July 21, 2014 by C Acunto

VOLUME 125, NUMBER 13 / July 21, 2014

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

A CINN Group, Inc. Publication

Contents [COVER STO RY ] 16

EBB and FLOW: Unions Swim Against the Tide as Pension Tsunami Looms P/C 1st Quarter Results

July 21, 2014 | volume 125 number 13 44

Courtside: When Policy Excludes Someone Who "Is" Covered Under Another Policy, "Is" Also Includes "Was" Lawrence Rogak

Classiﬁeds

Guest Opinion: Emotionalist: a Political Malady Marilyn M. Singleton, M.D., J.D.

[FEATURES] 4

Foreword: NAIC Launches Campaign Steve Acunto, Publisher

Insight: Christmas in July Peter H. Bickford

On the Level: Being 007 Ain’t What It’s Cracked Up to Be N. Stephen Ruchman

Face to Face: 7-11-2014 Back to the Future Michael Loguercio

Guest Opinion: VA Scandal—A Battleﬁeld of Deceit, Delays and Death for Veterans Elizabeth Lee Vilet, M.D.

On the Level: How is Your Relationship? N. Stephen Ruchman

In the Associations: IMUA Elects Ofﬁcers & Board; The Grifﬁth Insurance Education Foundation Announces 2014 Spring Scholarship Winners

On My Radar: Facts Rule: Coverage Pollution Exclusion Effective Barry Zalma

Looking Back: June 1989

[ AD FEATURES] 18

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Like us on Facebook… The Insurance Advocate Magazine

www.insurance-advocate.com INSURANCE ADVOCATE / July 21, 2014 3

[ FORE WORD ]

Steve Acunto

NAIC Campaigns

he National Association of Insurance Commissioners (NAIC) has launched ‘Protecting the Future,’ an educational initiative about the indispensable role state-based insurance regulation plays in strengthening the U.S. economy. This unprecedented education program from the NAIC is being deployed in Washington, D.C., Brussels, the capital of the European Union, and in Basel, Switzerland, the seat of the Financial Stability Board(FSB) for the G-20. “This new program highlights the compelling benefits state-based insurance regulation provides to American consumers, employers and taxpayers. It is a critical time for state-regulators as some federal officials and global regulators are seeking unprecedented authority over American insurance markets, including the imposition of bank-centric regulation on insurance companies,” the NAIC explains. Readers of the IA know that states have effectively regulated America’s insurance companies for nearly 150 years. Even during the 2008 financial crisis—as the federal banking and mortgage regulatory regimes collapsed—the state-based insurance regulatory system performed well, protecting policyholders and helping to prevent an even deeper economic downturn. “The U.S.’s state-based insurance regulation system has an unmatched track record and can best adapt to meet our future economic and financial challenges,” said Senator Ben Nelson, NAIC CEO. “By ensuring soundness, solvency, stability and competition, state-based insurance regulation does more than make insurance markets work—it protects the future for American consumers, employers and the economy as a whole.” We support this effort fully and praise Ben Nelson and the NAIC for its leadership… Thanks to Guy Hatfield of the Hatfield Insurance Agency for pointing out that on page 16 of our article on the “Voss decision” (June 9th edition) in the second paragraph, the word "insurer" should be "insured." Important distinction, missed in proofreading. Thank you, Guy… Dave Walsh and his team at Amalgamated Life, once again, hold the distinction of America’s smallest, but among its most consistent, A.M. Best “A” rated carriers. Amalgamated Life (www.amalgamatedlife.com), a provider of life and health insurance, has received the highest rating, “A” (Excellent), for the 39th consecutive time, evidence of its strong fiscal position and claims-paying history. Dave told us: “We do not waiver when it comes to our company’s fiscal responsibility and obligations to our policyholders. Our mission is to help individuals and businesses achieve financial security and protect against potential risks. We take this role very seriously and our performance metrics are all monitored to maintain our consistently high standards.” Anyone who knows Dave and his remarkable background as head of NAIC, Alaskan Commissioner and so much else will not be surprised by the continuing accord his Company has received. Bravo, Dave… The American College of Financial Services, responding to Americans’ financial planning demands for financial advice to fit the real world challenges, announced a redesigned Chartered Financial Consultant (ChFC®) designation focused on offering applied knowledge to address real world family and business planning issues, including: divorce; blended families; special needs children and families of the lesbian, gay, bisexual, and transgender (LGBT) community; retirement income planning; and behavioral finance. Smart and realistic in one way, startling, and a little sad in another – especially as it reflects trends that change the essential character of the family in the U.S. SA 4 July 21, 2014 / INSURANCE ADVOCATE

VOLUME 125, NUMBER 13 JULY 21 , 2014

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Raﬁ Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com PROOF READER Maria Vano SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x117 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

Christmas In July

h the anticipation! Ever hopeful for pleasant surprises and thoughtful gifts! Alas, once again it is not to be. Nothing but another collection of coal in our stockings! Guess we’re still bad boys and girls. The 2013 annual report of the NY superintendent of financial services to the

titled “Building on Success.” This buoyant report extols the administration’s legislative accomplishments including support for the growth of businesses and workers statewide. Financial services, including insurance, are not mentioned much at all. But the annual report of the DFS should fill any void. The first two DFS annual

Given the content of the report, however, the extra month to prepare seems to have been wasted, and the timing makes its contents largely stale and useless for any governmental or legislative purpose.

Peter H. Bickford

governor and the legislature, required to be submitted on or before June 15th each year (the required date for submission used to be a month earlier, but the law was changed a year ago to give the apparently overwhelmed regulators an extra month to prepare), was posted on the DFS website on July 3rd. The report is dated as of the due date—June 15th, which happens to have been Father’s Day and a Sunday—so I suspect that it was not actually submitted to the governor or the legislature until at least Monday, June 16th. In any event, with the extra month to prepare, the report at best would be received by the governor and the legislature during the last week of the legislative session when all the legislators and the governor’s staff were, I’m sure, poised to absorb and study the report as part of their deliberative process. Given the content of the report, however, the extra month to prepare seems to have been wasted, and the timing makes its contents largely stale and useless for any governmental or legislative purpose. The legislative session ended with its usual flurry over the weekend of June 2122. The following day, June 23, Governor Cuomo issued his end-of-session report 6 July 21, 2014 / INSURANCE ADVOCATE

reports have not done so, but there is always hope for Christmas in July. This administration has shown the ability to produce great looking reports. The Governor’s budget and end-of-session reports are good examples. And let’s not forget the NY Liquidation Bureau’s beautiful report issued earlier this year (see my Insight column “Encore! Encore!” in the May 12, 2014 IA issue). The 2013 DFS report, in contrast, lacks any pizzazz whatsoever. It is 17 pages of narrative – mostly about the DFS – and 47 pages of dry statistics and schedules. So what? Flash is not what the report is supposed to be all about. The statutory purpose of the report is to provide a “general review of the insurance business, banking business, and financial product or service business utilizing the most current information available.” By contrast the DFS website describes the superintendent’s annual report as “a review of the department’s activities as well as developments in the financial services industry regulated by the department in the previous year.” This description places an emphasis on the DFS activities over the regulated businesses – an emphasis that is simply not found in the statute.

The superintendent’s cover letter to the report gives the reader some hope for insight into DFS efforts on behalf of the insurance and banking industries by stating: “As its charter instructs, the Department has and will continue to work aggressively to foster the growth of a fair, robust financial services industry and to protect consumers.” If not exactly the statutorily prescribed charge to the DFS, it at least mentions growth of the industry as an objective. Let’s look at how the report addresses this promise. After an introductory section that describes the various DFS divisions, the report narrative turns to “Major Accomplishments” – not of the industry but of the DFS – with the statement that: “The Department continues to work to protect consumers and promote a thriving sustainable financial services sector for the long term.” And what does the DFS consider to be its major accomplishments in “Encouraging the Growth of Industry”? Here are the insurance related topics under that heading in the report: • Setting industry standards for the acquisition of annuity businesses; • Automobile Usage Based Insurance Discount Programs. That’s it! That is the extent of the 2013 accomplishments that DFS considers to be “encouraging growth” in the insurance industry. Compare this to the next section, “Protecting Consumers”, that includes the following topics: • Storm Sandy Disaster Response (including the infamous Report Card on claim handling practices of insurers) • Reforming Force-Placed Insurance • Reducing Health Insurance Costs • Affordable Care Act Implementation • Investigation into Out-Of-Network Medical Costs • Reforming Life Insurers’ Claims Practices • Investigating the use of Shadow Insurance Without even getting into the report’s next section of major accomplishments, “Promoting Strong, Smart, Targeted continued on page 8

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[ INSIGHT ] tion it may contain is woefully stale by the time it reaches its intended recipients, who are at that time already halfway out the door on their summer break. Even if the report were timelier, however, it is far from compliant with the statutory charge that the report be based on “the most current information available.” Although the report is for the most recent calendar year (2013), the consolidated financial data from licensed companies is actually for the calendar year 2012. Today

continued from page 6

Regulation,” you may already suspect that the report confirms an unfriendly agenda where lip service is paid to promoting the growth of the insurance industry. And how is this report in any way helpful to its intended recipients - the governor and the legislature? Aside from being devoid of meaningful analysis of the industry itself, whatever helpful informa-

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with immediate access to electronically filed statements in a standard format there is no excuse for not being able to include 2013 data in the 2013 annual report by its due date five and a half months after the end of the year. It makes no sense in this age of instant data access for the report to provide consolidated industry data that is essentially 18 months old. Nor should funding for a timely and relevant report be considered an issue. At the end of the report, there are several schedules of DFS collections and expenditures. Here are a few highlights from these schedules: • Total DFS Receipts - $1.292 billion • Insurance Industry Assessments $394.6 million • Insurance Industry Examination Fees - $11.3 million • Fines and Penalties - $368 million • Total Expenditures [i.e., operating expenses] from Insurance Accounts - $203.5 million Insurance industry assessments alone far exceed DFS expenditures for the Insurance Division. Then there is the number that jumps off the page: the $368 million in “Fines and Penalties” collected by the DFS during 2013 (2014 is also off to a good start considering some of the major fines already announced this year by the DFS). There is no discussion in the report on the use or disposition of any excess receipts over and above the specific usage (such as the p/c guaranty funds) or operating budgets. What happens to these excess funds? How are the fines and penalties used? Where does the money go? Are we entitled to know? Who is enjoying Christmas in July?[IA]

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[ EXPOSURES AND COVERAGES ] Certificates of Insurance: New CT Law & Cancellation Notice Requirement Solution An Email Swindle Yields a Trifecta of Insurance Issues Cyber Breach: A Billion Dollar Headache Certificates of Insurance Yet Again Want Expanded Coverage via Certificate in CT? FUHGEDDABOUDIT! Two months ago I wrote about Delaware’s new law that not only bars insurers and producers from issuing false or misleading certificates, but also bars anyone from requesting such a certificate.1 Connecticut has just passed a similar law to be effective October 1, 2014. In addition to barring issuance of false or misleading certificates, the Connecticut law stipulates that no person shall: • Warrant that the insurance policy complies with the insurance or indemnification requirements of a contract, • Require an opinion letter or other document inconsistent with the law, except that an insurer or insurance producer may prepare an addendum to a certificate that explains the coverage. (In New York, that will be done with the new ACORD form 855 NY, which is also mentioned in the June Insurance Advocate article.2) • Request that another person violate provisions of this law.3 This should be very helpful to producers. For example, contractors often ask that the certificate confirm coverage for the hold harmless provisions in their contracts with

property owners. At present the producer is barred by insurance department regulations form complying. This leaves the producer at best with an irate client; at worst the client finds another producer who will issue the certificate and the producer loses the client. Starting October 1, 2014, such a request will be illegal in Connecticut. Both houses of New York’s legislature have again passed legislation similar to that just enacted in Connecticut. Governor Cuomo vetoed the bills last year; he hasn’t acted on this year’s versions as of this writing (July 7, 2014). Stay tuned. Cancellation Notice Requirement Solution. Almost every contract that contains insurance requirements calls for a 30day notice of cancellation to the additional insured. But you almost never see a certificate of insurance that provides it—and insurance companies almost never send such notices in any event. Here’s an interesting twist that would make life much simpler for everyone if it were widely adopted: The Law Department of the City of Atlanta, GA realized that its staff was spending an inordinate amount of time fighting with contractors and their agents about non-conforming certificates. At a minimum, approval of contracts was delayed by continued on page 12

1 Jerome Trupin, “Certificates of Insurance in the News Again,” Insurance Advocate June 9, 2014, pages 12 and 14. 2 Ibid 3 Excerpted from AAIS article “Connecticut Enacts Regulation on Certificates” http://www.aaisonline.com/ AAISFrame/ConnectFrame/AdvisoryFrame/tabid/143/ArticleID/831/Connecticut-Enacts-Regulationson-Certificates.aspx (accessed 7/3/14) and Michael A. Bono, “Expanded Insurance Certificate? Don’t Even Ask,” http://blog.wcmlaw.com/2013/06/expanded-insurance-certificate-ny/

10 July 21, 2014 / INSURANCE ADVOCATE

By Jerome Trupin, CPCU

Jerome Trupin

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

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at least a month. When the City surveyed its records, it found that in the prior 15 years, there were no known incidents linked to cancelled contractor insurance. As a result, the City no longer requires the certificates show that Atlanta will receive notice of cancellation.4 Instead, the City’s contracts now require the contractor to fax or email a copy of the insurer’s cancellation notice within two business days of receipt. If the cancellation is for non-payment, the City can pay the premium to the insurance company and charge the amount back to the contractor, thereby keeping the insurance in force. As an added measure to prevent non-payment problems, an additional insured could require that a paid bill for the policies accompany the certificate.

Email Swindle Yields the Trifecta of Insurance Issues Most court cases involving insurance claims deal with legal minutiae and don’t offer much enlightenment. But when one combines three odd points, we have what I’d call an insurance trifecta. Horse One: Are there really people who fall for the impassioned emails offering to share a portion of some fictional pot of money with you in exchange for some simple assistance and a small investment? Eric Carlson, an employee of Avon State Bank in Minnesota, “invested” $60,000 of his own money in response to an email promising a share of a $9,000,000 estate for help transferring the funds from Senegal to the United States. Apparently eager to share the wealth with others, Carlson convinced two more bank clients to pony up $500,000 to “clear the final hurdle” so that the money could be released and they could all cash in. (Yes, Virginia, there is a Santa Claus.)

Most employee dishonesty policies have what’s called a “dual trigger.” That is, the employee must manifest intent to cause loss to the insured and that he/she, or someone else he/she intends to benefit, expects to gain from the scheme. Carlson assured the “investors” that the bank was also an investor. He told them to make checks payable to the bank and then, in violation of bank rules, he wired the money from Avon to a Hong Kong bank. As is always the case, none of the investors ever received anything. Horse Two: How broad is the property-covered provision in fidelity insurance? Broader than you think. When the “investors” sued Avon for the money they’d lost, Avon submitted the claim to its insurer, BancInsure. BancInsure covered Avon for both liability and fidelity coverage. It denied the liability claim based on a fraudulent acts exclusion. It denied the fidelity claim arguing that fidelity coverage only applied to property owned or held by the bank. This defense failed when the court ruled that the bank “held” the funds as evidenced by the wire transfer from Avon to Hong Kong. Horse Three: Does every fidelity policy have the same exclusions? Or, what a difference a word makes. Most employee dishonesty policies have what’s called a “dual trigger.” That is, the employee must manifest intent to cause loss to the insured and that he/she, or someone else he/she intends to benefit, expects to gain from the scheme.5

It is very difficult to establish that the employee intended to cause a loss to the bank. However, Avon’s policy read “...cause loss to the insured or stand to gain…” The court had no trouble deciding that the employee expected to gain and therefore held that the loss was covered. The or meant that the insured had to satisfy only one of the conditions.6

Cyber Breach: Loss Control Comes First, Then Insurance OR a Billion Here a Billion There Target has made cyber breach insurance the talk of the town—well the insurance village anyway. Latest figures estimate the cost to replace credit cards for Target customers whose data was stolen at more than $200 million.7 Target may well have to foot that bill. Target will also provide credit monitoring services to the cardholders whose information was stolen. Doing that for the 70 million customers won’t be cheap. The loss of business and loss of reputation can’t be exactly valued, but it’s the biggest problem Target faces. It’s possible that this may become a billion-dollar loss. Target had $100 million cyber breach coverage.8 Selling stolen credit card information isn’t pocket change. Reportedly, credit card information stolen from Target was on the black market almost at once for $20 or more per card.9 Multiply $20 by the 70 million credit card holders whose information was stolen and we’ve got a “street” value of another billion dollars! It’s clear that any entity with the personally identifiable information of numerous customers may need insurance, but loss control is a vital first step. Suggesting how to properly protect electronic data is way above my pay-grade, but some insurers that continued on page 14

4 Bill Wilson, The Big ”I“ Virtual University insurance guru, sent me a copy of Atlanta City Attorney Robert B. Caput’s Power Point “Legal Aspects of Airport Insurance; What Every Good Airport Lawyer Should Know.” It contained this information. 5 The “dual trigger” is the reason I prefer the employee theft form to the employee dishonesty form. While “theft” is arguably more limited than “dishonesty,” the theft form does not contain the dual trigger language. 6 Avon State Bank v. BancInsure, Inc., CIV. 12-2557 RHK/LIB (D. Minn. Jan. 10, 2014) (An appeal is pending to the Eight Circuit and the decision may be reversed. Attorneys often urge that lower court cases be disregarded, however this trifecta is too enticing and it’s enlightening even if it’s reversed.). 7 “Target Data Breach Cost for Banks Tops $200M” NBC News, http://www.nbcnews.com/business/business-news/target-data-breach-cost-banks-tops-200mn33156 (accessed 6/25/14). 8 John Vomhof Jr. “Target’s $165M Insurance Firewal,” Minneapolis/St. Paul Business Journal Afternoon Edition Newsletter, Jan. 21, 2014 http://www.bizjournals.com/twincities/news/2014/01/21/target-100m-insurance-firewall.html (accessed 6/28/14). In addition to the $100 million cyber breach coverage, Target had $65 million D&O that might be exposed to loss. 9 Erin L. Webb “Target Data Breach Highlights Importance of Insuring Cyber Risks” Policyholder Informer DicksteinShapiro LLP

12 July 21, 2014 / INSURANCE ADVOCATE

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sell cyber breach insurance offer free advice on protecting data as does the Federal Trade Commission’s Data Security web page: http://www.business.ftc.gov/privacy-andsecurity/data-security. Another source is an article by Melissa J. Krasnow of Dorsey & Whitney LLP, “Guidance for Managing Cyber Security Risks” that was just posted on International Risk Management Institute’s website.10 Do Small Businesses Need Cyber Breach Insurance? Beware of overselling the coverage. It’s not full cyber liability insurance and not every firm has a meaningful cyber breach exposure. The question is: What would the insured stand to lose and how much of that would be covered by insurance? One commonly quoted set of cost-ofbreach estimates is produced by Ponemon Associates. Every year since 2005, Ponemon has conducted in-depth studies of 50 or so firms that sustained cyber breaches that year to get the details of their losses. This year’s report is co-sponsored by IBM. The average cost per record over the nine-year period is just under $200. The latest study shows a cost of $201 per record.11 Sometimes insurers talk about the $201 per record figure, overlooking that only $67 of that is direct costs, which is all that would probably be covered by insurance. (Over

Tell your clients about cyber breach. Tell them they need to protect the information in their computer systems. And tell them about the insurance that’s available. But don’t oversell it. the 9-year period that Ponemon has been conducting these surveys, direct costs have averaged about $60 per record lost.) Direct costs refer to expenses such as engaging forensic experts, hiring a law firm or offering victims identity protection services. Most of these costs can be covered by insurance. One policy offers the following coverages: First Party Response expenses including but not limited to: • Legal & Forensic Services • Crisis Management/Public Relations • Notification Expenses • Good Faith Advertising Expenses, and Third Party Defense & Liability expenses (including defense costs).12 Indirect costs include the use of existing employees to help in the data breach notification efforts or in the investigation of the incident, loss of goodwill and loss of cus-

4441 Sepulveda Blvd., Culver City, CA 90230-4847 www.zalma.com | zalma@zalma.com 310-390-4455 | fax: 310-391-5614 http://zalma.com/blog Zalma Insurance Consultants provides expert advice to counsel for insurers and counsel for policyholders. Advice from Zalma Insurance Consultants is indispensable to the resolution of insurance disputes. Consultation from Zalma Insurance Consultants can save you, your counsel or client hundreds of hours of investigative and legal work. 14 July 21, 2014 / INSURANCE ADVOCATE

tomers. For the most part, indirect costs are not covered by cyber breach insurance. To up the stakes for insureds, ISO has just mandated that data breach be excluded from coverage in CGL policies—most companies feel there’s no coverage even without the specific exclusion. The endorsement to implement the exclusion is CG 2106 05 14 (Exclusion – Access or Disclosure of Confidential or Personal Information and Data-Related Liability – With Limited Bodily Injury Exception). The exclusion is already incorporated in certain ISO forms, which won’t require the endorsement. The exclusion applies to: 1. Disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information, or 2. The loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data. (This second part of the exclusion is not a part of cyber breach coverage at all.) Tell your clients about cyber breach. Tell them they need to protect the information in their computer systems. And tell them about the insurance that’s available. But don’t oversell it. [IA]

10 Melissa J. Krasnow “Guidance for Managing Cyber Security Risks,” IRMI Risk & Insurance http://www.irmi.com/expert/articles/2014/kras now05-cyber-privacy-risk-insurance.aspx (accessed 6/30/14) 11 “2014 Cost of Data Breach Study: United States” Ponemon Institute© Research Report http://www-01.ibm.com/common/ssi/cgibin/ssialias?subtype=WH&infotype=SA&appna me=GTSE_SE_SE_USEN&htmlfid=SEL03017USE N&attachment=SEL03017USEN.PDF#loaded (accessed 6/30/14) 12 “What is Data Breach Coverage?” Orr & Associates, http://www.commercialquotes insurance.com/what-is-data-breach-coverage/ (accessed 6/30/14)

www.insurance-advocate.com

[ COVER ]

By Allen B. Roberts

EBB and FLOW: Unions Swim Against the Tide as Pension Issues Surface

16 July 21, 2014 / INSURANCE ADVOCATE

[ COVER ]

ontributions to multiemployer defined benefit pension plans have been a mainstay, legacy feature of union negotiations in many industries. But the fabric of such staples may be tearing apart as employers contemplate the potential of escalating contributions to amortize unfunded liabilities that increase costs but may have imperceptible value for their own employees. Increasingly, employers and their employees are questioning whether the promise of retirement security can be delivered cost effectively—or at all—by defined benefit pension plans maintained under union contracts. With private sector union membership standing at 6.7 percent nationally in 2013, major sectors of the economy and geographic areas are not affected significantly by either current unionization or successful organizing efforts. But that does not mean that all employers are untouched— or untouchable—by bargaining demands or organizing campaigns that may paint corporate retirement programs and 401(k) plans unfavorably to multiemployer plans that unions negotiate. Especially if the current National Labor Relations Board moves forward with its initiatives to abbreviate severely the length of time from notice of an election petition to the date of employee voting, unorganized employers should be armed as early as possible with reliable information about “union” defined benefit pension plans for their own decision-making and to share with employees. Similarly, employers entering a new round of collective bargaining should prepare by learning the basics of contributions relative to benefit value and business risk. About a year ago, I wrote an item titled “Multiemployer Pension Plans—An Imperative to Define the Benefit”, noting that “[i]t is commonplace for unions to promote the message that the multiemployer defined benefit pension plans included in the contracts that they negotiate provide comfortable retirement security—touted as ‘superior’ to that offered by employer or individual retirement programs—for those they represent and those they wish to organize.” Current circumstances make it worthwhile to revisit this topic.

Fundamentals of Defined Benefit Pension Plans Multiemployer defined benefit pension plans are designed to provide a defined monthly benefit at retirement based on a formula taking account of the years of employer contributions and employee service. Optimally for the health of defined benefit pension plans, there would be a broad base of active participants for whom regular employer contributions fund their own retirement over a working life of plan participation. Atop the broad-based pyramid would be a much smaller number of retirees and beneficiaries receiving pension benefits. Stability would come from nourishment supplied by a base of new entrants into the plan, as next generations of employees begin participation through contributions from current and newly contributing employers. But such a theoretic formula for sustainability of defined benefit pension plans has been undermined by numerous realities. Iconic companies that once were bedrock industry participants have, in some instances, collapsed and disappeared as their fortunes reversed, or they have either relocated or outsourced previously unionized operations or lost market share (and opportunities to maintain and create jobs) to non-union domestic and offshore competitors. In growth industries that are not historically unionized, employers have designed benefits packages more appealing to employee interests, with features allowing individual elections to reflect preferences, geographic and upward mobility, and portability. For many multiemployer plans, the result has been inversion of the pyramid: fewer dollars flowing in from fewer employers and for fewer active employees, while the number of individuals having vested benefits for themselves and their spouses swells. Of course, investment portfolio experience also is a factor in the soundness of pension funds. With a statutory mandate to diversify investment portfolios, coupled with skittishness from severe declines in 2008, many pension funds did not ride the wave of a buoyant stock market in 2013, so they showed more conservative returns that

Allen B. Roberts

With private sector union membership standing at 6.7 percent nationally in 2013, major sectors of the economy and geographic areas are not affected significantly by either current unionization or successful organizing efforts. But that does not mean that all employers are untouched—or untouchable…

continued on page 20

INSURANCE ADVOCATE / July 21, 2014 17

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[ COVER ] continued from page 17

did not materially diminish a funding gap or recoup prior losses. From time to time, Congress has stepped up with legislation like the Pension Protection Act of 2006, and more legislative “reform” is floated periodically, but at bottom, the fundamentals of multiemployer defined benefit pension plans dictate their real value to participating employees, as well as employer exposure to liability attributable to a gap between plan assets and unfunded vested benefits. By statute, annual certifications are required based on standardized funding and liquidity measures for determining the financial health of those multiemployer plans.

Due Diligence for Making Benefit Comparisons Employers preparing for negotiations or expecting to encounter union organizing campaigns featuring comparisons of retirement benefits should take steps to conduct some due diligence concerning multiemployer defined benefit funds in the following respects: Benefits Relative to Dollars Contributed Learn how dollars contributed poten-

To assess the value of contributions, it is important to learn how much of each dollar contributed is likely to benefit active employees whose work is the basis of the contribution. tially benefit employees on whose behalf the contributions are made. Defined benefit pension fund contributions typically are based on units or periods of work. To assess the value of contributions, it is important to learn how much of each dollar contributed is likely to benefit active employees whose work is the basis of the contribution. The very nature of the structure and funding of defined benefit pension plans precludes earmarking and precise tracking of contributions. However, some indicators of value are available.

NEW YORK JOCKEY INJURY COMPENSATION FUND, INC. Open for Proposals for Coverage for 2015

The New York Jockey Injury Compensation Fund, Inc. (“Fund”) is a not-for-profit corporation, which by law, is the employer of all thoroughbred jockeys and exercise people in the State of New York for workers compensation purposes. Each year the “Fund” obtains proposals for providing workers compensation insurance for the following year. The “Fund” is now seeking offers for providing this coverage for the 2015 policy year. The current premium is in excess of $4 Million Dollars. The New York Jockey Injury Compensation Fund, Inc. will commence its twenty fourth year of actual operation on January 1, 2015. The “Fund” was created by the New York State Legislature in 1990. It went into operation on January 1, 1991 to provide workers compensation insurance coverage for all licensed jockeys, apprentice jockeys and exercise people working at thoroughbred race tracks in the State of New York. The workers compensation benefits are provided from one policy which affords coverage throughout the state. Details of the terms, conditions and policy specifications regarding interest in presenting an alternative to the “Fund” may be obtained by contacting Karen Fenzl, c/o First Niagara Risk Management, Inc., 726 Exchange Street, Suite 900, Buffalo, New York 14210; or email Karen.fenzl@fnrm.com; or phone 716-819-5506; or phone Gail Gray, Manager of the “Fund” at 585-367-2722.

Benefit Accrual Rates Learn about benefit accrual rates relative to dollars contributed. For legal and practical reasons, many plans suffering funding shortfalls have reduced their future benefit accrual formulas, so dollars contributed buy less credit for employee participants in the plans’ current distressed times than in prior more robust or optimistic times. Historic rates of benefit accrual may have been reduced so current contributions can fund vested benefits. By way of example, if the amount of a defined benefit is a function of (1) contributions, (2) years of credited service, and (3) a benefit multiplier, then reduction of the benefit multiplier will aid in reducing unfunded vested benefits, but only by redirecting current contributions that otherwise would support a larger benefit multiplier for active employees. Service Credits Relative to Dollars Contributed Learn about caps on service credit for active employees relative to the contribution obligation. Some plans require a contribution formula based on all hours worked (including overtime hours) or hours paid (including vacations, sick and personal time, holidays, and other paid time off), even though there is no additional value once a threshold is satisfied, sometimes as low as 1,000 hours and not uncommonly 1,600 hours or less. Employer contributions for hours beyond the threshold do not fund additional benefits, so employers with a workforce whose average annual hours exceed the threshold are aiding reduction of underfunding and shortfalls from other employers, but those payments may not yield value to benefit their own bargaining unit employees. Surcharges and Amortization Formulas for Plans in Critical Status Learn about surcharges or amortization payments needed as part of a mandatory rehabilitation plan to fund plans in critical status. Plans considered in “critical” status because of funding and/or liquidity problems that hit certain statutory thresholds (generally, a projected funding deficiency, with consideration of whether the funding is less than 65 percent) are continued on page 22

20 July 21, 2014 / INSURANCE ADVOCATE

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Helping clients protect their identity is another value-added service of the professional insurance agent.

address, denoting that the site is secure. Phishing is the use of emails to bait someone into divulging personal information. According to the AntiPhishing Working Group’s Global Phishing Survey, (APWG), in the first half of 2013, there were 13,498 attacks on PayPal alone. (docs.apwg.org) Vishing is similar to phishing, in that it involves voice or telephone spam to solicit information. SMiShing, or SMS fishing, is the use of Short Message Systems (texts) to direct the victim to a website or phone number. For example, the message may be purported to be from the IRS, with substantial penalties or arrest if the victim does not visit the website or call the number shown. Once at the website, the

victim’s computer may be infected with malware. According to messaging security experts, “phishing attempts accounted for 55% of reported SMS messages in January of 2014” (www.cloud mark.com). Smartphones and other mobile devices are useful tools, but they are also a prime target of identity thieves. For example, before downloading an app, check to see what information the app is going to access. This could include your phone number, location, and calling patterns. Data access and storage on mobile devices is also a concern. Identity theft can mean a major disruption in someone’s life, leading to financial loss as well as destruction of credit rating. Helping clients prevent identity theft is another sign of the true insurance professional.

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[ COVER ] continued from page 20

required to adopt a rehabilitation plan. For participants and beneficiaries having a benefit commencement date after the plan is in critical status, the rehabilitation plan may reduce or eliminate adjustable benefits, including post-retirement death benefits, 60-month payment guarantees, disability benefits (if not yet in pay status), early retirement benefits or retirementtype subsidies, benefit payment options other than a qualified joint and survivor annuity, and benefit increases occurring in the past five years. Less severely distressed plans that are considered “endangered” (generally, assets less than 80 percent of liabilities or a projected funding deficiency within seven years) are required to adopt a funding improvement plan that may include reductions of benefits earned in future years. If a plan is in critical status, employer contributions will be allocated either to benefits for active employees or to surcharges or amortization amounts to reduce the unfunded vested pension liabilities that have accumulated. While it fulfills statutory obligations to move a plan towards financial stability, diverting a portion of employer contributions to amortizing underfunding does not produce a tangible benefit enhancement for current employees participating in a defined benefit pension plan. Beneficiary Rights and Forfeitures Learn what benefits are payable if a participating employee dies prior to the commencement of benefits or without a “surviving spouse.” Many plans provide for no payment if the participating employee dies before retirement or without a beneficiary who qualifies as a surviving spouse. The effective consequence could be forfeiture of the value of anticipated benefits that were funded by long-term contributions. While extinguishing the value of a deceased participant’s accrued benefits is actuarially sound, it could be disappointing to non-spouse family members or partners who survive the participant but receive none of that value. Withdrawal Liability Learn about withdrawal liability that could be charged if the obligation to con22 July 21, 2014 / INSURANCE ADVOCATE

However sound the documented funding of a plan may be, there is the additional peril of taking on an unanticipated withdrawal liability when a relatively healthy plan is merged with one that is not as well funded. tribute to the multiemployer plan has ended, possibly because the employer has ended its obligation to bargain collectively with a sponsoring union or because of a permanent cessation of covered operations, as by a sale or closing of the business unit or facility that was subject to collective bargaining. Although a technical calculation subject to actuarial determination, very generally, withdrawal liability is a contributing employer’s proportionate share of the plan’s unfunded vested benefits. Withdrawal liability is determined by the plan’s adoption of either of two allocation methods: (1) direct attribution that traces the unfunded vested benefits attributable to the employer’s employees, or (2) pro rata that allocates liability in proportion to the employer’s share of the fund’s total contributions over a specified period. Seemingly routine assumptions by fund actuaries concerning funding, investment return, or applicable mortality tables can spike withdrawal liability exposure, frequently without advance notice to affected employers or any effective opportunity to protest. Plans also have discretion to set procedures that can affect the extent and pace of exposure to withdrawal liability for newly contributing employers, so it is worthwhile learning the methods adopted for calculating withdrawal liability.

In the context of a merger or acquisition, withdrawal liability presents a potential impairment to the net worth or value of a business, whether or not the transaction actually triggers withdrawal liability payment obligations. In extreme, but not unprecedented, situations, withdrawal liability may approach or exceed the value of a business. While transactions may be structured in a way that will not trigger the seller’s withdrawal liability, a purchaser willing to step into a seller’s shoes and make other commitments enabling a seller to avoid a withdrawal may price its contribution commitment or a future withdrawal into the transaction cost by reducing its offer, depending upon its experience, expectations, and objectives. Prospect That a Healthy Plan Will Be Merged with One That Is Weaker However sound the documented funding of a plan may be, there is the additional peril of taking on an unanticipated withdrawal liability when a relatively healthy plan is merged with one that is not as wellfunded. This can occur without meaningful prior notice and entirely beyond the control of a contributing employer, which may learn about it outside of customary union relations or collective bargaining only after the fact and with a ministerial notice that may not attract much attention. But the merger of a healthy fund with a currently or prospectively weaker fund, or a fund having less favorable demographics or characteristics, can severely alter financial soundness. The impact of such a merger can upset predicated expectations and projections underlying an employer’s initial willingness to commence participation as a contributing employer or its analysis justifying ongoing and escalating contributions.

What Employers Should Do Now Don’t Wait to Start Due Diligence Employers with current contribution obligations to a multiemployer defined benefit pension plan should obtain the annual financial and actuarial reports, summary plan descriptions, and notices that the plan has been filed or distributed, and they should utilize inquiries, press accounts, and fund reports to learn the

[ COVER ] plan’s track record in claiming, litigating, and collecting withdrawal liability. Those without collective bargaining relationships, but whose business or industry is in the crosshairs of a particular union having an organizing agenda, should learn about the current status and trends of the multiemployer defined benefit pension plan that the union features in its collective bargaining agreements. Identify Value of Existing Plans Employers not contributing to a multiemployer defined benefit pension plan should promote and modify existing benefit packages based on employee experience and satisfaction and assure that presentations for enrollment in retirement programs and reports of periodic performance are utilized to meaningfully inform and enthuse employees so that they take advantage of available benefits and appreciate their value—absolutely and relative to less rewarding and higher risk plans that could be more costly but deliver less certain value. Inquire About Plan Mergers While significant advance information may not be obtained easily from union leadership or plan administrators, employers with existing union relationships and an obligation to contribute to a multiemployer defined benefit pension plan should inquire at each new round of collective bargaining whether any merger is underway or contemplated. Contributing employers should then be vigilant during the contract term for notice of a merger. As a precaution against dispersion or dilution of its future contributions or an increase in its potential withdrawal liability, the employer may propose reopening the collective bargaining agreement during the contract term to address continuing contributions if a smaller, healthier fund to which the employer contributes becomes merged into a larger fund that appears less financially sound—or if any other individual or cumulative mergers affect the soundness of the fund to which the employer contributes. Conclusion The disconnect between conventional wisdom and the sorry state of many underfunded pension plans is not an abstraction or academic concern; it is hitting home.

For unionized employers and their employees, defined benefit pension plans are much more than the “fringe” benefit that they may once have been. With proper groundwork, there is an opportunity to craft bargaining table proposals most beneficial to the current and anticipated workforce and the sustainability of business and compensation objectives. Defined benefit pension plans should not be approached passively or with resignation that contributions are an inevitable fixture of collective bargaining. For unionized employers and their employees, defined benefit pension plans are much more than the “fringe” benefit that they may once have been. With proper groundwork, there is an opportunity to craft bargaining table proposals most beneficial to the current and anticipated workforce and the sustainability of business and compensation objectives. Employers targeted for organizing campaigns should become informed about costs and values associated with multiemployer plans featured in union contracts to aid their own decisionmaking and that of employees whose votes in a union election could be influenced by promises of retirement security—and the

real-world revelations and trade-offs demonstrated through necessary due diligence applied to scrutinize those plans. [IA] ALLEN B. ROBERTS is a Member of Epstein Becker Green and co-chair of the firm's Whistleblowing and Compliance Subpractice Group. Mr. Roberts represents public and privately held domestic and international businesses and not-for-profit organizations in developing and effectuating strategy and policies in employment law and labor relations matters, employment agreement formulation and enforcement, employment policy audits, employment due diligence for mergers and acquisitions, and union relations and maintaining union-free status. He leads the firm's representation of several national and multinational clients, counseling on labor and employment compliance, litigation avoidance and strategy, and case management. With his wife, Heidi, Mr. Roberts is a founder of the U.S. Friends of Hoedspruit Endangered Species Centre, Inc., supporting programs in South Africa for breeding, care, and research for individual animals and entire species and for outreach to South African schools and community organizations. From 1995 to 2011, Mr. Roberts served as chair of the board of Aging in New York Fund, Inc., a not-forprofit organization established by the New York City Department for the Aging to promote productive aging and enhance the quality of life of older New Yorkers and their families.

125th Year 2014 Watch for News and

Other Events! www.insurance-advocate.com INSURANCE ADVOCATE / July 21, 2014 23

[ E B B AND FLOW ]

P/C Insurers’ Profits and Profitability Slipped in First-Quarter 2014 as Gains on Underwriting Shrank

ERSEY CITY, N.J.—Private U.S. property/casualty insurers’ net income after taxes fell to $13.8 billion in first-quarter 2014 from $14.3 billion in first-quarter 2013, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus falling to 8.4 percent from 9.6 percent. Insurers’ pretax operating income - the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income - fell to $13.7 billion in firstquarter 2014 from $15.8 billion in first-quarter 2013. Deterioration in underwriting results prompted the decreases in insurers’ pretax operating income, net income after taxes, and overall rate of return, with net gains on underwriting falling $2.3 billion to $2.2 billion in first-quarter 2014 from $4.5 billion in first-quarter 2013. The combined ratio - a key measure of losses and other underwriting expenses per dollar of premium - deteriorated to 97.3 percent for firstquarter 2014 from 94.9 percent for firstquarter 2013, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI). Net gains on underwriting dropped as premium growth slowed and net loss and loss adjustment expenses (LLAE) surged upward, with quarterly LLAE rising for the first time since Superstorm Sandy struck in fourth-quarter 2012. The deterioration in underwriting results in first-quarter 2014 also reflects increases in underwriting expenses and dividends to policyholders, which both rose compared with their levels in firstquarter 2013. Partially offsetting the decline in net gains on underwriting, insurers’ net investment gains - the sum of net investment income and realized capital gains (or losses) on investments - rose $1.3 billion to $14.1 billion in first-quarter 2014 from $12.8 billion in first-quarter 2013. Insurers’ 24 July 21, 2014 / INSURANCE ADVOCATE

ic recovery even if we’re struck this hurricane season by a storm more devastating than Superstorm Sandy or Hurricane Katrina,” said Robert Gordon, PCI’s senior vice president for policy development and research. “The experts are predicting the hurricane season this year will be relatively calm, but it only takes one powerful storm to disrupt millions of lives and cause tens of billions of dollars in damage. Moreover, millions of Americans live with the ever-present threat of a catastrophic earthquake or terrorist attack that could cause vast devastation and loss of life, while others of us live in locations at risk of being struck by wildfires, torna- Robert Gordon, Senior Vice President does, inland flooding, or other natPolicy Development and Research, PCI ural disasters. This means that all of us - insurers, homeowners, businesses, and officials at all levels of government - must continue to focus on risk management, disaster results for first-quarter 2014 also benefited readiness, and mitigation aimed at minifrom a $0.4 billion increase in miscella- mizing the human tragedy caused by neous other income to $0.2 billion in first- future catastrophes. Many businesses and quarter 2014 from negative $0.1 billion in individual consumers could also benefit first-quarter 2013. Insurers’ federal and from reviewing whether they have adeforeign income taxes for first-quarter 2014 quate insurance including flood and earthamounted to $2.8 billion, virtually quake coverage.” unchanged from their level a year earlier. “Though insurers’ net gains on underPolicyholders’ surplus - insurers’ net writing in first-quarter 2014 were down worth measured according to Statutory from the levels experienced a year earlier, Accounting Principles - grew $8.7 billion underwriting results remained unusually to a record $662.0 billion at March 31, strong. Insurers posted net gains on under2014 from $653.3 billion at year-end 2013. writing for only 21 of the 113 quarters The figures are consolidated estimates since the start of ISO’s quarterly data, and for all private property/casualty insurers insurers’ 97.3 percent combined ratio for based on reports accounting for at least 96 first-quarter 2014 was 7.7 percentage percent of all business written by private points better than the average since firstU.S. property/casualty insurers. quarter 1986,” said Michael R. Murray, “Policyholders’ surplus - the funds ISO’s assistant vice president for financial available to cover new claims - rose $8.7 analysis. “Better-than-average underwritbillion in first-quarter 2014 to a record- ing profitability offset weakness in investhigh $662.0 billion, leaving no doubt that ment income, with insurers’ 8.4 percent insurers are strong, well-capitalized, and annualized overall rate of return for firstwell-prepared to pay future claims. quarter 2014 equaling the average rate of Policyholders can rely on insurers to fulfill return since the beginning of 1986. But their obligations and help finance econom- with premium growth slowing and loss

“The experts are predicting the hurricane season this year will be relatively calm, but it only takes one powerful storm to disrupt millions of lives and cause tens of billions of dollars in damage…”

[ E B B AND FLOW ] adjustment expenses surging upward in first-quarter 2014, there is some risk that net gains on underwriting will slip further as the year progresses. Further slippage in underwriting results could lead to downward pressure on insurers’ overall profitability, as current investment yields make offsetting increases in investment income rather unlikely. In fact, insurers’ net investment income - primarily interest on bonds and dividends from stocks - peaked at $15.4 billion in fourth-quarter 2007 but totaled just $11.2 billion in first-quarter 2014 as a result of low investment yields brought about by the Great Recession, the financial crisis, and residual weakness in the economy.” The property/casualty industry’s 8.4 percent annualized rate of return for firstquarter 2014 was the net result of doubledigit rates of return for mortgage and financial guaranty (M&FG) insurers and single-digit rates of return for other insurers. ISO estimates that M&FG insurers’ annualized rate of return on average surplus improved to 16.5 percent for firstquarter 2014 from 8.3 percent for firstquarter 2013. Excluding M&FG insurers, the industry’s annualized rate of return fell to 8.2 percent in first-quarter 2014 from 9.6 percent in first-quarter 2013.

Underwriting Results Underwriting gains (or losses) equal earned premiums minus LLAE, other underwriting expenses, and dividends to policyholders. Though premiums rose in first-quarter 2014, net gains on underwriting fell to $2.2 billion during the period from $4.5 billion in first-quarter 2013 as LLAE surged upward. Net written premiums climbed $4.2 billion, or 3.6 percent, to $121.4 billion in first-quarter 2014 from $117.2 billion in first-quarter 2013. At 3.6 percent, quarterly net written premium growth had slowed from 4.3 percent in first-quarter 2013 to its slowest pace since first-quarter 2012, when written premiums rose 3.0 percent. Similarly, net earned premiums grew $4.9 billion to $117.9 billion in first-quarter 2014 from $113.0 billion in first-quarter 2013, with growth in net earned premiums receding to 4.3 percent in first-quarter 2014 from 4.6 percent in first-quarter 2013. Outpacing the growth in premiums, LLAE rose $6.4 billion, or 8.6 percent, to

$80.8 billion in first-quarter 2014 from $74.4 billion in first-quarter 2013. The 8.6 percent increase in LLAE in first-quarter 2014 contrasts with a 1.5 percent decline in first-quarter 2013. Other underwriting expenses increased $0.7 billion, or 2.0 percent, to $34.2 billion in first-quarter 2014 from $33.5 billion in first-quarter 2013 as dividends to policyholders grew $0.1 billion to $0.7 billion from $0.6 billion. Increases in both catastrophe and noncatastrophe losses contributed to the upward surge in overall LLAE. ISO estimates that private U.S. insurers’ net LLAE from catastrophes increased to $3.2 billion for first-quarter 2014 from $2.5 billion a year ago. Other net LLAE rose $5.7 billion, or 8.0 percent, to $77.6 billion in firstquarter 2014 from $71.9 billion in firstquarter 2013. Private U.S. insurers’ net LLAE from catastrophe includes their losses from all catastrophes, whether they struck the United States or elsewhere around the globe. Net LLAE from catastrophes also includes revisions to LLAE from catastrophes that occurred during prior periods but excludes LLAE covered by the federal flood insurance program, residual market insurers, and foreign insurers and reinsurers. U.S. insurers’ $3.2 billion in net LLAE from catastrophes in first-quarter 2014 is primarily attributable to catastrophes that struck the United States. Though estimating U.S. insurers’ LLAE from catastrophes elsewhere around the globe is difficult, the available information suggests that U.S. insurers’ net LLAE from catastrophes elsewhere around the globe was immaterial in both first-quarter 2014 and first-quarter 2013. Direct insured property losses from catastrophes striking the United States totaled $3.0 billion in first-quarter 2014, up $0.2 billion from $2.8 billion in firstquarter 2013 and $0.4 billion above the $2.6 billion first-quarter average for the past ten years, according to ISO’s Property Claim Services® (PCS®) based on the information available through July 2, 2014. Direct catastrophe losses are before reinsurance recoveries and exclude loss adjustment expenses. These figures include losses covered by residual market insurers, foreign insurers, and reinsurers but exclude ocean marine losses and losses covered by

the National Flood Insurance Program. Reflecting the imbalance between growth in premiums and growth in LLAE and the other costs of providing insurance, the combined ratio deteriorated by 2.3 percentage points to 97.3 percent in first-quarter 2014 from 94.9 percent in first-quarter 2013. “The increase in net LLAE more than accounts for the deterioration in underwriting results in first-quarter 2014,” said Gordon. “If LLAE had been flat instead of increasing 8.6 percent, the combined ratio would have improved 3.1 percentage points to 91.8 percent instead of rising 2.3 percentage points to 97.3 percent.” Underwriting results would have deteriorated more in first-quarter 2014 if not for $5.5 billion in favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years. The $5.5 billion of favorable reserve development in first-quarter 2014 follows $5.6 billion of favorable development in first-quarter 2013. The $5.5 billion of favorable reserve development for the industry overall in first-quarter 2014 reflects $0.2 billion of favorable reserve development for M&FG insurers and $5.3 billion of favorable reserve development for other insurers. M&FG insurers’ $0.2 billion of favorable reserve development in first-quarter 2014 is $0.1 billion less than their $0.3 billion of favorable reserve development in first-quarter 2013. The amount of favorable reserve development for the industry excluding M&FG insurers remained essentially unchanged at $5.3 billion. Excluding development of LLAE reserves, total industry net LLAE grew $6.3 billion, or 7.8 percent, to $86.3 billion in first-quarter 2014 from $80.0 billion in first-quarter 2013, and the combined ratio rose by 2.0 percentage points to 101.9 percent from 99.9 percent. The $2.2 billion in net gains on underwriting in first-quarter 2014 amounted to 1.9 percent of the $117.9 billion in net premiums earned during the period, whereas the $4.5 billion in net gains on underwriting in first-quarter 2013 amounted to 4.0 percent of the $113.0 billion in net premicontinued on page 26

INSURANCE ADVOCATE / July 21, 2014 25

[ EBB AND FLOW ] continued from page 25

ums earned during that period. “Mortgage and financial guaranty insurers’ superior underwriting results contributed to their superior overall rate of return,” said Murray. “Mortgage and financial guaranty insurers’ combined ratio dropped 13.2 percentage points to 81.5 percent for first-quarter 2014 from 94.7 percent for first-quarter 2013, and their combined ratio for first-quarter 2014 was 15.9 percentage points better than the 97.4 percent combined ratio for the industry excluding mortgage and financial guaranty insurers. Reflecting the difference in combined ratios, M&FG insurers’ 16.5 percent annualized overall rate of return for firstquarter 2014 was more than twice the 8.2 percent annualized rate of return for the industry excluding M&FG insurers.” M&FG insurers’ net written premiums fell 15.2 percent to $1.0 billion for firstquarter 2014 from $1.2 billion for firstquarter 2013, and their net earned premiums fell 18.6 percent to $1.2 billion from $1.4 billion. M&FG insurers’ net LLAE fell even more sharply, declining 42.0 percent to $0.5 billion from $0.9 billion last year. M&FG insurers’ underwriting expenses were unchanged at $0.4 billion for both first-quarter 2014 and first-quarter 2013. Excluding M&FG insurers, industry net written premiums rose 3.8 percent in first-quarter 2014 to $120.4 billion, net earned premiums increased 4.6 percent to $116.7 billion, LLAE grew 9.2 percent to $80.3 billion, other underwriting expenses increased 2.0 percent to $33.8 billion, and dividends to policyholders increased 21.2 percent to $0.7 billion. As a result, the combined ratio for the industry excluding M&FG insurers climbed to 97.4 percent for first-quarter 2014 from 94.9 percent for first-quarter 2013. “Reflecting changes in the economy and developments in insurance markets, overall net written premium growth slowed to 3.6 percent in first-quarter 2014 from 4.3 percent in first-quarter 2013, with premium growth for commercial lines insurers being particularly weak,” said Gordon. “Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines slid 0.8 percentage points to 2.0 percent in first-quarter 2014 26 July 21, 2014 / INSURANCE ADVOCATE

as premium growth for insurers writing more balanced books of business slipped 0.7 percentage points to 3.4 percent. In contrast, premium growth for insurers writing mostly personal lines receded just 0.1 percentage point to 5.4 percent in firstquarter 2014.” “Reflecting the slowdown in premium growth and the upward surge in LLAE, underwriting profitability deteriorated for all major sectors of the industry,” said Murray. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio rose 4.1 percentage points in first-quarter 2014 to 95.5 percent as balanced insurers’ combined ratio increased 0.6 percentage points to 98.2 percent and personal lines insurers’ combined ratio climbed 2.3 percentage points to 98.5 percent.”

Investment Results Insurers’ net investment income - primarily dividends from stocks and interest on bonds - fell 2.0 percent to $11.2 billion in first-quarter 2014 from $11.4 billion in first-quarter 2013. But insurers’ realized capital gains on investments rose $1.5 billion to $2.9 billion in first-quarter 2014 from $1.4 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains grew $1.3 billion, or 10.3 percent, to $14.1 billion for first-quarter 2014 from $12.8 billion for first-quarter 2013. Insurers’ $2.9 billion in realized capital gains in first-quarter 2014 was the net result of $0.3 billion in realized losses on impaired investments and $3.2 billion in realized gains on other investments, with realized losses on impaired investments falling $0.1 billion to $0.3 billion in firstquarter 2014 from $0.4 billion in firstquarter 2013. “The decline in insurers’ investment income reflects low market yields, with the annualized yield on insurers’ investments dropping to 3.1 percent in first-quarter 2014 from 3.3 percent in first-quarter 2013. Insurers’ average holdings of cash and invested assets - the assets on which insurers earn investment income - actually rose 6.0 percent in first-quarter 2014 compared with their average holdings a year earlier,” said Gordon. “Long-term annual data show that insurers’ investment yield last fell as low as 3.1 percent in 1965. From

1960 to 2013, insurers’ investment yield averaged 5.1 percent but ranged from as low as 2.8 percent in 1961 to as high as 8.2 percent in 1984 and 1985.” Combining the $2.9 billion in realized capital gains in first-quarter 2014 with $1.3 billion in unrealized capital gains during the same period, insurers posted $4.2 billion in overall capital gains for first-quarter 2014 - down $10.3 billion from the $14.5 billion in overall capital gains for firstquarter 2013. Since the start of ISO’s quarterly data in 1986, insurers’ total capital gains have averaged $2.6 billion per quarter but have ranged from as high as $26.8 billion in fourth-quarter 1998 to as low as negative $31.9 billion in fourth-quarter 2008 during the financial crisis. “The decline in insurers’ overall capital gains on investments from $14.5 billion in first-quarter 2013 to $4.2 billion in firstquarter 2014 reflects developments in financial markets,” said Murray. “The S&P 500 rose 10.0 percent in first-quarter 2013 but just 1.3 percent in first-quarter 2014. Similarly, the NASDAQ Composite increased 8.2 percent in first-quarter 2013 but just 0.5 percent in first-quarter 2014.”

Pretax Operating Income Pretax operating income - the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income - declined $2.1 billion to $13.7 billion for first-quarter 2014 from $15.8 billion for first-quarter 2013. The $2.1 billion decrease in operating income reflects the $2.3 billion decrease in net gains on underwriting and the $0.2 billion decline in net investment income, with those developments partially offset by the $0.4 billion increase in miscellaneous other income. “The $2.1 billion first-quarter 2014 decline in operating income was the first since fourth-quarter 2012, when operating income tumbled $8.1 billion largely as a result of Superstorm Sandy,” said Gordon. “But the first-quarter 2014 decline in operating income wasn’t driven by a spike in catastrophe losses. Rather, it was largely driven by the $5.7 billion increase in noncatastrophe LLAE.” M&FG insurers’ operating income increased to $0.7 billion in first-quarter 2014 from $0.3 billion in first-quarter 2013. Excluding M&FG insurers, the

[ E B B AND FLOW ] insurance industry’s operating income dropped $2.5 billion to $12.9 billion for first-quarter 2014 from $15.5 billion for first-quarter 2013.

Net Income after Taxes Combining operating income, realized capital gains (losses), and federal and foreign income taxes, the insurance industry’s net income after taxes decreased $0.6 billion to $13.8 billion for first-quarter 2014 from $14.3 billion for first-quarter 2013. The decline in net income was the net result of the $2.1 billion decrease in operating income and the $1.5 billion increase in realized capital gains. M&FG insurers’ net income after taxes rose to $0.7 billion in first-quarter 2014 from $0.3 billion in first-quarter 2013. Excluding M&FG insurers, the insurance industry’s net income after taxes fell $1.0 billion to $13.1 billion in first-quarter 2014 from $14.1 billion in first-quarter 2013.

Policyholders’ Surplus Policyholders’ surplus climbed $8.7 billion to a record-high $662.0 billion as of

March 31, 2014 from $653.3 billion at yearend 2013. Additions to surplus in firstquarter 2014 included insurers’ $13.8 billion in net income after taxes, $1.3 billion in unrealized capital gains on investments (not included in net income), and $1.8 billion in new funds paid in. Those additions were partially offset by $7.4 billion in dividends to shareholders and $0.7 billion in miscellaneous charges against surplus. • Unrealized capital gains on investments fell $11.8 billion to $1.3 billion in first-quarter 2014 from $13.1 billion in first-quarter 2013. • New funds paid in grew to $1.8 billion in first-quarter 2014 from $1.4 billion in first-quarter 2013. • Dividends to shareholders grew $2.5 billion, or 50.3 percent, to $7.4 billion in first-quarter 2014 from $5.0 billion in first-quarter 2013. • Miscellaneous charges against surplus fell to $0.7 billion in first-quarter 2014 from $1.2 billion in first-quarter 2013. M&FG insurers’ surplus rose to $16.1 billion as of March 31, 2014, from $15.7

billion at year-end 2013. Excluding M&FG insurers, industry surplus rose $8.2 billion to $645.9 billion as of March 31 this year from $637.7 billion as of December 31, 2013. “Using 12-month trailing premiums, the premium-to-surplus ratio dropped to 0.73 as of March 31, 2014 from 0.76 as of March 31, 2013. And the ratio of loss and loss adjustment expense reserves to surplus fell to 0.87 as of March 31 this year from 0.95 a year earlier,” said Murray. “To the extent that these leverage ratios shed light on the amount of risk supported by each dollar of surplus, insurers are extremely well capitalized at this point and have ample capacity to meet increasing demand for coverage as the economy grows. The 0.73 premium-to-surplus ratio as of March 31 is only about half of the 1.45 average premium-to-surplus ratio based on annual data for the 55 years from 1959 to 2013. Similarly, the 0.87 LLAE-reserves-to-surplus ratio as of the end of first-quarter 2014 is far below the 1.39 average for the 55 years ending 2013.” [IA]

OPERATING RESULTS FOR 2014 AND 2013 ($ Millions) FIRST QUARTER 2014 2013 Net Written Premiums ..............................................121,421 . . . . . . . . . . 117,201 Percent Change (%)............................................3.6 . . . . . . . . . . . . . . 4.3 Net Earned Premiums .............................................117,880 . . . . . . . . . . 112,971 Percent Change (%)............................................4.3 . . . . . . . . . . . . . . 4.6 Incurred Losses & Loss Adjustment Expenses........80,789 . . . . . . . . . . . 74,376 Percent Change (%)............................................8.6 . . . . . . . . . . . . . . (1.5) Statutory Underwriting Gains (Losses) ....................2,908 . . . . . . . . . . . . 5,076 Policyholders' Dividends .........................................673 . . . . . . . . . . . . . . 555 Net Underwriting Gains (Losses) ............................2,235 . . . . . . . . . . . . 4,521 Pretax Operating Income ........................................13,654 . . . . . . . . . . . 15,794 Net Investment Income Earned ...............................11,180 . . . . . . . . . . . 11,413 Net Realized Capital Gains (Losses) ......................2,933 . . . . . . . . . . . . 1,387 Net Investment Gains ..............................................14,113 . . . . . . . . . . . 12,800 Net Income (Loss) After Taxes ................................13,754 . . . . . . . . . . . 14,327 Percent Change (%)............................................(4.0) . . . . . . . . . . . . . 38.7 Surplus (Consolidated) ............................................662,013 . . . . . . . . . . 609,805 Loss & Loss Adjustment Expense Reserves ...........574,648 . . . . . . . . . . 576,475 Combined Ratio, Post-Dividends (%) ......................97.3 . . . . . . . . . . . . . 94.9 INSURANCE ADVOCATE / July 21, 2014 27

[ ON THE LEVEL ]

By N. Stephen Ruchman, CPA

Being 007 Ain’t What It’s Cracked Up to Be

love a good spy story—Espionage, conspiracy, international trade and government drama … it’s all so exciting! But, in real life the most dangerous versions of these can seem mundane on the surface. Perhaps that’s why agents—insurance agents, not secret agents—have been so slow to do for themselves what they should

…This stuff sounds like it comes directly out of an Ian Fleming novel! But it’s not, and it’s beyond me why any agent, who assesses and covers risks for a living would not make sure his or her own business isn’t protected adequately. The cost of a cyber breach to your business could be extreme. As insurance agents, we are trust-

I’ve been talking with fellow agents about covering cyber liability, and while they extol the importance of it, and even decry the difficulty of convincing their own clients of its necessity, many agents have a reckless attitude about their own business’ need for protection. N. Stephen Ruchman

also be recommending to clients when it comes to cyber coverage. I’ve been talking with fellow agents about covering cyber liability, and while they extol the importance of it, and even decry the difficulty of convincing their own clients of its necessity, many agents have a reckless attitude about their own business’ need for protection. Even this week, when U.S. security officials announced the indictment of Chinese military officials on hacking charges, warning our domestic corporations that these hackers have made no reduction in efforts to break into U.S. networks, many businesses—insurance agencies included—blindly (or worse, willingly) disregard repeated warnings that they are in danger’s way. Though China and other countries officially deny any such activity, the U.S. Justice Department continues to charge that hacking attempts are increasing, evidenced by the announcement earlier in the spring that Chinese military hacked the systems of U.S. companies to steal trade secrets. Asked whether attempts to hack into U.S. networks that originate in China had slowed, Reuters reported one U.S. official has said: “They have been very active and this hasn’t changed a bit.” 28 July 21, 2014 / INSURANCE ADVOCATE

ed with storing private client data such as driver’s licenses, birthdates, addresses, credit history and more. The bottom line is, we are responsible for protecting our clients’ data, and we are liable if it is compromised. Are you prepared to comply with complex breach notice laws? Can you bring your system back into operation securely and defend your business in a network security lawsuit? In today’s technology-driven world, the risks associated with doing business online and storing sensitive customer data electronically have never been greater. Cyber risk is increasing and data breaches now affect hundreds of millions of records a year. The threat to agencies as they handle their clients’ information is only going to increase and it doesn’t matter how big or small your business is; you are at risk. How can we rightfully tell our clients they need this coverage if we don’t get if for ourselves? The most perplexing part about this is that I know protection for agencies exists. PIA offers cyber liability coverage for insurance agencies, which includes breach-ofprivacy coverage; covers damages resulting from alleged violations of HIPPA, state, federal and foreign privacy protection rules; customer breach notice expense and coverage, and more.

I hate to harp on it but I find this a big liability; perhaps the biggest that we have out there. Eventually, this coverage will become more popular. Unfortunately, it will come at the cost of an agency that suffers a horror story. When that happens, everyone will jump on board. Imagine being the one agent who doesn’t have cyber coverage only to become the cautionary tale that motivates all others to protect themselves... In the meantime, you don’t want to be that one agent – it’s not what it’s cracked up to be.[IA] N. Stephen Ruchman, CPIA, is a retired partner of B&B Coverage LLC, and founder of Ruchman Associates Inc., the agency he started in 1961. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and has sat on, or chaired, nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. A graduate of Michigan State University, with a major in insurance, Ruchman is past president of the Peninsula Counseling Center and a member and past president of the Rockville Centre Chamber of Commerce board of directors. He is division chair for the Insurance Division of the United Jewish Appeal and has served on the business advisory board of The First National Bank of Long Island. He can be reached via email at nsruchman@gmail.com.

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INSURANCE ADVOCATE / July 21, 2014 29

[ FACE TO FAC E ]

By Michael Loguercio

7-11-2014 Back to the Future

o for the past twenty something years, I have been traveling across the country for business, visiting forty three out of fifty states. I have stood right next to hot, flowing lava; been in a hurricane in New Orleans; witnessed firsthand earthquakes in Seattle and Los

the wall in their reception area. The agent would take us through the entire week’s vacation, planning the resort, transfers, excursions, and air travel. Some agents would even personally deliver your airline and cruise tickets to your home, once they arrived via snail mail to the agent’s office.

…business travel has taken a huge turn the past few years, due to the cost of travel skyrocketing, along with enhancements in technology that have made a good portion of business travel obsolete and not necessary.

Michael Loguercio

Angeles; survived 115 degree heat in the jungle of Mexico, and 30 below zero in northern Wisconsin. I have even run from a tornado in tornado alley…all this “while on the job”! However, business travel has taken a huge turn the past few years, due to the cost of travel skyrocketing, along with enhancements in technology that have made a good portion of business travel obsolete and not necessary. Programs like GoToMeeting, GoToMyPC, and other desktop and file sharing programs have all been major contributors to this change in the way we do business. Folks can make presentations from the comfort of their office or home directly to others around the globe, all at “real-time” speed, and without the lag time delays that were so prevalent when these programs were first released to the business market. Conversely, leisure travel has increased exponentially, as more and more people want those weekend getaways and extended vacations, whether it is to the islands, a Disney theme park, or just a trip to Vegas. In planning these trips, gone are the travel agents as we may remember them from years past, where an agent would sit down with us and plan the entire trip, all from a color brochure that they had in a rack on 30 July 21, 2014 / INSURANCE ADVOCATE

I don’t even remember the last time I used a paper ticket to exchange for a boarding pass on any airline, but this just goes to show you how times have changed. Now, airlines download the barcode to your phone, and all you have to do is show the barcode which the gate agent can scan when you board. Even TSA is getting into the fun, as many airports now have scanners at the first checkpoint on the security line before going through the body scanners and metal detectors. To make leisure travel even more exciting, and less burdensome and much more pleasantly arranged, some companies have implemented new technology that makes our booking experience an enjoyable event…and helps to build the excitement even more for our vacation. Thanks to Ron Berg, Executive Director of ACT/AUGIE, I am pleased to bring you a piece written by Daniel Burrus, CEO of Burrus Research. In this piece, Daniel talks about some new ways to plan a leisure trip, that will certainly change the way we plan a vacation. Take a look: How Technology Will Impact the Future of Travel In the next ﬁve to ten years, technology will give us many new ways to enjoy travel—from the planning phase to the actual

trip. In fact, tomorrow’s travel will look nothing like it does today, and the travel adventures anyone can go on will be limited only by our imagination. Here’s a look at what you can expect: • Semantic voice search technologies will revolutionize how people discover, discuss, and plan their travel. Semantic voice search is already working fairly well with Apple’s Siri and Google’s voice search tools, and they will be much better in the near future thanks to the advances of the Three Digital Accelerators of processing power, digital storage, and digital bandwidth. Within the next five years most of our searching will be with voice to what I have called an ultra-intelligent electronic agent (an audio and/or visual version of Siri and the others). • Ultra-intelligent electronic agents will also be your travel buddy. Think of this electronic travel buddy as your virtual concierge, trouble shooter, and travel guide. If you don’t have your own ultra-intelligent electronic agent, you will be able to rent one as part of your travel package via the travel agent or company you’re booking with. These travel buddies will help you with everything from securing movie, show, or park tickets at your destination to making restaurant reservations to hailing taxis to helping you if you get lost. You’ll never again travel alone. • Virtual reality technologies will allow you to experience (see, hear, and even smell) your chosen destination months before you arrive. Within the next five years you will be using virtual reality technology to have 3D experiences of your favorite destinations as if you were there. But this won’t reduce the need for travel; if anything, it’ll make people want to experience the real thing. It will be a form of what is called “show-rooming” in retail outlets today—a way to find what you want and then plan a trip there knowing exactly what you will want to see and do. • Airports will become an enjoyable part continued on page 32

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[ FAC E TO FAC E ] continued from page 30

of the travel experience thanks to the use of biometrics, such as fingerprint reading and face recognition, to keep people moving and reduce the long lines. For example, you can already use your fingerprints as a pass to get through international security when you arrive back in the U.S., so in the future there is no reason why you could not do the same for boarding a plane once you’re checked in. This will be an option that will save time and many will opt into this type of program. • Social Travel with a social mobile media element will happen in a formal way within the next five years. We currently have web sites that are like community marketplaces for people to list, discover, and book unique accommodations around the world. Technological advances will make this sort of peer-to-peer booking more seamless and user-friendly. • Space tourism will take off … literally. Currently, you can book a space flight for about $250,000 USD, but you only get a few minutes in Low Earth Orbit space before you come back down. To go up and stay for a while and enjoy it will take some time—most likely closer to the ten year mark. But if you want to go there for a few minutes to see the Earth and experience weightlessness (and have bragging rights), that will happen on a mass scale very soon. • Augmented adventure will become popular thanks to the use of Google Glass-style wearable technology to detect virtual reality and data apps embedded in the landscape, adding a new layer to a hike in the hills, and making getting lost a thing of the past. • Finally, we’ll see a future of man-made travel environments, from Qatar’s Desert Park to conceptual architects such as Jean-Marie Massaud suggesting a new generation of slow travel luxury airships and dBox’s zeroimpact floating islands. Disneyland was the first to do this on a large-scale decades ago. We will see even more impressive examples happen around the world using many new and powerful tools. 32 July 21, 2014 / INSURANCE ADVOCATE

We currently have web sites that are like community marketplaces for people to list, discover, and book unique accommodations around the world. Technological advances will make this sort of peer-to-peer booking more seamless and userfriendly.

Travel will certainly transform over the next few years. What changes are you already seeing? What are you most looking forward to? Please share with me some of your experiences, both pleasant and unpleasant, along with some of your travel pet peeves regarding both business and leisure travel, as I am working on an upcoming article that will address travel tips for both the business traveler and vacationer. So all is quiet on the insurance convention front, as summer here in the Northeast is in full swing! Next we will be talking about some summer networking events from organizations such as the PIA, IIAA, and CIBGNY. So until we chat again next month, have a safe and happy summer…Ciao for now![IA] Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as a licensed insurance broker and an insurance technology professional. He is an active Past President of the Young Insurance Professionals of New York State, current ACT/AUGIE, Professional Insurance Agents of New York State, Independent Insurance Agents and Brokers of New York State, and Council of Insurance Brokers of Greater New York committee member. NY-YIP/PIA has honored Michael with a “Distinguished Service” award in 2001; “Insurance Professional of The Year” award in 2009; “Lifetime Achievement” award in 2012; and

“Special Service” awards in 2013 and 2014. In his community, Michael is the Immediate Past President and current member of the Longwood Central School District Board of Education on Long Island, NY since 2004; is a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of The Middle Island, NY, Rotary Club; Central Brookhaven Lion’s Club; and Ridge, NY, Volunteer Fire Department. He also served two terms on his Church’s vestry, and in 2013 he was awarded the SCOPE “Community Service” award for his dedication to the public. Michael is a regular Contributor to the Insurance Advocate since 2008, and may be contacted at 631-345-9359 or michael.loguercio@ezlynx.com.You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr.

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[ GUEST OPINION ]

By Elizabeth Lee Vliet, M.D.

VA Scandal—a Battlefield of Deceit, Delays and Death for Veterans The VA has many truly dedicated doc- doctors and nurses, and a shortage of spetors, nurses, and health professionals who cialists. Overall, however, veterans were do their best to genuinely serve America’s treated with compassion, concern, and veterans. I salute their conscientious work appropriate care. and commitment Now, however, the VA has seemingly under difficult condi- become a Machiavellian extension of the tions, often in a culture very battlefields veterans thought they were of fear and intimida- leaving when they came home. Today’s tion if they identify whistleblowers describe a degree of callousproblems. ness, deceit, greed, nest-feathering, denial News headlines of proper care, and outright malevolence at since the Phoenix scan- multiple VA hospitals that is orders of magdal first broke in late nitude worse than anything I ever saw in April, however, clearly the VA years ago. show a dark underbelly Across the U.S., the Code of Corruption in the VA that is the means that administrators set up secret Elizabeth Lee Vliet, M.D. antithesis of dedication waiting lists to hide outrageously long wait to patients. It speaks of a “Code of times. The falsified wait times improved Corruption,” not the Military’s Code of their “outcomes” to qualify for financial Honor that America’s veterans have upheld. bonuses. Corrupt, self-interested actions are The U.S. military has an admirable code common in government-run systems that of ethics: duty, honor, and sacrifice. Their have no accountability and little oversight. Code is to protect the vulnerable, shield Good employees who want to speak out are civilians when possible, watch their fellow threatened with job loss and career damage. soldier’s back, and leave no one behind in Not everyone has been silenced by the combat. Our soldiers, holding themselves to intimidation. Courageous whistleblowers these standards, trusted that the country continue to come forward with more disthey served would also honor its commit- turbing data almost daily. They provide a ment to them for medical care when needed. portent of what is to come for all Americans Now we see VA bureaucrats, adminis- under the government-run Obamacare, trators, and politicians whose only “Code” when its full impact hits after 2016 elections. seems to be the opposite of the military Here are some recent examples: ethos: lie, cover up, cheat to protect my • In Phoenix, 40 veterans died while income at all costs, even if veterans die while waiting to see a doctor, 1700 were conI cook the books. firmed to be on a secret waiting list, Recent headlines tell the story eloquently: and others’ average wait times were • “VA Internal Audit: Wait-list Fraud almost 4 months. Yet the hospital Found at 64% of VA Facilities” administrator was paid a $9,000 bonus • “VA Denies Coverage for US Air Force for her “quality outcomes.” Veteran with Malignant Brain Tumor” • Falsified records about wait times have • “VA IG report confirms: 1,700 vets been reported so far in Ft. Collins, seeking care weren’t on official wait Wyoming, San Antonio, Austin, list at Phoenix VA, wait times for othAlbuquerque, and Chicago. ers averaged 115 days” • Pittsburgh VA employees have been • Do Not “...send out any more non-VA accused of covering up veterans’ deaths care GI requests for endoscopy until from contaminated water supplies. further notice” • Los Angeles kept more than 60 veter• “Deaths at Phoenix VA Hospital May ans’ bodies in a morgue for over a year Be Tied to Delayed Care” without proper burial. When I worked in a VA early in my • Currently, it takes veterans about 160 career, there were problems with wait times, days to access health benefits once busy emergency departments, overloaded back in the U.S. There is a backlog of 34 July 21, 2014 / INSURANCE ADVOCATE

close to 350,000 benefits claims to be processed. • According to the Cato Institute, appeals of VA decisions have an average wait time of 1,598 days—that is 53 months, or 4.4 years! This is the same “death by bureaucracy” that we have seen in Canada and England under medical systems controlled by government agents rather than medical professionals answering to the needs of patients. Will YOUR life be next when we move into “the-VA-for-all” of Obamacare? As a Nation, we must restore our Moral Compass that values individual life as God’s gift, not the Government’s.[IA] Elizabeth Lee Vliet, M.D. is a 2014 Ellis Island Medal of Honor recipient, and the 2007 recipient of the Voice of Women award from the Arizona Foundation for Women for her pioneering advocacy for the overlooked hormone connections in women’s health. Dr. Vliet is a preventive and climacteric medicine specialist with medical practices in Tucson AZ and Dallas TX that take an integrated approach to evaluation and treatment of women and men with complex medical and hormonal problems. Dr. Vliet is also CEO of International Health Strategies, SpA, a global medical consulting company based in Santiago, Chile whose mission is medical freedom and privacy while preserving the Oath of Hippocrates focus on individual patients. Dr. Vliet is a past Director of the Association of American Physicians and Surgeons (AAPS). She received her M.D. degree and internship in Internal Medicine at Eastern Virginia Medical School, and completed specialty training at Johns Hopkins Hospital. She earned her B.S. and Master’s degrees from the College of William and Mary in Virginia. Dr. Vliet has appeared on FOX NEWS and many nationally syndicated radio shows addressing the economic and medical impact of the 2010 healthcare law. DISCLAIMER: Dr. Vliet speaks as an independent physician, not as an official spokesperson for any organization or political party. Dr. Vliet has no financial ties to any health care system or health insurance plan. Her allegiance and advocacy is to and for patients.

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[ ON THE LEVEL ]

By Jamie Deapo

How is Your Relationship?

ot your personal relationship but the relationship your agency has with your clients and prospects. The most important reason to get your insurance protection from an independent agent or broker is the strong, trusting relationship you develop with your agent and the agency staff.

a competitive premium from a company that best fit their needs. I can’t tell you how many people I talk to who tell me they haven’t heard from their agent for several years and many say not since they first bought their coverage. Strong relationships are built on communication and it’s no different when you’re talking about your clients.

Excellent customer service, that helps retain existing clients and bring on new customers, doesn’t happen by accident. It’s a culture built on a foundation of commitment that starts with the owners of an agency and is exhibited by every member of the staff.

Jamie Deapo

What’s it like to be a customer or prospect of your agency? When they call in or visit the agency are they greeted warmly or do they feel like an annoyance that has to be dealt with? Are their phone calls returned in a timely manner or do they have to call back several times to actually speak with the right person or get an answer? Customer retention and agency growth rely on quality customer service. Clients and prospects want an agency that makes it easy for them to handle their insurance needs. They may very well want service when it fits their schedule and you have to work to meet that need. They want service from a knowledgeable and well-trained staff that can give them exceptional advice and handle their needs. As we all know it isn’t always possible to meet every client’s need and when you can’t you should be upfront with them and let them know as soon as possible. When you wrote their protection did you promise to review it regularly and communicate suggestions that would protect them as their lives changed? Those regular communications were meant to make sure they always had the broadest protection at 36 July 21, 2014 / INSURANCE ADVOCATE

When a client has a claim do you stay on top of the claims handling? Even if you choose to have the client report the claim direct to the carrier you should note it in your system. That should trigger a letter letting them know you are sorry they have experienced a loss and are available should they feel there are issues with the handling of their claim. A quick follow-up communication in an appropriate amount of time checking with the client to make sure they are satisfied with the progress of the claim is important. Remember, if the client wanted to handle the claim themselves, without any help or follow-up, they would have purchased their protection directly from the insurance company. Is your staff overwhelmed with work or lacking training that would allow them to provide the service a client or prospect is looking to receive? Agency staff with more work than they can handle or who don’t have the knowledge base to handle a customer’s need are frustrated and that frustration is manifested in poor customer service. These agency shortcomings need to be immediately addressed and corrected or they will grow into a culture of frustration and poor service.

Is part of your agency growth based on client referrals? Have referrals been steady, are they growing or do you notice them dropping off ? Reduced referrals could indicate an issue with service. What about your retention? Is it steady, growing or declining? Don’t be so quick to blame it on a lack of competitiveness. It may very well be an indicator of declining customer service. Many agencies reach out to customers that are leaving the agency to determine the real reason and to make sure it is not because of something related to the agency’s service or staff. Don’t wait until a client has left to find out how your agency’s service has been. It’s a good practice to routinely reach out to clients and ask how they would rate the agency’s service in several areas. You can do this as a general inquiry, possibly at the halfway point of their coverage so you can make corrections before they renew. You can also consider doing it as a follow-up to some service recently done by the agency. Do you offer your clients and prospects useful information that will help them to better protect themselves against financial loss? An Agency can use its website, blog and social media to provide clients and prospects with this information. This relatively easy, value added service will further solidify your relationship by keeping clients informed as well as showing the agency’s breadth of knowledge and professionalism. Excellent customer service, that helps retain existing clients and bring on new customers, doesn’t happen by accident. It’s a culture built on a foundation of commitment that starts with the owners of an agency and is exhibited by every member of the staff. They never make promises of service they don’t intend to keep and they regularly check the satisfaction of their clients. Customer satisfaction doesn’t occur by accident: it’s created by hard work and commitment.[IA]

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From: Physicians’ Reciprocal Insurers Re:

Placing Hospital, Medical Facilities and Physicians Professional Liability

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[ IN THE ASSOCIATIONS ]

IMUA Elects Officers & Board

he Inland Marine Underwriters Association (IMUA) elected a new slate of officers: Michelle Hoehn, The Travelers Group, was inaugurated as IMUA’s new Chairperson replacing Peter Opinante, Swiss Re America, who has served as the Association’s Chairperson for the past four years. Also elected were Deputy Chairperson William Rosa, XL Reinsurance, and L. Pat Stoik, Chubb Group as Vice Chairperson. In her acceptance remarks Ms. Hoehn praised the work of the IMUA and direction the association has taken over the past few years. She said, “I am extremely honored to serve as the Chairperson of such a prestigious organization as the IMUA. But more importantly, I am proud to be a part of this group and thank you, the membership, for this unique opportunity. Over the past four years I have personally witnessed the progress the association has made, serving as your Deputy Chairperson, especially in the area of professional development. As part of my agenda, I not only intend to stay the course, but build upon our successes and create an even stronger entity. We will pursue all avenues as they relate to professional development of those of you who serve this industry and add programs where they make sense an drop those that don’t. Together we can build and even stronger IMUA.” Ms. Hoehn then recognized the “incredible job” Peter Opinante has done to elevate the stature of the association during some tough times. “His dedication to the principles of the IMUA never faltered. He set a course for growth and stuck to it. We thank you for that.” Mr. Opinante served as IMUA’s Chairperson from 2012 to 2014. She then turned to the IMUA staff and recognized their dedication by noting that the past two Annual Meetings had the largest attendance ever. This year’s meeting hosted over 275 registered attendees. Also elected during the IMUA Business Meeting was the Board of the Class of 2014 includes: Tom Brochett – Munich Re America Donald Keahon – Aspen Specialty Michael Miller – Markel Corp. David Higley – The Hartford 38 July 21, 2014 / INSURANCE ADVOCATE

The Class of 2015 includes: • Sheila O’Keeffe – Gen Re • Rich Pye — Zurich • Joseph Rich — Liberty Mutual • Bruce S Jervis – ACE North America Property The Class of 2016 includes: • Diane Shelton – Catlin U.S. • James Cordrey – Hanover Insurance Group • Grace Thomas – Great American • Peter Opinante – Swiss Re America Kevin O’Brien and Lillian Colson - the Association’s President and CEO and Vice President and Secretary, respectively, were also unanimously re-elected at the 84th Annual Meeting. IMUA is the national association for the commercial inland marine insurance industry. IMUA serves as the voice of its member companies representing over 90 percent of all commercial inland marine insurers. The association provides its members with comprehensive training and educational programs, including research papers and bulletins, industry analysis and seminars. IMUA was founded in 1930. [IA]

Westfield Insurance and Westfield Agents Association (WAA). “The Griffith Foundation’s Westfield Scholarship has taken away some of the financial burden while I work my way through school,” said Jennifer Richey, a student at Missouri State University and a 2014 scholarship recipient. “I will have more time dedicated to studying to pass exams rather than to holding multiple jobs to pay for college.” Students from the following institutions were awarded scholarship funds: Appalachian State University Bradley University Butler University Drake University Eastern Kentucky University Illinois State University Kent State University Missouri State University Ohio State University Olivet College Temple University “I congratulate each of the 2014 Spring Scholarship recipients and thank all of those who participated,” said Jason Terrell, The Griffith Foundation’s managing director. “We had a record number of impres-

The Griffith Insurance Education Foundation Announces 2014 Spring Scholarship Winners MALVERN, Pa. — The Griffith Insurance Education Foundation has announced that 21 undergraduate and graduate students from nine states have been selected as recipients of $63,000 in scholarship funds. These biannual scholarships are available to students who are in good academic standing and are committed to pursuing careers in the insurance industry. Through scholarship opportunities, selected students are not only encouraged to take risk management and insurance courses, but they can also receive the financial support they need to complete their degrees. This year, additional scholarship funds were made available to students thanks to the contributions of

sive and inspiring applications submitted by students this year. Such quality is a reflection of not only the students’ capabilities but also the work and dedication of their professors.” The Griffith Insurance Education Foundation is a 501(c)(3) not-for-profit educational organization that promotes the study and teaching of risk management and all lines of insurance through educational programs targeting students and public policymakers. The Griffith Foundation is affiliated with The Institutes, the leader in delivering proven knowledge solutions that drive powerful business results for the risk management and property-casualty insurance industry. For more information, visit www.GriffithFoundation.org. [IA]

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[ ON M Y RADA R ]

By Barry Zalma

Facts Rule: Coverage Pollution Exclusion Effective

nsurers do not want to cover pollution under a basic automobile insurance policy. In their generosity they take on the liability of their insureds if, as a result of a collision or upset of an insured vehicle, some pollution occurs. That does not,

caused by the spill was limited to the $5,000 required by the Massachusetts mandatory endorsement, and otherwise was foreclosed under the pollution exclusion clause in the policy. The insurer issued a check to United for $5,000.

The Massachusetts court of appeal agreed with the motion judge that the polluting accident in this case comes under paragraph (a) of the pollution exclusion, because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination. Barry Zalma

however give coverage for every incident of pollution related to a vehicle. The plaintiffs, Frank Izdebski, doing business as the sole proprietor of United Energy Oil Company (United), and National Equity Properties, Inc. (National), appealed summary judgments entered against them in their consolidated cases seeking a declaration that United’s policy with Hanover Insurance Company (insurer) covered damage from an oil spill. In Izdebski v. Hanover Ins. Group, Inc., Slip Copy, 2014 WL 2973681 (Mass.App.Ct.) the Massachusetts Court of Appeal resolved the dispute.

BACKGROUND Izdebski delivered 1,000 gallons of heating oil from his oil truck to a commercial building owned by National in New Bedford. The oil was transferred from the truck to the oil storage tank by a pump. In the process of the transfer, Izdebski overfilled the oil storage tank, and oil seeped out through a vent pipe from the oil storage tank onto the ground behind the building. At the time of the spill, United’s oil truck was covered under a business auto insurance policy issued by the insurer, Hanover, whose claims adjuster determined that its responsibility for damage 40 July 21, 2014 / INSURANCE ADVOCATE

United filed a complaint seeking a declaratory judgment, alleging that the policy provided liability coverage of one million dollars and that it was entitled to recover for the clean-up of the oil spill and property damage payment to National. National also filed an amended complaint for declaratory judgment and other relief against the insurer. The insurer counterclaimed for declaratory judgment, asserting that any coverage was limited to the $5,000 that had already been paid; the insurer later moved for summary judgment in both cases, arguing that the policy contained an exclusion for pollution damage such as the oil spill and that none of the exceptions to that exclusion applied. The judge allowed the insurer’s motions for summary judgment on the basis of the pollution exclusion clause. The policy’s pollution exclusion clause (paragraph 11) provides that coverage does not extend to any property damage: “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’: “a. That are, or that are contained in any property that is: (1) Being transported or towed by, handled, or handled for movement into, onto or from, the covered ‘auto’; (2) Otherwise in the course of transit by or on

behalf of the ‘insured’; or (3) Being stored, disposed of, treated or processed in or upon the covered ‘auto’; … [or] “c. After the ‘pollutants’ or any property in which the ‘pollutants’ are contained are moved from the covered ‘auto’ to the place where they are finally delivered, disposed of or abandoned by the ‘insured.’”

DISCUSSION Language in an insurance policy must be given its ordinary meaning and construed in the sense that the insured will reasonably understand to be the scope of his coverage. Exclusionary clauses must be strictly construed against the insurer so as not to defeat any intended coverage or diminish the protection purchased by the insured. It is undisputed that United’s truck is the covered “auto” under the policy and that the heating oil is a pollutant. It is also agreed that the spilled oil did not leak from the truck or from the pump attached to the truck while the oil was being transferred into National’s oil storage tank during delivery. The Massachusetts court of appeal agreed with the motion judge that the polluting accident in this case comes under paragraph (a) of the pollution exclusion, because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination. The oil was therefore being “handled for movement … from, the covered “auto.” The plaintiffs’ argument that paragraph (a) does not apply because the oil had reached its final destination—or that the oil that was displaced was the oil already in the tank before Izdebski began to fill it ignores that the expression “arising out of,” both in coverage and exclusionary clauses, must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. The phrase “arising out of ” must be read expansively and has a broad meaning analogous to “but for” causation. Paragraph 11c. of the Pollution Exclusion Paragraph (c) of the pollution exclusion provides that the policy will not cover

[ ON MY RADAR ] “‘property damage’ arising out of the actual … discharge, … release or escape of ‘pollutants’” once they have been “finally delivered.” This paragraph applies because the oil spill occurred after the oil had been moved from the covered auto to the place [National's oil storage tank] where it was finally delivered by United. In fact, the plaintiffs concede that the oil spilled had been finally delivered by the insured to the customer and the release of oil occurred after delivery. They therefore agree that this exclusion may be applicable to the release of pollutants in this case. However, the plaintiffs also argue that the exception to the paragraph (c) exclusion applies here. That exception provides that the exclusion does not apply: “to ‘accidents’ that occur away from premises owned by or rented to an insured with respect to pollutants not in or upon a covered auto if: “(1) The ‘pollutants’ or any property in which the ‘pollutants’ are contained are upset, overturned or damage[d] as a result of the maintenance or use of a covered ‘auto’; and (2) The discharge, dispersal, seepage, migration, release or escape of the ‘pollutants’ is caused directly by such upset, overturn, or damage.’” (Emphases deleted) It follows that a fair reading of the exception is that it is intended to provide coverage for an accidental oil spill in the event that United’s truck, the covered auto, is “upset, overturned or damaged” while away from United’s premises. Here, National’s property damage occurred as a result of oil seeping out of its oil tank vent pipe after the oil, or the “pollutant,” was delivered into National’s storage tank. It was not caused by oil “upset” or “overturned” or even “damaged” by the maintenance or use of United’s delivery truck. It was caused because the tank was overfilled. The plaintiffs’ argument that the oil in National’s storage tank was “upset” by the pumping in of new oil from United’s truck strains the wording and would force the court to rewrite a policy previously agreed to by the insured and Hanover.

CONCLUSION The appellate court ordered the trial court, therefore, to modify its judgment to include a declaration that the business auto insurance policy issued by Hanover to United does not provide coverage to

Insurance policy wording must be interpreted to provide the coverages that the words of the policy indicate was the intent of the parties.

United or National for the property damage claims from the oil spill that occurred from Izdebski’s delivery beyond the $5,000 required by the Massachusetts mandatory endorsement.

ZALMA OPINION Insurance policy wording must be interpreted to provide the coverages that the words of the policy indicate was the intent of the parties. In this case it was clear that Hanover only agreed to insure pollution that resulted from an overturn, collision or other accidental damage to the covered “auto,” the oil tanker, that was the insured auto. Since the facts were agreed that there was no damage to the tanker and the only cause of damage was the fact that Izdebski overfilled the storage tank, the pollution exclusion applied and the exceptions did not. Izdebski was entitled only to the $5,000 mandatory coverage and would have to pay out of his pocket for any costs in excess as a result of negligent acts for which his insurer did not agree to indemnify him.[IA] Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. Mr. Zalma recently published the ebooks, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013 , “Zalma on California Claims

Regulations – 2013 ; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/ Getting-the-Whole-Truth_p_254.html. Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www. stpub.com/insuranceclaims-a-comprehensive-guide-online. Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv or at the bottom of the home page of his website at http://www.zalma.com.

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[ COURTSI DE ]

By Betty Flood and Katlin Nash

When Policy Excludes Someone Who "is" Covered Under Another Policy, "is" also Includes "Was"

t is now legendary that when former President Bill Clinton testified before a grand jury in 1998, he rationalized his repeated statements that "there is nothing going on between us" [himself and Ms. Lewinsky] by telling the jurors, "It depends on what the meaning of the word 'is' is...." He went on to explain that at the time he made the statements, his involvement with Ms. Lewinsky had ended, and the involvement was in the past; and that therefore, if the word "is" meant only the present, and not the past, and therefore did not also mean "was," he was telling the truth when he said it. Recently, a Federal court dealt with the same question — to wit, whether "is" also means "was" — in an insurance context. In Carla A. Caesar v Fireman's Fund Insurance Company (2012 WL 6594379), the U.S. District Court for New Jersey

(William J. Martini, D.J.) considered the following question on a motion for summary judgment: when an insurance policy excludes a person who "is" covered under another policy, does the word "is" also mean a person who "was" covered under another policy until those policy limits were exhausted? On April 12, 1999, Plaintiff Carla Caesar rolled over in her father's SUV. Her insurance company, Esurance, provided Caesar with $15,000 in benefits. Hoping for an additional recovery, Caesar made a claim with her father's insurer, Fireman's Fund Insurance Company. Fireman's denied the claim. Caesar moved for summary judgment declaring her entitlement to Fireman's coverage; Fireman's crossmoved for the opposite declaration. As the named insured on her Esurance policy, Caesar recovered $15,000. She also

tried to recover under her father's policy, but Fireman's denied her claim. Fireman's argued that Caesar was not covered because she fell under the terms of a policy exclusion. That exclusion, Exclusion A.1.c., disclaims personal injury protection (“PIP”) coverage for anyone who “is entitled to New Jersey [PIP] Coverage as a named insured ... under the terms of another policy.” "For present purposes [the Court stated], Caesar makes two arguments in support of her summary judgment motion. First, she argues that Exclusion A.1.c. does not apply to her. The Court disagrees. Second, she argues that Exclusion A.1.c. is invalid under New Jersey law. Even if Caesar were right about this latter point, the Court would not void the Exclusion. Instead, it would dial back the Exclusion to make it conform with New Jersey law.

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[ CLASSIFIEDS ] The dialed-backed Exclusion would still cover Caesar, so Caesar's second argument for summary judgment fails. Caesar is not entitled to benefits from Fireman's. "Caesar falls under the terms of Exclusion A.1.c. With exceptions not relevant here, Exclusion A.1.c. applies where an insured 'is entitled to New Jersey [PIP] Coverage as a named insured ... under the terms of another policy.' At the time of the accident, Caesar was a named insured under her Esurance policy. Therefore, Caesar satisfied the terms of Exclusion A.1.c. She is not entitled to benefits from Fireman's. "Caesar's argument to the contrary focuses on the Exclusion's use of the word 'is'. Exclusion A.1.c. applies if two conditions are met. An individual is excluded from coverage if she is (1) a named insured (2) who 'is entitled to ... [c]overage ... under the terms of another policy.'" "Caesar does not dispute that she is a named insured under her Esurance policy. Instead, she disputes that she 'is' entitled to Esurance coverage. She acknowledges that she was entitled to Esurance coverage at the time of the accident. But she argues that her entitlement to coverage ended once she exhausted her policy. Caesar's argument is creative but incorrect." "Exclusion A.1.c. is almost a word for word copy of N.J.S.A. 39:6A–7(b)(3). Exclusion A.1.c. applies if an insured 'is entitled to New Jersey [PIP] Coverage as a named insured....' Section 7(b)(3) also applies if an insured 'is entitled to [New Jersey PIP] coverage ... as a named insured.' Taking its lead from the Supreme Court of New Jersey's decision in Rutgers Cas. Ins. Co. v. Ohio Cas. Ins. Co., 153 N.J. 205, 208–10, 707 A.2d 1350 (1998), the Court concludes that the word 'is' in Exclusion A.1.c. has the same meaning as the word 'is' in Section 7(b)(3)." "The facts in Rutgers are as follows: Following a series of car accidents, Rutgers honored claims from its named insureds. It then sought contribution from other companies, one of which was the Ohio Casualty Insurance Company. Like Fireman's in this case, Ohio argued that Rutgers' policy holders fell under the terms of an Ohio policy exclusion. That exclusion, referred to as the follow-the-family exclusion, reads as follows:

The insurance under this endorsement does not apply to ... any person ... if that person is entitled to New Jersey [PIP] coverage as a named insured ... under the terms of another policy .... "Rutgers' policy holders fell under the terms of the follow-the-family exclusion because they were named insureds whose Rutgers policies ‘entitled [them] to New Jersey [PIP] coverage.’ Exclusion A.1.c. As Ohio did not owe Rutgers insureds any money, Rutgers was not entitled to contribution. The Supreme Court of New Jersey recognized that this conclusion was 'consistent with and confirmed by' Section 7(b)(3). Ultimately, for purposes of the follow the–family exclusion and Section 7(b)(3), a named insured 'is entitled' to coverage from her insurer even after she recovers from that insurer." "Rutgers controls the outcome of this case. Caesar was a named insured on her Esurance policy at the time of the rollover. Before she recovered from Esurance, she was entitled to Esurance coverage for purposes of Exclusion A.1.c. Having now recovered from Esurance, she still 'is entitled' to Esurance coverage for purposes of Exclusion A.1.c. Caesar's entitlement to Esurance coverage excludes her from Fireman's coverage." "Caesar also argues that Exclusion A.1.c. is invalid because it sweeps more broadly than Section 7(b)(3) allows. Right or wrong, that argument does Caesar no good. If Exclusion A.1.c. was impermissibly broad, the Court would dial it back to conform with Section 7(b)(3)... Section 7(b)(3) excludes from coverage those people who were named insureds at the time of their accident. Because Caesar was a named insured at the time of her accident, she satisfied the terms of the Section 7(b)(3) exclusion." "Ultimately, whether or not Exclusion A.1.c. is valid under New Jersey law, the outcome is the same: Caesar is not entitled to recover from Fireman's. Caesar's second argument for summary judgment fails." "For the foregoing reasons, there is no genuine issue of material fact: Caesar is not covered by her father's policy."[IA]

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[ GUEST OPINION ]

By Marilyn M. Singleton, M.D., J.D.

Emotionitist: a Political Malady

oday’s political debates are extremely polarized and emotional. One person’s charming, clever, and assertive is another’s manipulative, cunning, and ruthless. Consider the opposing perspectives on some of the most important issues: • Did the politician lie or merely misspeak? • Is the NSA perpetrating an obscene invasion of privacy or deploying a crucial tool against terrorism? • Is supporting voter identification laws resurrecting Jim Crow or ensuring legitimate votes are not diluted by fraudMarilyn M. Singleton, MD ulent votes? • Do federal regulations stifle business and entrepreneurship or do they ensure Americans’ safety? • Why is it racist to disagree with the policies of President Obama or Attorney General Holder, but reasonable to disagree with Condoleezza Rice or Clarence Thomas? • Why is interest in the possible longterm effects of Hillary Clinton’s brain concussion intrusive, sexist, and unfair, but delving into Sarah Palin’s medical records to determine if she had actually given birth to her new baby is manifestly valid? (I guess it’s a political crime to be petite.) • Have you cornered the market on compassion if you believe Medicaid provides good health care, or are you a heartless subhuman if you believe Medicaid traps lower income individuals in a two-tiered health system? Marcus Aurelius said, “Everything we see is perspective and not the truth.” In 1880, William James, a Harvard physician, philosopher, and “father of psychology” observed, “As a rule we disbelieve all the facts and theories for which we have no use. A great many people think they are thinking when they are really rearranging their prejudices.” To analyze why we cement our beliefs 46 July 21, 2014 / INSURANCE ADVOCATE

in the face of contrary facts, psychologist Leon Festinger proposed the theory of cognitive dissonance: people seek consistency in their beliefs and perceptions because it is uncomfortable to have inconsistent ideas. For example, you like President Obama, so how can you dislike ObamaCare? One unconscious mechanism we use to ignore facts is “motivated reasoning.” Here, we process information such that the influence of our beliefs outweighs new facts in forming seemingly reasonable conclusions. In other words, our brain’s goal is not accuracy, but defense of beliefs. Adding to the difficulty in changing our minds, we tend toward “confirmation bias,” i.e., listening only to those who confirm our preconceptions. Another psychological tool is post-purchase rationalization. Anyone who purchased a time-share or hot-off-the-shelf Betamax knows what that is. Modern technology confirms Professor James’s observation. An Emory University study analyzing functional magnetic resonance imaging (fMRI) found that the areas in the brain regulating emotion and conflict resolution light up when subjects were questioned about their political beliefs. The part of the brain most associated with reasoning was quiet. Emotionitis and ideological divisiveness should never have been allowed to take over the healthcare reform debate. A good relationship with your doctor is just too important to health and peace of mind. And there are actually large areas of agreement. A mere 19 percent of Americans say that they trust Washington “to do what is right” just about always or most of the time according to Pew Research Center. Yet, while we think the government is made of incompetent self-serving fools, we trusted it with our health care system. Perhaps enough first-hand experience with grossly higher premiums, deductibles, and co-pays and limits on patients’ choice of physicians jolted people into reality. The support for the Affordable Care Act (ACA) is at an all-time low of 26 percent according to the latest Associated Press poll. There is also almost universal agree-

ment that American medicine has serious problems. The right approach would have been to seek dispassionate analysis of the causes instead of leaping into the Affordable Care Act. Our system relies heavily on public and private third party payers and muscles out the one-on-one relationship between patient and doctor. ACA just makes it worse. ACA’s “health insurance” is not medical care—and it isn’t insurance either. Real insurance—unlike ACA and most of pre-ACA coverage also—is affordable because it is designed to financially protect against catastrophes, not routine necessities. Individualized affordable medical care can be achieved through expansion of health savings accounts, direct pay (which cuts out third-party overhead), charity care, and major medical insurance. We need to overcome our emotional attachment to the false promise of security through third-party coverage.[IA] Marilyn M. Singleton, MD, JD is a board-certified anesthesiologist and Association of American Physicians and Surgeons (AAPS) member. Despite being told, “they don’t take Negroes at Stanford”, she graduated from Stanford and earned her MD at UCSF Medical School. Dr. Singleton completed 2 years of Surgery residency at UCSF, then her Anesthesia residency at Harvard’s Beth Israel Hospital. She was an instructor, then Assistant Professor of Anesthesiology and Critical Care Medicine at Johns Hopkins Hospital in Baltimore, Maryland before returning to California for private practice. While still working in the operating room, she attended UC Berkeley Law School, focusing on constitutional law and administrative law. She interned at the National Health Law Project and practiced insurance and health law. She teaches classes in the recognition of elder abuse and constitutional law for non-lawyers. Dr. Singleton recently returned from El Salvador where she conducted makeshift medical clinics in two rural villages.

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