—professional, independent agents.” PIA Management Services Inc. and Floodbroker.com announced their partnership early in 2014, offering the product exclusively to members in New York, New Jersey, Connecticut and New Hampshire.

This month, PIA National announced it too has entered into an agreement, extending the exclusive availability to PIA member agents throughout the country. “After our members experienced the damaging storms of Irene, Lee and Sandy, PIA has continued to look for ways to help our members as storms of this magnitude appear to be increasing in frequency,” said PIA Management Services President and CEO Mark LaLonde, CPIA, CIC, AAI. “We identified Floodbroker.com as a valuable resource to help agents sell coverage and provide them with important documentation and defense should an unfortunate E&O claim arise after disaster strikes.” The primary goal of Floodbroker.com is to help agents sell more flood insurance. This is done by creating agency-branded microsites for participating agents. These microsites contain a proprietary National Flood Insurance Program quoting engine and have a unique URL such as www.Flood broker.com/agents/agencyname. Agents direct insureds and prospects to their Floodbroker.com microsite where they input information about their property and generate an NFIP quote. This quote is emailed to their agent who completes the sale using the agency’s regular write-yourown flood carrier(s). Floodbroker.com is a quoting engine only: It does not retain data that is input into its system and PIA members’ insureds and prospects are not shared or retained. Floodbroker.com’s flood-zone database tracks with FEMA’s digital flood insurance rate maps. There are communities around the country that are not yet digitally mapped, so cases exist where the Floodbroker.com system may not be able to generate a quote. In some other situations the person completing the online

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[ IN THE ASSOCIATIONS ] form may not be able to provide all of the information necessary to obtain a quote. In both of these cases, the individuals completing the online form can still submit the information that they have input into the form. That information is emailed to their agent so that he or she can follow up and continue the flood insurance sale. For a monthly fee of just $50, an agency’s website becomes a part of the exclusive Floodbroker.com network, from which it can offer online quotes to all of its clients—while documenting against E&O losses. And, set up is easy: an agency simply needs to send Floodbroker.com its logo, an email address to which leads should be forwarded; and a URL and contact information for the agency. The product is available to PIA members in all states and territories in which the NFIP writes business. PIA membership is required to access this program. PIA members interested in the PIAexclusive Floodbroker.com can sign up to get more information at http://pages.pia. org/floodbroker. For information on PIA membership, agents are encouraged to call PIA at (800) 424-4244. [IA]

Floodbroker.com’s flood-zone database tracks with FEMA’s digital flood insurance rate maps. There are communities around the country that are not yet digitally mapped, so cases exist where the Floodbroker.com system may not be able to generate a quote.

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[ ON TH E LEVEL ]

By Jamie Deapo

Are We Our Own Worst Enemy?

ecently I referred several friends and relatives to a close friend of mine for insurance. I did so because I knew he was a good agent and would do a good job counseling them on their insurance needs. Unfortunately his strength does not lie in making sure his

How would you rate your agency’s customer service? Do you check with clients regularly to inquire about their experience in writing new coverage with your agency or being helped with an insurance issue? How frequently do you get touch your clients and are you doing regular reviews

Work with your managers and staff to get issues worked out. Invest in training and education to help your staff be the best they can be. Make sure you are providing the necessary service when a client has a claim.… Find out how technology can speed up the process while freeing up time for your staff to work directly with clients. Jamie Deapo

office provides an exceptional customer experience and he has relegated that responsibility to someone else who is not doing a good job. How do I know this? Because the people I referred have told me so when I checked back with them on their experience. The sad part is the agency I referred them to didn’t check back after the fact to see how their experience went and so they have no idea that their new clients have started out on the wrong foot. The issues and less than satisfactory experiences were all things that should not have occurred in the agency. It involved failing to provide exactly the kind of personalized, quality service that is the hallmark of doing business with an independent insurance agent. Is it any wonder after experiencing less than adequate service why it is so easy for our competitors to sell price as the only determinant in deciding where you buy insurance. My experience is not unique. I have worked with several employees of IIABNY on issues related to their personal insurance only to find they have gone years with no contact from their independent agent or have been caught up in issues related to their coverage that stemmed completely from less than adequate customer service. 28 June 9, 2014 / INSURANCE ADVOCATE

of their coverage? Is it possible you are like my agent friend, very good at counseling clients on the coverage they need only to have them experience less than adequate service from your agency? There are a lot of reasons, but no excuse, for an independent agency not to provide exceptional customer service. It starts with a serious commitment by the owners of the agency to providing a high level of service. It then gets translated into action with training, technology, support and management of the process. It is not a one-time process but instead a living, breathing part of the day-to-day operations of a successful agency. It requires strong management and leadership coupled with a commitment to providing the very best service possible. Sounds like a significant amount of work and expense. In the beginning it can be but once the framework is established it’s just a matter of regular management and oversight. Done well it will help you to retain and grow your agency. Excellent service gets noticed by clients and creates retention and referrals. Happy clients tell their friends, relatives and neighbors about you, refer them for coverage and build your image in the community. If you work very hard to obtain a new

client why would you not want to work just as hard to make their experience great and keep them as a long time client? Your agency actually offering a client an exceptional customer experience backed by support and expertise advocating when there is a claim is a large piece of your value proposition. What’s the customer experience like in your agency? Do you ask clients to rate their experience? Do your clients feel important and do they believe they are getting exceptional service? Take some time and investigate the situation. Work with your managers and staff to get issues worked out. Invest in training and education to help your staff be the best they can be. Make sure you are providing the necessary service when a client has a claim. That is when your client most needs you and having your knowledge and support will have the greatest impact. Find out how technology can speed up the process while freeing up time for your staff to work directly with clients. I was embarrassed by the poor service the friends I referred received from the agency. I intend to discuss it with the agent I sent them to, however, if he isn’t already checking his agency’s performance I question whether he already knows or even cares. Candidly, I’m not sure I will refer others to his agency – I may have to look elsewhere. That’s exactly what clients do as well. Unless asked they don’t mention the poor service they just all of a sudden leave and move their business elsewhere. How many customers do you lose to poor service that you believe left for a better product or price? Maybe it’s time to do a little investigating. [IA]

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[ GUEST EDITORIAL ]

By Chris Paradiso

Four Factors That Will Grow Your Agency

s I look back over the last nine months, there have been a few factors that have played a large role in the growth of our agency. The first of these factors is having a social media engineer. I personally feel that every agency needs at least one so-

implement a process and procedure manual. I will say it has absolutely played a huge role in our closing ratio, and we haven’t even touched on sales training. The reason we have implemented this coaching is because our goal is to remember that our shareholders are our

I often hear agency owners say that they cannot afford a social media engineer, but what I say to that is: you can’t afford NOT to have a social media engineer!

Chris Paradiso

cial media because I have witnessed significant growth from the day I hired my first social media engineer, due in large part to the way society and technology has progressed. Agency owners simply lack the time to manage all of the social media outlets, so that’s where the social media engineer comes in. I often hear agency owners say that they cannot afford a social media engineer, but what I say to that is: you can’t afford NOT to have a social media engineer! The reason I feel this way is because if you look at the direct writers such as Geico’s lizard, you’ll see that they are reaching the public at a minimum of three times a day. Our response to this strategy is to market our agency through social media because of its reaching power and little to no cost. The second factor would be hiring the right coach for processes and procedures. We hired a process and procedure trainer back in October 2013 and since then we have implemented many successful process changes. Additionally, without process change, you cannot move on to the procedural change. The process is not as simple as it sounds, as it took our agency about four months until we were able to work perfectly through the process. Once that was complete, we were able to move on to the procedure portion of the training. Two years ago, I would have never thought to 30 June 9, 2014 / INSURANCE ADVOCATE

policyholders, so we must do everything in our power to make the customer experience exactly what they want. Here’s a great quote:

“There is only one boss: The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” - Sam Walton

The third factor is the hiring of a sales coach. How can agency owners expect our staff/teammates to improve without investing in their sales skills? I have personally looked into many different areas of improving our sales skills but I have to say the investment in having someone inside the agency, working with our team, is the most powerful way to improve your staff. The investment is well worth it as long as you feel your agency has the right people apart of it. The fourth factor is getting a Mobile Marketing App. Why is this a necessity for your agency? Because it’s a mobile world! Connectivity with your existing clients is key, but with the legal limitations of text communication, an app is the way to go.

Another great part of the app is that it allows us the ability to provide our clients with the best customer service possible. It allows our clients to pay their bill or file a claim with the push of a button. Society wants it and wants it right this second, so this will not only help our agencies give the client great service, it will also help agency owners be more profitable. Two other great points about the app are that it allows the client to have their insurance cards stored right in their phone, and the best factor of all is that it will allow us to communicate to our clients through push notification. The main reason why I say this is key for your agency for this year is because it will take nine months to a year to establish this app base with your clients, so that’s why you need to do it NOW, rather than later! These four factors are what agencies need to have in order to grow in our industry. Technology today has allowed people and businesses alike to operate and function at speeds we never thought possible. That’s why these four aforementioned tips will allow your agency to not only take on the massive marketing campaigns of the direct writers, but succeed in this highly competitive arena. As an agency owner, I have implemented all four of these factors and have found huge success - Your agency can too![IA] Christopher Paradiso, CPIA, is President of Paradiso Financial & Insurance Service. He has been acknowledged by several insurance publications as a leader in the industry for his use of digital marketing and social media to help brand his agency and promote other small businesses within his community. Chris has also been recognized for his charity work with The Connecticut Children’s Medical Center. In 2011, Chris introduced “Paradiso Presents LLC,” a social media program aimed at teaching small agencies how to not only survive, but compete in today’s complex online marketing world. Chris resides in Stafford Springs, CT with his wife and two children, Mia and Gianni.

INA 6-9-14_INA 6-9-14 6/19/14 1:28 PM Page 31

NYIA congratulates the association’s 2014 Chair’s Distinguished Service Award recipient, Thomas White of Community Mutual Insurance Company—an affiliate of Union Mutual.

Tom is incredibly loyal to the industry and NYIA. He has dedicated 35 years to advancing the insurance profession. Thank you, Tom, for your steadfast commitment and unwavering conviction in promoting the industry.

INA 6-9-14_INA 6-9-14 6/19/14 1:28 PM Page 32

[ ON M Y RADAR ]

By Barry Zalma

I’ve Made Up My Mind – Don’t Confuse Me With Facts

he Four Corners Rule, applied in Pennsylvania and several other states, limits the decision to defend and/or indemnify an insured to a review of the allegations of a complaint. As such, it ignores facts extrinsic from the the word-

a turn, and he struck the catch-fence. Steven Guthrie, Jr. and Samuel Ketcham were standing behind the fence in the pit area when the impact occurred. Mr. Guthrie died as a result of his injuries, and Mr. Ketcham was seriously injured.

Mr. Lanigan contends that he is an insured under the commercial general liability policy at issue and that neither the factual allegations of the underlying complaints nor the complaints joining him as an additional defendant support Insurer’s denial of a defense. Barry Zalma

ing of the complaint, and provides an insured with coverage that would not exist if the court applied the facts rather than the allegations. In Lanigan v. T.H.E. Insurance Co., 646 WDA 2013 (Pa.Super. 03/14/2014), a Pennsylvania appellate court was asked to reverse a summary judgment in favor of an insurer by ignoring the facts and applying only the allegations of the complaint.

FACTS William Michael Lanigan (“Mr. Lanigan”) filed the within declaratory judgment and bad faith action against T.H.E. Insurance Company (“Insurer”) seeking a declaration that the Insurer breached its duty to defend him under a commercial liability policy and acted in bad faith. Insurer filed a motion for summary judgment as to both claims; Mr. Lanigan filed a cross-motion for summary judgment solely on the duty to defend issue. The trial court granted summary judgment in favor of Insurer as to both counts contained in the complaint, and Mr. Lanigan appealed. Mr. Lanigan was driving his car in a race at the Mercer Raceway Park in Mercer, Pennsylvania. The throttle stuck unexpectedly, Mr. Lanigan lost control on 32 June 9, 2014 / INSURANCE ADVOCATE

Mr. Lanigan was sued and tendered his defense to Insurer, which verbally denied him a defense on December 7, 2009. Insurer responded in writing stating that the denial was based upon Exclusion 8 of the policy endorsement which excluded coverage for “Bodily injury… to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.” Mr. Lanigan retained his own counsel to defend him in the underlying litigation. Prior to the filing of the within declaratory judgment action on August 18, 2010, he was dismissed from that litigation. All that remained was a claim for the costs of defense.

Analysis At issue is an insurance company’s duty to defend its insured. The courts of this Commonwealth have long held that the duty to defend is a distinct obligation, separate and apart from the insurer’s duty to provide coverage. In making a determination whether there is a duty to defend in Pennsylvania, a court must compare the four corners of the insurance contract to the four corners of the complaint. An insurer may not justifiably refuse to defend

a claim against its insured unless it is clear from an examination of the allegations in the complaint and the language of the policy that the claim does not potentially come within the coverage of the policy. Mr. Lanigan contends that he is an insured under the commercial general liability policy at issue and that neither the factual allegations of the underlying complaints nor the complaints joining him as an additional defendant support Insurer’s denial of a defense. He continues that the complaints asserted negligence claims against him that potentially fell within the coverage and the “participant” exclusion relied upon by Insurer is to be strictly construed against it. Mr. Lanigan was an insured for purposes of the policy. “Participant” was defined as individuals who have registered to and actually do engage in the racing activity provided under the raceways program – including drivers, mechanics, pitmen, race officials, flagmen, announcers, ambulance crews, newsmen, photographers, gate workers, and all other persons bearing duly and officially assigned credentials and/or guest pit passes for the program. Insurer relied upon an exclusion that provided: “This insurance does not apply to any loss on any premises owned by, rented to, or controlled by any insured for any of the following:… “(8) bodily injury or property damage to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.” While Mr. Lanigan was an insured the exclusion prevented coverage if the injured party was also a participant. Insurer maintains that, immediately after the accident, it commenced an investigation, which “established that both accident victims were members of the Guthrie Motor Sports pit crew, had executed the Agreements granting them the right to be present in the restricted pit area, that both had been issued armbands allowing such access and that both were present in the pit area when the accident happened.” The trial court defined the issue before it as, whether “Mr. Guthrie and Mr. Ketcham were ‘participants’ at the time of

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[ ON MY RADAR ] the accident.” In making that determination, it expressly considered facts obtained during the discovery process in the underlying litigation. The issue, properly framed, is whether, examining only the underlying complaints and the insurance policy, the claims of negligence against Mr. Lanigan were potentially covered under the policy, giving rise to a duty to defend. The appellate court concluded the trial court erred when it considered the Insurer’s investigation and discovery in the underlying case in ascertaining whether there was a duty to defend. Additionally, the complaint contained an allegation that the victims sustained their injuries while they were in the pit area. The complaint, however, contains no averments that they were registered to engage in racing activities or that they were actually engaged in such activities. It did not indicate that they were participants as defined in the policy. In deciding that Insurer did not owe a duty to defend, the trial court applied the wrong legal standard. It looked beyond the policy and the allegations of the complaint to discovery and investigative reports. The facts that indicate that plaintiffs purchased a pit pass, signed a release form, and wore an armband, are not present in the complaint. In essence, the court concluded that the policy exclusion applied to negate coverage, and absent coverage, there was no duty to defend. In so holding, the trial court was complicit in Insurer’s attempt to define its duty to defend based on the outcome of the coverage determination, an approach the Pennsylvania Supreme Court rejected. The appellate court found that the allegations of the underlying consolidated complaints could possibly have resulted in coverage under the endorsement. Based on the allegations in the complaints and the policy, Insurer was obligated to defend Mr. Lanigan in the underlying action until it was conclusively determined that the claims asserted were not covered. Hence, summary judgment on the duty to defend issue should have been entered in favor of Mr. Lanigan rather than Insurer. Pennsylvania courts recognize that a bad faith claim is separate from the basic claim for coverage, and the success of the bad faith claim is not dependent upon the success of the underlying claim.

In order to constitute bad faith, it is not necessary that the refusal to defend be fraudulent. However, mere negligence or bad judgment is not enough.

Furthermore, the common law provides a remedy for bad faith breach of a duty to defend in addition to statute. Since it concluded that Insurer should have provided Mr. Lanigan with a defense in the underlying action, there is a material issue whether Insurer’s refusal to do so was made in bad faith. In order to constitute bad faith, it is not necessary that the refusal to defend be fraudulent. However, mere negligence or bad judgment is not enough. Mr. Lanigan acknowledges that in order to prove bad faith, he must show by clear and convincing evidence that Insurer (1) did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim. The fact finder is charged with deciding whether the insurer recklessly disregarded its duty to defend against the claim, and if this disregard rose to the level of improper purpose and beyond gross negligence, which proves bad faith. The case was remanded to the trial court for entry of summary judgment in favor of Mr. Lanigan on the duty to defend issue and for further proceedings in the bad faith action.

ZALMA OPINION The four corners rule worked an injustice in this case. It found a duty to defend and potential bad faith because the insurer, whose investigation established facts that made it impossible for there to be coverage, because the lawyer who sued its insured failed to allege the facts that eliminated coverage. This is allowing a judge-made rule overcome logic and justice. Many states allow insurers to use extrinsic evidence – not alleged in the complaint – to make a decision on coverage. Often that extrinsic evidence provides coverage that would have

been eliminated by the allegations of the complaint as well as defeat coverage. The problem with the four corners rule is it allows a plaintiff ’s counsel to plead a case that would prevent an insured from receiving defense to punish the defendant when if extrinsic facts were considered it would get coverage. The rule makes no sense and not only hurts insurers but those insured. [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/insurance-claims-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. INSURANCE ADVOCATE / June 9, 2014 33

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[ LOOKING BACK… Insurance Advocate, 25 years ago]

34 June 9, 2014 / INSURANCE ADVOCATE

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[ LOOKING BACK… Insurance Advocate, 25 years ago]

[ FORE WORD ] continued from page 4

as they have proved redundant. Now, Mosher said, those same reserving methods have low inflation baked into them. An uptick could mean property/casualty company reserves could become inadequate. Low inflation also means company profits

grow more volatile, Shields said. Companies rely less on investment income and more on underwriting income. The investment income mainly comes from bonds, which are stable, while underwriting profits come from the business a company underwrites, which is more volatile. “That itself is a riski-

er model,” Shields said. The underwhelming returns have made property/casualty values consistently lower than the rest of the market. The new capital hasn’t made the situation easier. If they are right, the latest Actuary joke may be on the industry.[IA] INSURANCE ADVOCATE / June 9, 2014 35

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[ COURTSI DE ]

By Lawrence N. Rogak

Court of Appeals: City Liable for Permitting Bicyclist to Enter Road That Was Closed for Repairs Wittorf v City of New York (2014 NY Slip Op 04037) Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431, edited by Lawrence N. Rogak

e are asked in this case if the City of New York was engaged in a proprietary function at the time of plaintiff ’s bicycle accident in order to determine if the jury properly evaluated the City’s actions under ordinary negligence principles. On the morning of November 5, 2005, Donald Bowles, a supervisor with the Department of Transportation for the City of New York, and his crew arrived at the east entrance of Central Park’s 65th Street transverse to repair a roadway defect. The crew closed the east entrance to the transverse and then proceeded westbound. As they drove through an

Because of darkness in the tunnel, plaintiff did not see one of the depressions until she was almost upon it. When she attempted to avoid the hole, she encountered another, fell and was injured.

underpass, Bowles observed the problem they had been sent to correct—a series of deep depressions in the westbound lane. Having located the area in need of repair, Bowles went to the west entrance of the 65th Street transverse to close it to vehicular traffic by placing traffic cones across the roadway. As Bowles was placing the cones, plaintiff Rhonda Wittorf and Brian Hoberman arrived at the west entrance on bicycles. Hoberman approached Bowles and asked if they could use the roadway and Bowles replied that it was “okay to go through.” As plaintiff and Hoberman rode along the transverse, they

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[ COURTS I D E ] entered the underpass where the depressions were located. Because of darkness in the tunnel, plaintiff did not see one of the depressions until she was almost upon it. When she attempted to avoid the hole, she encountered another, fell and was injured. Plaintiff commenced this personal injury action against defendant City of New York (the City) seeking to recover for her injuries. After trial, a jury determined that the roadway where plaintiff ’s accident occurred was not in a reasonably safe condition, but that the City could not be held liable for the defect because it did not receive written notice of the condition at least 15 days prior to the accident, as required by the Pothole Law (Administrative Code of the City of New York § 7-201 [c]; [2]). The jury also found that the City did not cause or create the condition by an affirmative act of negligence. It did, however, conclude that Bowles was negligent in permitting plaintiff and her companion to enter the 65th Street transverse and that such negligence was a substantial factor in causing her injuries. In considering comparative negligence, the jury apportioned fault at 40 percent to plaintiff and 60 percent to the City. The City moved to set aside the verdict, alleging that Bowles was engaged in a governmental function at the time of the accident thereby entitling it to judgment as a matter of law or, alternatively, to set aside the verdict as against the weight of the evidence. Supreme Court granted the motion and dismissed the complaint, agreeing with the City that Bowles was performing a governmental function when he closed the transverse to vehicular traffic. It denied the remainder of the City’s motion as academic. A divided Appellate Division affirmed, concluding that the underlying negligent omission occurred during the performance of a governmental rather than a proprietary function (104 AD3d 584 [1st Dept 2013]). The dissenter would have reversed Supreme Court’s dismissal of the complaint and denied the motion to set aside the verdict. The Appellate Division granted plaintiff leave to appeal on a certified question. Plaintiff contends that the courts below erred in concluding that the City could not be held liable for its negligence because Bowles was performing a governmental function when his negligent act occurred.

She argues that highway maintenance and repair and the issuance of appropriate warnings for roadway hazards have consistently been deemed proprietary activities that may subject municipalities to liability when such conduct is performed by highway maintenance personnel or planners. The City responds that Bowles was engaged in traffic control—traditionally a governmental function—at the time he failed to warn plaintiff of the roadway condition and, as such, the City is immune from liability. We recently explained the framework that must be used when a negligence claim is asserted against a municipality in Applewhite v Accuhealth, Inc. (21 NY3d 420 [2013]). First, a court must decide “whether the municipal entity was engaged in a proprietary function or acted in a governmental capacity at the time the claim arose” (id. at 425). If the municipality’s actions fall on the proprietary side, “it is subject to suit under the ordinary rules of negligence applicable to nongovernmental parties” (id., citing Matter of World Trade Ctr. Bombing Litig., 17 NY3d 428, 446-447 [2011]). A governmental entity undertakes a proprietary role when its “activities essentially substitute for or supplement traditionally private enterprises” (id., quoting Sebastian v State of New York, 93 NY2d 790, 793 [1999]). “In contrast, a municipality will be deemed to have been engaged in a governmental function when its acts are undertaken for the protection and safety of the public pursuant to the general police powers” (id. [internal question marks and citation omitted]). Generally, “the distinction is that the government will be subject to ordinary tort liability if it negligently provided services that traditionally have been supplied by the private sector” (id. at 426). In deciding whether a function is proprietary or governmental, a court examines “the specific act or omission out of which the injury is claimed to have arisen and the capacity in which that act or failure to act occurred . . . , not whether the agency involved is engaged generally in proprietary activity or is in control of the location in which the injury occurred” (Miller v State of New York, 62 NY2d 506, 513 [1984]). Historically, the maintenance of roads continued on page 38

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[ COURTSIDE ] continued from page 37

and highways was performed by both private entities and local governments, with each subject to the ordinary rules of negligence (see e.g. Ireland v Oswego, Hannibal & Sterling Plank Rd. Co., 13 NY 526, 531-532 [1856]; Hutson v Mayor of City of N.Y., 9 NY 163, 168 [1953]; [“It requires no argument to prove that it is the duty of the defendants to see that the public streets of this densely crowded city are kept in repair”]). This duty to repair applied whether the dangerous condition in the road had been caused by a municipality (see Nelson v Village of Canisteo, 100 NY 89, 93 [1885]) or a contractor (see Turner v City of Newburgh, 109 NY 301, 305-306 [1888]). Indeed, we explained that a municipality has the obligation to warn or barricade a dangerous condition regardless of who caused or created it (see Pettengill v City of Yonkers, 116 NY 558, 564 [1889]; [Municipal corporation’s duty “was to keep the streets in a safe condition for public travel, and it was bound to exercise reasonable diligence to accomplish that end, and the rule is now well established to be applicable whether the act or omission complained of and causing the injury is that of the municipal corporation or some third party”]). In recognition of this duty, the courts of this State have held that a municipality can be held liable for failure to install traffic control signs (see Wager v State of New York, 7 NY2d 945, 947 [1960]); failure to repaint faded road stripes (see Henriquez v Parsippany Constr. Co., Inc., 62 AD3d 749, 751 [2d Dept 2009]; Purves v County of Erie, 12 AD3d 1112 [4th Dept 2004]); and for inadequate warnings of ongoing road construction (see Beardsley v State of New York, 57 AD2d 1061 [4th Dept 1977]; Miller v State of New York, 6 AD2d 979, 980 [3d Dept 1958]). As we held generally in Friedman v State of New York (67 NY2d 271, 283 [1986]), a municipality has a duty to maintain its roads and highways in a reasonably safe condition and liability will flow for injuries resulting from a breach of that duty. Thus, it is well established that a municipality has a proprietary duty to keep its roads and highways in a reasonably safe 38 June 9, 2014 / INSURANCE ADVOCATE

We emphasized that “tort suits that test the course of action undertaken by the police in furtherance of public safety are disfavored under our law because they implicate choices about the allocation of finite police resources.”

condition. Although liability for failing to maintain roads and highways can and has been limited by prior written notice laws (see e.g. Bruni v City of New York, 2 NY3d 319 [2004]; Amabile v City of Buffalo, 93 NY2d 471 [1999]), the nature of that function remains proprietary when performed by highway maintenance personnel. Guided by these precedents, we conclude that Bowles was engaged in a proprietary function at the time he failed to warn plaintiff of the conditions in the transverse. Bowles was in Central Park on the day of the accident specifically to oversee the road maintenance project in his capacity as a City Department of Transportation supervisor. At the time he failed to warn plaintiff, he was blocking the transverse to vehicular traffic in preparation for that road repair. Although the maintenance work had not yet begun, Bowles and his crew could not have repaired the roadway without having closed the road to traffic. In other words, his act of closing the entry to vehicular travel was integral to the repair job—a proprietary function. Consequently, under the circumstances of this case, we conclude that Bowles was performing a proprietary function and the jury could therefore assess the City’s conduct under the ordinary rules of negligence. Our decision in Balsam v Delma Eng’g Corp. (90 NY2d 966 [1997]) is not to the

contrary. In that case, police officers were present at an accident scene in order to ensure the safety of an injured plaintiff and the public in general. In that capacity, their “traffic control” decision not to place flares or other warnings served a governmental function. Indeed, there was no independent basis for the police officers to be at the accident scene; their task was protection of the public. We emphasized that “tort suits that test the course of action undertaken by the police in furtherance of public safety are disfavored under our law because they implicate choices about the allocation of finite police resources” (id. at 968). We explained that traditional performance of a function by police officers rather than private actors “is a telltale sign that the conduct is not proprietary in nature” (id.). And with particular relevance to this appeal, we noted that “no claim is made here that the police were charged with the responsibility to physically maintain the property where plaintiff ’s accident occurred—a proprietary duty” (id.). In contrast, Bowles closed the transverse as part of his assignment to repair a defect in the roadway. Hence, his conduct stemmed from the execution of a proprietary duty. In sum, although the City was not held liable for its failure to repair the defect in the road due to lack of adequate prior written notice, rejection of that position did not foreclose the jury’s finding that Bowles was negligent in carrying out the proprietary function of road maintenance. Therefore, the City was not entitled to judgment dismissing the complaint as a matter of law, and a remittal is necessary to consider the weight of the evidence issues (CPLR 4404 [a]). Accordingly, the order of the Appellate Division should be reversed, with costs, the case remitted to Supreme Court for further proceedings in accordance with this opinion, and the certified question not answered as unnecessary.[IA] 2014 NY Slip Op 04037 Decided on June 5, 2014 Court of Appeals Graffeo, J.

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