October 13, 2014 by C Acunto

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VOLUME 125, NUMBER 17 / October 13, 2014

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Contents [COVER STORY ] 18

“To Converge or Not to Converge,” That is the Question for Regulators and Legistators Martin F. Carus

[FEATURES] 4

Foreword: Shared Histories Steve Acunto, Publisher

Insight: A Golden Opportunity! Peter H. Bickford

Exposures and Coverages: Short Takes on Sundry Topcis II: The $750 Million Comma; Assualt & Battery Exclusions; A Written Contract Required to be an IA; Theft by Tenant—Is it Covered?; & Certiﬁcates of Insurance Legislation Jerome Trupin, CPCU

On the Level: Morph to Thrive and Not Just Survive Jamie Deapo

In the Associations: Life Insurance Industry Convenes in Cooperstown for Annual Legislative Regulatory Conference

The Social Notebook: Email Marketing Myths That are Killing Your Agency’s Campaigns! Christopher Paradiso

October 13, 2014 | volume 125 number 17

On My Radar: When an SIR Isn’t Barry Zalma

TechBites: Insurance Companies (Even Small Ones) Are Not Immune from Cyber Risk Paul B. Dzielinski

Looking Back: June 1989

Courtside: No Coverage for Damage Caused by Rainwater Entering Building Because of “Faulty Design” Lawrence Rogak

Classiﬁeds

Face to Face: Text in the City Michael Loguercio

Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / October 13, 2014 3

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[ FORE WORD ]

Steve Acunto

Shared Histories It is so gratifying to share common history and opinion. Art Moll was a friend to so many of us and to the industry itself that, when we ran his column in “Looking Back” several letters and e-mails followed with sentiments we all share. We present one of the most thoughtful here below. As always your thoughts and views are welcomed – especially when they are as articulate as those that follow. SA

Re: Looking Back, Aug. 18, 2014 edition Dear Steve, I know so many PIA members were delighted to see the Looking Back retrospective, featuring an article written 25 years ago by the beloved Arthur I. Moll, CPCU, CLU, CIC, past president of PIA of New York and PIA National in the Aug. 18 Insurance Advocate. As the Looking Back section often reveals, many things haven’t changed in our industry. Art was a staunch believer in professional education, as demonstrated by the multiple designations he earned and used with his name. In fact, PIANY long has offered a memorial scholarship of tuition to two CISR seminars in Art’s name at its MetroRAP in January. While Art was against mandated continuing education (and many still agree with his position), he knew that quality education, such as that provided by the CIC and CISR programs through PIA are what differentiate professional agents from those who would acquire mandated CE from cheap, fly-by-night shops that exploit regulations for their own profit. Art would cringe at the cottage industry mandated CE has created for unscrupulous providers that dispense CE without substance. PIA offers valuable education; quality instructors; multiple designation programs and methods to learn that fit diverse schedules. Art’s position is as true today as it was in 1989: “A charlatan will still be a charlatan and a professional will still be a professional.” And, his prediction, “Those who want to learn will and those who don’t won’t,” continues to differentiate professional independent agents. He would encourage all agents to invest in their careers, their businesses and their employees with quality education and to “never stop learning.” MetroRAP will be here again soon. For their own careers and in memory of Art Moll, I encourage professionals with five or fewer years in the industry to apply for the Art Moll Memorial Scholarship today. Applying is easy—Simply fill out the form found on PIA’s website at: http://www.pia.org/EDU/extras/ NYdownstateScholarship.php. Education makes professionals. Sincerely, Anthony A. Kubera, CIC President Professional Insurance Agents of New York State Inc. 4 October 13, 2014 / INSURANCE ADVOCATE

VOLUME 125, NUMBER 17 OCTOBER 13, 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 .

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 21 times a year, and once a month in July, August and December by CINN ESR, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing ofﬁces. POSTMASTER Send address changes to Insurance Advocate®, P.O. Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN ESR, Inc. and is copyrighted 2014. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

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

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[ INSIGHT ]

By Peter H. Bickford

A Golden Opportunity!

elcome to my 50th Insight Column! I guess that makes it some kind of golden anniversary. But I look at it more as having been provided with a golden opportunity. For the past two and a half years my column has been addressing the natural tension between insurance regulators and

• Laws, rules and regulations that serve no regulatory purpose, contradict their stated objective, or place undue burdens or costs on the industry and its customers Anyone in the business who has ever had responsibility for preparing and filing reports, statements, questionnaires or oth-

What the regulators (and many companies) may not fully realize yet, is that the State v. Fed battle has been superseded by the obsessive focus on capital requirements, and the growing International trend to apply strict bank-centric standards to all financial institutions including insurance. Peter H. Bickford

regulatees, particularly where regulated entities face unreasonable, exacerbating and often puzzling positions by functionaries with potentially life or death control over their businesses. After four decades of experience in all aspects of the insurance business, I admit it has been cathartic to be free from the burden of forced smiles and bitten lips, and free to address controversial views without fear of regulatory consequences (although I have been cautioned to avoid dark alleys and window seats in restaurants). A review of my past columns reveals a number of recurring themes, including: • The often hypocritical view by regulators of the concept of transparency The best examples of the disconnect between regulatory openness and reality are the “incredible shrinking annual reports” of NY’s superintendent and the need to make freedom of information requests – not always granted – for information that should be made publicly available as a matter of course and good government. It is hard to understand the mindset of regulators restricting access to public information, or how they reconcile their own closed-door practices with a stated policy of requiring openness and transparency by others.

er required information with state insurance departments knows all too well that many of these filings and much of the information provided to the regulators is of little, if any, practical value to effective regulation. Stories about meaningless, redundant, arcane, time consuming and costly filings and requirements are customary fodder for exasperated hallway commentary among knowing and sympathetic colleagues. Unfortunately, too often the fear of reprisals — both real and imagined — squelches anything beyond sharing your forehead with the nearest wall or kicking the water cooler in frustration. • The State, National and International trends towards severe ﬁnancial regulation of insurance For decades the theme was the struggle between state and Federal regulation of the insurance business, but that battle has been mostly won by the Feds through erosion and the 2008 financial crisis, even though the insurance sector actually performed very well during that crisis. What the regulators (and many companies) may not fully realize yet is that the State v. Fed battle has been superseded by the obsessive focus on capital requirements, and the growing International trend to apply strict bankcentric standards to all financial institu-

tions including insurance. And because the International regulators are so far ahead of the US in this regard, even the Feds are in danger of losing the ultimate control over setting the financial rules to the International community. In the end, they may win the battle and lose the war. • The growing lack of knowledge of or respect for the business of insurance There have been numerous commentaries of late that the paradigm (hate that word) in insurance regulation has shifted from a focus on control and oversight to enforcement. This is not a new trend, but it has become much more pronounced in the last few years. Nowhere is this shift more pronounced than in New York. Once known as the standard for industry knowledge, expertise and regulatory leadership, the 150-year-old New York Insurance Department has become a lesser division of a new Department of Financial Services, run by former prosecutors focused on enforcement over oversight and financial punishment over industry growth and development, or consumer needs and expectations. While some may applaud this focus on “financial stability,” doing so at the expense of the underlying business of insurance and its customers leads inevitably to a deterioration of knowledge of these needs and expectations. Ignoring leads to ignorance, and ignorance leads to a lack of respect. If the regulators do not respect the industry being regulated, that industry cannot thrive or properly support its customers. And last but definitely not least: • The defective, inefficient and ineffectual state receivership process including the state guarantee fund system I have been writing and speaking about the insurance insolvency process (some would say obsessively – See “Serio on Bickford,” IA, August 18, 2014) for over 20 years. One of my first articles, published in Business Insurance magazine in 1991, focused on a number of myths surrounding the state insolvency process. Unfortunately, the five myths addressed in that article are still believed by many today. They are: • Liquidators are regulators; • Regulators are the best parties to act continued on page 8

6 October 13, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ] are not! (A copy of the full BI article can be found on my website at www.pbnylaw.com/publications.) When all is said and done, the state receivership process – now euphemistically called “estate resolution” – has failed to address any of its defects and shortcomings over the past two decades, and is the one area that could very well prove to be the final undoing of state regulation of insurance. Supporters point out that the state receivership system has worked remark-

continued from page 6

as liquidators; • The interests of liquidators are the same as the interests of regulators; • Liquidators are properly accountable for their actions; and • Liquidation is in the best interest of the policyholders of an insolvent insurer. The answer to each of these myths is the same today as it was 23 years ago: They

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The sad irony is that the current focus of National, Federal and International regulators on preventing insolvencies through excessively high capital and other financial requirements overshadows the long history of effective state regulation of the business of insurance.

ably well over the past decades, proving its value and effectiveness. To the extent the system has succeeded, however, it has been more a matter of luck, industry participation and the effectiveness of state regulation in avoiding significant insolvencies. Although state receivers continue to argue that the state system is quite capable of handling the receivership of a major insurer, including any company the Feds may consider as a systematically important financial institution (SIFI), the myth of the effectiveness of the state system’s ability to handle a major national insolvency was shattered by the Executive Life saga, both in California and New York. Despite all the legislative and regulatory attempts to sweep the scope and consequences aside, Executive Life has dramatically exposed the deficiencies in the receivership process and the failure of the guarantee funds to fully and adequately protect policyholders. The sad irony is that the current focus of National, Federal and International regulators on preventing insolvencies through excessively high capital and other financial requirements overshadows the long history of effective state regulation of the business of insurance. Effective regulation of the business, however, is no longer the norm. Now it is all about capital and enforcement. My goal with this column has centered on exposing important regulatory issues to free and open debate, and to encourage regulators and their enablers to listen to themselves and to better understand the consequences of their actions. Thanks again to Steve Acunto and Insurance Advocate for providing me with this golden opportunity.[IA]

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[ EXPOSURES AND COVERAGES ]

By Jerome Trupin, CPCU

Short Takes on Sundry Topics II: The $750 Million Comma; Assault & Battery Exclusions; A Written Contract Required to be an AI; Theft By Tenant—Is It Covered?; & Certificates of Insurance Legislation

y “possible topics” basket is still overflowing and new items come in all the time, so here’s another round of Short Takes.

The $750 Million Comma BP is claiming that an exclusion in a contractor’s policy is ambiguous because a comma is missing in its agreement with the contractor. The missing comma may cost insurers $750 million. The dispute grows out of liability coverage for the Deepwater Horizon oil well blowout catastrophe in the Gulf of Mexico in 2010. Here’s BP’s position as summarized by Bloomberg News: (BP asserts that) …the clause in the drilling agreement reads that BP,…would be “named as additional insureds” in Transocean’s policies “except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract.” BP contends that because there’s no comma after the words “workers’ compensation,” this leaves open liability coverage for oil discharged from the well. Insurers could have inserted “standard language” to restrict coverage and “cannot rewrite the policies to add those restrictions now,” BP said.1 It’s a convoluted case heard by three courts so far. The first case was decided in the insurers’ favor, the second in the insureds’ favor and the third court punt-

Jerome Trupin

The accepted rule is that ambiguities are resolved in the insured’s favor if the interpretation it proposes is reasonable. It doesn’t have to be the best interpretation, only a reasonable one.

ed—it referred the case to the Texas Supreme Court to make the decision. The Texas court hasn’t issued its opinion yet. There are more than a dozen law firms representing the various insureds and insurers, so my thoughts won’t settle the argument. Whichever way it turns out, the lesson for us is: ambiguities are bad news; they can really bite insurance companies. The accepted rule is that ambiguities are resolved in the insured’s favor if the interpretation it proposes is reasonable. It doesn’t have to be the best interpretation, only a reasonable one. That leaves the court with a lot of leeway in making its decision. And when you need a battalion of lawyers to fight for you, the insured may not be a winner either. There is one safe harbor for insurers: large insureds may not get the benefit of continued on page 12

1 Margaret Cronin Fisk and R.G. Ratcliffe “BP Seeks Access to $750 Million Transocean Insurance” http://www.bloomberg.com/news/2014-09-16/bp-seeks-access-to-750-million-transoceaninsurance.html (accessed 9/24/14)

10 October 13, 2014 / INSURANCE ADVOCATE

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 at jtrupin@aol.com. Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.

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[ EXPOSURES AND COVERAGES ] continued from page 10

the doubt. The theory is that such insureds are well-represented and have the knowledge, power and sophistication to negotiate the language in their contracts; they don’t face the “take-it-leave-it” options of typical insureds. This may become an issue in the BP case—BP is certainly a large and sophisticated insured. Courts in some states have ruled in favor of the insurer. A New Jersey court took a more nuanced view. It wrote: “The dispositive question is not whether the insured is a sophisticated corporate entity, but rather whether the insurance contract is negotiated, jointly drafted, or drafted by the insured. In such instances, we conclude that the doctrine of contra preferentum (that’s legalese for “resolving ambiguities against the drafter”) should not…benefit…the insured.”2 Lesson for insureds: Don’t depend on ambiguities for coverage. If you see an ambiguity, try to clarify it before the loss. And for all of us: mean what you say and say what you mean.

Assault & Battery—an Exclusion that Can Beat Up the Insured The “assault and battery” exclusion is finding its way into more and more insurance policies. From an insurance perspective, assault and battery may be a business risk for some businesses that insurers are unwilling to cover. That’s certainly true for boisterous events with a liquor or drug fueled audience. But the exclusion doesn’t belong in a policy covering a standard risk. There’s no standard ISO exclusion for assault and battery that I could find, but a typical one used in the excess/surplus market reads: This insurance does not apply to any claim arising out of an as-

sault and/or battery…whether caused by the insured, an employee, a patron or any other person (emphasis added). This exclusion applies to all causes of action arising out of an assault and/or battery including, but not limited to…any act, error, or omission relating to an assault and/or battery.3 This is a dangerous exclusion. It’s an “arising out of ” exclusion: that means that insureds lose coverage when the claim is based on an alleged assault or battery by anyone. In a case that shows how troublesome this exclusion can be, a fire in an apartment building resulted in death and serious injuries to tenants. The fire was caused by an arsonist unconnected to the insured in any way; nevertheless the insurance company denied coverage to the building owner because the arsonist’s acts, which resulted in deaths and injuries, fell within the definition of assault and battery. Despite what we might think of him (or her), the arsonist is certainly “any other person.” The court ruled against the insured.4 New York courts have regularly enforced this exclusion. In February, the NY Court of Appeals decided that the exclusion would apply in a case where an employee threw a glass at a patron.5 Don’t accept this exclusion in a policy covering an apartment building owner. You should be able to find a market that will provide the coverage the insured needs.

Get it in Writing—A Written Contract Required to be an AI in Many Policies The automatic addition insured endorsement (CG 20 33 04 13) is becoming standard. It’s a logical way to save work for everyone. Why issue an endorsement

every time the insured has to provide an additional insured with coverage? Insurers don’t underwrite that coverage, they don’t even want to know about it in most cases. They’ve delegated the task of issuing the certificates to agents and brokers. There’s a trap for the supposed additional insured. The full title of the endorsement is: “Additional Insured – Owners, Lessees or Contractors – Automatic Status When Required In Construction Agreement With You.” (“You” means the insured.) The last seven words make it not as automatic as we often think. Additional insured status is only triggered when there’s a written contract between the insured and the party to be added as an additional insured. The classic case illustrating this is memorable because it involves Hard Rock Café. We always assume that large organizations have the staff and procedures to avoid these traps, but apparently they are mortal just like us and our clients. Hard Rock contracted with Regions Facility Services to do alterations in one of its restaurants. The contract called for Hard Rock to be named as an additional insured on Regions’ policy—so far so good—but the contract was never signed. There was a work order, but it was only signed by Regions. The Supreme Court for New York County had no problem deciding that Hard Rock was not, in fact, an additional insured. The ruling was upheld by the First Department Appellate Term.6 What about the doctrine that an unsigned contract may be enforceable if there is objective evidence that the parties intended to be bound by it? The argument works in many situations, but not for additional insured coverage according to a 2006 New York County Supreme Court summary judgment, also affirmed on continued on page 14

2 Scott G. Johnson “Resolving Ambiguities in Insurance Policy Language” Pittston Co. v. Allianz Insurance Co., 124 F.3d 508 (3d Cir. 1997) http://www.rkmc.com/~/media/PDFs/Resolving%20Ambiguities%20in%20Insurance%20Policy%20Language%20The%20Contra%20Proferentem%20Doctrine% 20and%20the%20Use%20of%20Extrinsic%20Evidence.pdf (accessed 9/24/14) 3 “Assault And Battery Exclusion” https://www.scui.com/concord/pdfs/Western%20World%20Insurance%20Company/Assault_and_Battery_Exclusion.pdf (accessed 9/26/14) 4 20-35 86th St. Realty, LLC v Tower Ins. Co. 2013 NY Slip Op 03413 May 14, 2013 http://law.justia.com/cases/new-york/appellate-division-firstdepartment/2013/10039-600805-10.html (accessed 9/26/14) 5 QBE Ins. Corp. v Jinx-Proof Inc. 2014 NY Slip Op 01100 Decided on February 18, 2014 6 Cusumano v Extell Rock, LLC 2011 NY Slip Op 05935 Decided July 14, 2011 Appellate Division 7 National Abatement Corp. et al., v National Union Fire Insurance Company 2006 NY Slip Op 07828 [33 AD3d 570] Appellate Division, First Department October 31, 2006

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The New York Insurance Association can help you: t Encourage innovation in a highly regulated marketplace. t Manage your workforce effectively. t Provide input to key public policymakers on the impact of proposed laws and regulations. NYIA has represented the New York property and casualty industry for more than 130 years. The association is dedicated to making New York a better place to do business for insurance companies. Whether itâ&#x20AC;&#x2122;s fighting mounting taxes and assessments, facilitating regulatory matters, reporting on guaranty fund implications, analyzing the impact of proposed legislation and new laws or helping navigate rate and form filings, NYIA is working for property and casualty insurers. To learn more about how NYIA can help your company visit www.nyia.org or call 518.432.4227.

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[ EXPOSURES AND COVERAGES ] continued from page 12

appeal.7 Finally, what if the contract is eventually reduced to writing and it states that it is to be valid retroactively? That argument too failed in the 2006 case.8 There was a written agreement in a case involving General Motors, but GM lost coverage anyway due to some sloppy wording. GM had contracted with B.J. Muirhead Company for maintenance services at its plant in Erie County, NY. The contract required Muirhead to purchase insurance for “liability arising from premises.” It did not say that GM was to be included as an additional insured. The appellate division of the Fourth Department, unanimously reversing a lower court, wrote that “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” Translation: no coverage for GM.9 It’s clear; let clients know that they need written and signed contracts that require them to be added as additional insureds. And tell them to be sure the contracts are drafted and reviewed by someone who knows the ins and outs of additional insured law in NY. Don’t forget to suggest that the contract require the new ACORD addendum to the certificate 855 NY that I wrote about in the August 18, 2014 issue of the Insurance Advocate.

Tenant Steals Landlord’s Property From Apartment— Covered as Theft? Classic New York Realty 2009 leased an apartment in Manhattan from Eminent Realty. Classic removed the kitchen appliances, cabinets, and fixtures to convert the space to a dormitory as it planned to use the apartment as a youth hostel. The hostel went out of business and Classic did not restore the kitchen when it vacated the premises. Eminent submitted a claim for theft under its property policy with Lexington. Lexington declined the claim citing the policy provision excluding losses due to dishonest or criminal acts committed by anyone to whom the owners entrusted the insured property for any purpose. Eminent sued Lexington. Eminent apparently admitted that theft of entrusted property was excluded. However, it argued that “entrustment” only applied to chattels (legalese for personal as opposed to real property) and therefore damage to real property was not excluded. The Supreme Court, New York County, rejected that argument saying the policy must be given its ordinary meaning and that therefore “entrustment” applied to all property. The decision was unanimously affirmed by the Appellate court for the First Department.10 Using the same line of reasoning, insurers exclude damage to houses that were used by the tenants as methamphetamine labs.11

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 October 13, 2014 / INSURANCE ADVOCATE

A related type of loss is trashing of the apartment by an irate tenant, usually one who is in the process of being evicted. There the difference in wording between Lexington and ISO might be significant. Deliberately damaging or defacing the landlord’s property may well be “dishonest or criminal” and therefore excluded under Lexington’s wording. ISO excludes “theft” rather than “dishonest or criminal acts.” Vandalism is not theft, so ISO’s wording might trigger coverage.

Update on Certificates of Insurance Legislation The Governor hasn’t taken any action as yet (October 23, 2014) on the bill to control the abuse of certificates of insurance. The pending legislation would, among other things, make it illegal for anyone, including insureds and additional insureds, to ask for an expansion of coverage via a certificate. This might protect producers from the outlandish demands of some additional insureds. The bill passed the Senate in May and the Assembly in June. (Similar legislation has been enacted in other states.) The governor’s office has not yet asked the Senate to send the bill to the governor. The guess is that some people in the governor’s office oppose the bill or are not convinced that there is a real problem. The Agents Associations have had ongoing discussions with the governor’s staff for months now. Last year a similar bill did not go to the Governor until December and was then vetoed. There’s a fear that history may repeat itself. Stay tuned.[IA] 8 Ibid 9 General Motors, LLC v B.J. Muirhead Co., Inc. 2014 NY Slip Op 05720 Decided August 8, 2014 Appellate Division, Fourth Department 10 Lexington Park Realty LLC v National Union Fire Ins. Co. of Pittsburgh, PA 2014 NY Slip Op 05817 Decided August 14, 2014 Appellate Division, First Department. The policy in question was apparently not an ISO form. The ISO special form contains a similar exclusion, but it excludes “theft” instead of “dishonest or criminal acts.” 11 Neighborhood Investments, LLC v. Kentucky Farm Bureau Mut. Ins. Co., No. 2013–CA– 000375–MR (Ky. Ct. Ap. March 28, 2014)

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[ ON TH E LEVEL ]

By Jamie Deapo

Morph to Thrive and Not Just Survive

ndependent agents have existed for a long time and will continue to exist, maybe in smaller total numbers but evolved into very large agencies and smaller “boutique” or specialized agencies. No matter the size or nature of the agency, in order to grow organically all independent

keeping them informed and properly covered. • Constantly evolving technology requiring a regular commitment of time and money to stay effective at writing and retaining clients. To successfully change, independent

To successfully change, independent agencies have to do an honest audit of where they stand in meeting these challenges and then develop prioritized plans to address each issue.

Jamie Deapo

agencies will have to expand on the value that makes them important to consumers. That’s acting as the client’s trusted advisor, offering real value added and creating a strong communicative and caring attitude toward them. To reach that goal many agencies will have to implement changes to address the issues present today. The following issues keep principals and managers of agencies up at night and if they don’t solve them they will have a drastic effect on an agency’s ability to operate and grow efficiently: • Substantial and widespread competition focused currently in personal insurance and moving into commercial lines of insurance. • Aging workforce with limited success in attracting new talent. • Changing consumer buying habits influenced by social media and technology. • Consumers’ acceptance of insurance as a commodity coupled with agency staff steeped in selling price instead of value. • Changing consumer demands – instant service provided when and where convenient for the customer and a desire to have a strong relationship with their agency focused on 16 October 13, 2014 / INSURANCE ADVOCATE

agencies have to do an honest audit of where they stand in meeting these challenges and then develop prioritized plans to address each issue. Failing to do so will surely affect the future of an agency and may signal the beginning of a downward slide culminating in a “fire sale” of the agency to retain as much value as possible. If you were given the opportunity to create the perfect agency for today’s market, here’s the characteristics I believe you would want to see: • Well thought out and customer centric workflow that maximizes technology. • Committed, well trained staff capable of value added selling. • Access to a wide range of carriers and products. • Sales oriented organization committed to building a positive customer relationship with clients and prospects supported by a strong marketing, public relations, advertising and social media presence. Where does your agency stand today in achieving these characteristics? Like I mentioned previously be honest in your evaluation. Don’t feel like you’re the only agency in need of some serious changes because I believe that actually puts you in the majority. Many independent agencies have been working so hard to just survive that these

important and necessary changes have been put on the back burner. My message today is that it’s time to bring these issues to the forefront and start to effectively deal with them if you not only want to survive but thrive in today’s marketplace. As you explore what needs to be done for some of you the needs can seem overwhelming. The good news is that you still have time to commit to making the changes and moving forward. The key is to outline what needs to be done and then to actually start moving forward attacking the highest priority items first. There will be challenges along the way. Where will the money come from to pay for some of these changes? Who will help me find potential new hires that are interested in growing into committed, outgoing, concerned and knowledgeable additions to our staff? What if my current staff won’t get onboard? How do I get access to a wide range of carriers and products? How do we make these changes while keeping the agency operating effectively and generating much needed revenue? All of these are valid questions and concerns. There are answers out there–you just have to commit to finding the best solutions you can, even if some are temporary, until the permanent solutions can be put in place. Sound too overwhelming or impossible? What’s the alternative? Not being effective in today’s marketplace. Losing good staff who get frustrated and leave with the hopes of joining a more progressive, forward-thinking agency. Not only being unable to add carriers but losing some of the carriers you already have because you’re not growing enough or even worse shrinking. Watching your life’s work deteriorate to the point that you have no choice but to sell your agency to retain as much of the value as possible. As I said before, there is hope. There are answers and you can improve your situation. The decision is yours. I hope you choose to thrive because I sincerely believe there is no better way to buy insurance than through a quality independent agent and I want to see as many of you thrive as possible. That’s been my life goal for almost 2 decades! [IA]

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[ COVER ]

By Martin F. Carus

“TO CONVERGE, OR NOT TO CONVERGE,” That is the Question for Regulators and Legislators And the answer may prove vexing on this increasingly dramatic financial services stage. 18 October 13, 2014 / INSURANCE ADVOCATE

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[ COVER ] Martin F. Carus is President of Martin Carus Consulting, LLC and has spent 50 years in the insurance industry as one of New York’s acknowledged top regulatory thinkers and protagonists. From 1965 through 1999, he was a member of the New York Insurance Department (now the Department of Financial Services), rising to Chief Examiner. From 1999-2014, he was Senior State Relations Officer for the American International Group, Inc. where he acted as AIG’s Observer to the International Association of Insurance Supervisors.

Martin F. Carus

hether “’tis nobler in the mind to suffer the slings and arrows of outrageous fortune....” is besides the point for financial services decision-makers. The question here is whether there are “noble minds” pondering this question as respects current efforts to devise global capital standards for insurers. I’ll leave the answer to you the reader after we look at the question further. First, though, consider whether there is convergence as regards: • Measuring weight, liquid, distance and temperature; • Languages, spelling, alphabets and language characters; • Culture, Art and Music; • Ethics (Huh, are you kidding!); • Governmental structure, legal codes; • Automobile driving conventions; • Electricity; • Money; • Religious beliefs. In fact, noting the last item on my list, there isn’t even convergence as to what text makes up the “Old Testament.” Even that is not “converged.” And after thousands of years no less! Almost every one of the above items, if converged, would generate much greater cost efficiencies than anything to do with the assessment of capital adequacy of insurance groups. Efforts to do so have failed. Just walk a few meters through the challenges. Now, is it likely that the first globally accepted convergence should be relative to insurer group capital standards? There seems to be this inexorable need on the part of financial system overseers to converge assessment systems of insurers which, in turn, would require a convergence of accounting standards used by insurers. If the latter is not achieved (and FASB and IASB have not been able to do so), how can the former be implemented? Some suggest allowing the use of different measurement standards and relying on outcomes. However, outcomes can only be gleaned after the fact and the purpose of assessment schemes is to direct the outcomes. In any case, the effort regarding a global standard for financial assessment of insurers moves on and on. This need seems to have come about because the overseers have just realized that the financial services industry, and the insurance segment in particular, has become, or is, global in nature. That seems a startling discovery when noting that several large banks and insurers have been operating internationally for decades if not centuries. A second factor emanates from the financial downturn during 2008-2009. They have concluded that certain institutions pose systemic risk. But, exactly what is “systemic risk”? In 2010, the Dodd-Frank Act (or its formal name, the WALL STREET REFORM continued on page 20

INSURANCE ADVOCATE / October 13, 2014 19

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[ COVER ] continued from page 19

AND CONSUMER PROTECTION ACT) was enacted “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Reviewing the Act one will not find a clear definition of just what systemic risk means, particularly with reference to insurers. There is no sentence that starts: “Systemic risk means….” The closest one comes is in Section 113(a)(1) which states: “(a) U.S. NONBANK FINANCIAL COMPANIES SUPERVISED BY THE BOARD OF GOVERNORS.— (1) DETERMINATION.—The Council…may determine that a U.S. nonbank financial company shall be supervised by the Board of Governors and shall be subject to prudential standards, in accordance with this title, if the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to the financial stability of the United States.” (Emphasis added) Sounds good, but again exactly what does “a threat to the financial stability of the United States” actually mean? How does one tell? What level of threat? As a general proposition, Wikipedia defines systemic risk as “the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system, which can be contained therein without harming the entire system. It can be defined as financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries. It refers to the risks imposed by inter-linkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause 20 October 13, 2014 / INSURANCE ADVOCATE

a cascading set of failures, which could potentially bankrupt or bring down the entire system or market.” (Italics mine) In other words, it’s calamity. Certainly there is a level of what may be called “misery” that can be applied whenever something occurs that is discomforting. A couple planning a wedding puts a down-payment on a catering hall that then goes bankrupt. Result: misery. You place an order for furniture and make a down-payment. The furniture store goes bankrupt. Ergo: more misery. An insurer goes broke so one has to replace certain mandatory coverages. The result is inconvenience and misery. Perhaps it is a life insurer and now the insured is older and their health condition has declined, resulting in even more misery. Perhaps you have a claim or are a beneficiary under a policy and the amount due is more than the guaranty fund (i.e., a policyholder protection plan) limits. Even greater misery! But, is any of this misery “a threat to the financial stability of the United States”? Does it suggest “the collapse of the entire financial system”? If five companies go down the tubes, indeed there is a great amount of misery but does misery equal financial system collapse? So considering the hyped 2008-2009 market downturn and ensuing misery, exactly how many US policyholders, claimants and beneficiaries failed to receive payments made under insurance contracts? And that’s considering what is labelled as the worst downturn in 80 years. In short, there is not a high level of interconnectedness from one insurance group to another or from the insurance industry as a whole to other segments of the financial services sector. What am I getting at here? Well, the efforts being expended to converge insurer financial assessment standards, and in particular the effort to devise a global capital standard for insurance groups, has been, is and will continue to be expensive. Meetings take place around the world and considering the impact on insurers’ operations and thus the insurance marketplace, they are attended by hosts of regulators, observers and other interested parties (e.g., consumers). Yes, that’s right, consumers! Who bears the costs of all these efforts? Consumers do primarily inasmuch as costs directly incurred by insurers are reflected

Well, the efforts being expended to converge insurer financial assessment standards, and in particular the effort to devise a global capital standard for insurance groups, has been, is and will continue to be expensive. in product prices. Regulatory costs are generally either assessed to insurers which, in turn, include those costs in product prices or are borne by taxpayers. To the degree that marketplace competition doesn’t allow for the recoupment through product prices, then the costs are borne by shareholders through lower net incomes, lower returns on capital, lower dividends and lower share prices. And even further, if such efforts bring the need for more capital, the cost of that capital will be borne by shareholders (through lower returns on capital or dilution) or by consumers through higher product prices inclusive of such costs. This leads to the question: What are the benefits of a group capital standard and assessment? There are a few things to consider which have not been adequately discussed in the public domain. These are: • Consumers buy products from individual insurers, not from insurer groups. They have no privity of contract with the parent or holding company affiliates of the particular insurer from which they made their purchases. The question then becomes why are insurance groups composed of individual insurance companies? There are some marketing reasons for there to be more than one insurer in a group (e.g., different continued on page 22

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ANSWERING MEMBER QUESTIONS HONE INQUIRIES INQUIRIES PER AVG. PER YEAR YEAR A VG. 4,300 4,300 PPHONE NLINE INQUIRIES INQUIRIES PER ER YEAR YEAR A AVG. VG. 443,000 3,000 POONLINE ISSUE-SPECIFIC ISSUE-SPECIFIC DOCS REFERENCE DOCS 2,736 2,736 REFERENCE TTORNEY-REVIEWED CONTRACTS CONTRACTS 2844 AATTORNEY-REVIEWED 28

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[ COVER ] continued from page 20

companies within a group specializing in different products). There are also some individual statutory reasons that engender that approach (e.g., prohibitions against tiered underwriting). And, there are some capital provider reasons, the latter being the segmentation of capital so that a single overall problem doesn’t take down the entire franchise, the corporate veil so to speak. Thus, the fact that the group is adequately capitalized per a regulatory view does not necessarily translate into an increased probability that the individual promises insurance contracts represent will be met. This calls into question whether a view of a group’s capital position is relevant to any particular consumer of an individual group member’s product. There are no statutory rules relative to the fungibility of capital within a group (as there is in the banking sector by the way). • Thus, group-held capital doesn’t necessarily have to ﬂow down to an individual insurer that might actually need that inﬂow at any given time. While regulators have and do cooperate, there is no global group statutory regulatory system in place that could guarantee that capital would flow in the indicated direction. And, there’s not likely to be such a system anytime soon. Suppose more than one downstream company needs the group capital; who would prioritize the flow of capital? Suppose further, that capital is down-streamed to individual insurers and then subsequently needs arise elsewhere in the group system; can the flow of capital automatically change direction? What if there are dividend limitations or the regulator of an individual insurer doesn’t believe it advisable to give up capital under its control to cure a problem elsewhere? Think about the answers to these questions in the political context. Would a domestic regulator (or any other jurisdictional regulator) decrease the probability of a company under its supervision meeting its responsibilities to that 22 October 13, 2014 / INSURANCE ADVOCATE

regulator’s constituents in order to increase the prospects for another policyholder of a different company within the group? • Consumers have policy protection schemes so that if their particular insurer from whom they purchased a product is unable to pay, the overall industry effectively provides a ﬁnancial guaranty for that product. Yes, such schemes (or guaranty funds) have limits but then, who gets any of the possible benefit from the capital residing at the group level or perhaps within the holding company’s individual insurers? The answer is the people who bought high value coverages above the guaranty fund limits. If, for example, you have a $500,000 life policy in a jurisdiction with that level of policyholder protection scheme and the company goes broke, you (or more likely your beneficiary) get $500,000. If you bought a $50 million policy then there’s a different question. So, is this an effort to protect those who buy $50 million policies? Do only those consumers pay the freight for this effort? • Excepting mutual and reciprocal enterprises, most groups are headed by a holding company. Most of the larger of these are publicly traded entities. Insurers are subject to statebased particularized receivership and liquidation schemes supervised by state courts. However, holding companies are not subject to such a paradigm, they being subject to federal bankruptcy laws supervised by the Federal courts. Thus, how would the failure of a holding company interact with the failure of the holding company’s insurance company subsidiaries? What if the holding company fails but the insurers do not? What happens if the holding company fails and its non-insurer subsidiaries fail but the insurers do not? What happens in the reverse situations? What happens if the holding company and the insurer subsidiaries fail? Suppose the Federal courts decide one course of action that is contrary to the interests of the state courts? • Let’s suppose that the effort is successful and an agreed upon group capital

system is obtained. To whom will it apply? Currently, it could apply to insurers deemed globally systemically important (G-SIIs) or domestically deemed systemically important groups (D-SIFIs), internationally active insurer groups (IAIGs), other insurer groups or all of the above. What is the competitive impact on the marketplace if not all groups are subject to such a standard, not only in consideration of the global marketplace but from the perspective of an individual jurisdictional or individual product category marketplace? • Since the idea is “to protect the American taxpayer by ending bailouts, to protect consumers from abusive ﬁnancial services practices, and for other purposes,” what would that group capital level be? If the determined level was accurate, presumably the level would be the present value of the probability of that undesirable bailout. But if that is indeed the case, then consumers (who, by the way, are also taxpayers and in many instances shareholders) are merely paying up front the cost of such a prevented bailout. Why? Isn’t that merely another tax? Moreover, what if the calculated standard is empirically correct but the groups to which it pertains all have capital significantly above that level (a prospect that seems eminently likely); then what is the benefit of this costly effort? Is the effort moot? Again, what is the quantified benefit? We could determine the money spent; but can we get a quantifiable amount of benefit? Did anyone conduct a cost/benefit analysis before the effort was begun? Not to anyone’s knowledge. So, effectively consumers (and shareholders) have funded, and continue to be required to fund, the cost of this effort without any knowledge, or even an estimate, of any quantifiable benefit from the effort. That seems neither wise nor reasonable. In fact, as a consumer, to me it’s outrageous! Moreover, there doesn’t seem to be any benefit—for shareholders, taxpayers or even, startlingly, regulators! As we say in some precincts of New York, “To be...or what?” Before the curtain rises on this play, we suggest a second, hard look at the script.[IA]

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[ IN THE ASSOCIATIONS ]

Life Insurance Industry Convenes in Cooperstown for Annual Legislative & Regulatory Conference

rom September 22 through 24, approximately 170 life insurance executives, state and national policymakers, firms that provide services to the industry, and their guests convened at The Otesaga Resort Hotel in Cooperstown, NY, to engage each other in discussion on a range of life insurance-related issues on the state, federal and international levels. The occasion was the 14th Annual Legislative and Regulatory Conference hosted by the Life Insurance Council of New York, Inc. “The Conference has become a tradition ingrained in the fabric of LICONY and is nationally recognized as the leading annual state life insurance conference,” said Thomas E. Workman, President and Chief Executive Officer of the Life Insurance Council of New York, Inc. “A conference such as ours involves a great amount of time and effort by everyone involved. I greatly appreciate the dedication of our participants, as well as the dialogue among attendees.” The Conference sessions were preceded earlier on Monday, September 22, by meetings of the LICONY Board in Executive Session and the LICONY Legislative and Regulatory Committee that deliberated on and approved the Association’s affirmative legislative and regulatory programs for 2015. That evening, participants were treated to a theme dinner featuring a tribute to Frankie Valli and the 4 Seasons. The business of the Conference proper commenced on Tuesday morning with introductory and welcoming remarks by Mr. Workman, and Michael A. Zarcone, LICONY Board Chairman, respectively, followed by a NYS Insurance Legislative Perspectives “Town Meeting.” This Q&A session centered on legislation impacting the life insurance industry, including the upcoming priorities for the remainder of the year, as well as for 2015. Participants included The Honorable James L. Seward, Chair, Standing Committee on Insurance, New York State Senate; The Honorable Kevin A. Cahill, Chair, Standing Committee 24 October 13, 2014 / INSURANCE ADVOCATE

on Insurance, New York State Assembly; The Honorable Neil D. Breslin, Ranking Minority Member, Standing Committee on Insurance, New York State Senate; The Honorable William A. Barclay, Ranking Minority Member, Standing Committee on Insurance, New York State Assembly; and, George J. Haggerty, Deputy Secretary for Financial Services, Office of the Secretary to the Governor, New York State. An informative presentation entitled “Insiders on the Road,” with New York State Elections Analysis by Robert J. Bellafiore, Founder and President, Stanhope Partners, and Steven Greenberg, Pollster, Siena Research Institute, provided results from recent polls on what could be expected in the elections on Tuesday, November 4. Next, senior officials of the Department of Financial Services provided their insights on the major regulatory issues impacting the life insurance industry during the DFS Insurance Regulatory Perspectives “Town Meeting.” Panelists included The Honorable Robert H. Easton, Executive Deputy Superintendent, Insurance Division; The Honorable Joy Feigenbaum, Executive Deputy Superintendent, Financial Frauds and Consumer Protection Division; Michael E. Maffei, Assistant Deputy Superintendent & Chief, Life Bureau; and, William B. Carmello, Jr., Chief Life Actuary, Insurance Division. During the Leaders Luncheon that day, which featured Assembly Speaker Sheldon Silver and Senator Seward, the Speaker presented a New York State Assembly Proclamation commemorating September 2014 as Life Insurance Awareness Month and recognizing the “exceptional work of LICONY in New York State.” Options after lunch included a golf tournament, a tour of the National Baseball Hall of Fame, working at a Habitat for Humanity worksite in nearby Oneonta, and a session on Lobbying Compliance in New York State, presented by Mark F. Glaser, a partner at LICONY member Greenberg Traurig, LLP.

On Tuesday evening The Honorable Benjamin M. Lawsky, Superintendent of the New York State Department of Financial Services brought “Greetings from the Governor” and introduced the featured speaker, Johnny Bench, a 1989 inductee into the National Baseball Hall of Fame, who played for the Cincinnati Reds (1967-1983). On the last day of the conference, Executive Director of the National Purple Heart Hall of Honor Inc., Andrew Komonchak made a presentation on the origin and work of his organization and welcomed the support of the conferees. The Hall of Honor is the national repository of the stories and memories of approximately 1.8 million military service men and women who were injured in combat and received the Purple Heart since 1932. A panel on International Insurance Regulation featuring Paul K. Sharma, Managing Director & Co-Head, UK Regulatory Advisory Services Practice, Alvarez & Marsal; Mr. Easton; Lawrence R. Hamilton, Partner, Mayer Brown LLP, discussed global developments in the life insurance industry and their implications for the U.S. and New York. The conference concluded with a National and Federal Insurance Issues “Town Meeting” that featured Senator Breslin in his role as President of the National Conference of Insurance Legislators (NCOIL); The Honorable James J. Donelon, Immediate Past President, National Association of Insurance Commissioners (NAIC), and Commissioner, Louisiana Department of Insurance; Kimberly Olson Dorgan, Senior Executive Vice President, Public Policy, American Council of Life Insurers (ACLI); and, Dr. Susan B. Waters, CAE, Chief Executive Officer, National Association of Insurance and Financial Advisors. The Conference once again demonstrated the tremendous learning and networking experiences possible when industry participants are given an opportunity to hear from and interact with each other and policymakers at the state and national levels.[IA]

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[ IN THE ASSOCIATIONS ]

LICONY 2014 BOARD CHAIRMAN, MICHAEL A. ZARCONE, EXECUTIVE VICE PRESIDENT & HEAD OF CORPORATE AFFAIRS, METLIFE

BENJAMIN M. LAWSKY, SUPERINTENDENT, NYS DEPARTMENT OF FINANCIAL SERVICES.

NYSDFS STAFF: MICHAEL E. MAFFEI, ASSISTANT DEPUTY SUPERINTENDENT & CHIEF, LIFE BUREAU; JOY FEIGENBAUM, EXECUTIVE DEPUTY SUPERINTENDENT; AND ROBERT H. EASTON, EXECUTIVE DEPUTY SUPERINTENDENT.

ASSEMBLY SPEAKER SHELDON SILVER (C); TOM WORKMAN AND MICHAEL A. ZARCONE

NEIL D. BRESLIN, RANKING MINORITY MEMBER, STANDING COMMITTEE ON INSURANCE, NYS SENATE; KEVIN A. CAHILL, CHAIR, STANDING COMMITTEE ON INSURANCE, NYS ASSEMBLY; AND JAMES L. SEWARD, CHAIR, STANDING COMMITTEE ON INSURANCE, NYS SENATE.

SENATOR NEIL D. BRESLIN; JAMES J. DONELON, IMMEDIATE PAST PRESIDENT OF NAIC, AND COMMISSIONER, LOUISIANA DEPARTMENT OF INSURANCE; AND KIMBERLY OLSON DORGAN, SENIOR EXECUTIVE VICE PRESIDENT-PUBLIC POLICY, ACLI.

INSURANCE ADVOCATE / October 13, 2014 25

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[ THE SOCI AL NOTEBOOK ]

By Chris Paradiso

Email Marketing Myths That are Killing Your Agency’s Campaigns!

s an email marketing aficionado, nothing infuriates me more than misleading ‘facts.’ NOTHING! And I don’t mean the ‘email is dead’ kind of articles that emerge every so often (just to set the record straight here, email marketing is very much alive) but rather articles suggesting that email marketing is only for the big corporations, that you should not send more than one marketing email a week and that

contacts list and now you notice that people have started to drop out. Let them! To begin with, it is much better for someone to unsubscribe from your emails than to mark you as spam. Yes I just said that! If they put you in the spam folder, you can potentially jeopardize your entire email campaign and brand credibility. So if somebody wants to not receive your communications, you should encourage

Hiding behind the idea of not wanting to come across as pushy or annoying, most businesses don’t send enough emails!

unsubscribes are bad for business. These are the types of email marketing myths Chris Paradiso that I feel compelled to debunk. And here are my top Five Myths that are killing your campaigns: Myth 1 Email marketing is reserved for big businesses. This is simply not a fact and is nothing but a MYTH! THE TRUTH: Email marketing is easy to use, effective and cheap. Everybody can send emails today so this is the type of marketing activity that you don’t need a specialist for. It would be ludicrous not to have email as a tool in your marketing arsenal. Email can help you acquire new customers as well as retaining ones at a low cost. In fact, a recent study found that 74% of customers prefer to receive marketing messages via email which means that if you are not sending out emails you are missing out (a lot)! Myth 2 Unsubscribes are BAD THE TRUTH: Nobody likes to see people unsubscribing from their mailing list. You have worked hard to grow your 26 October 13, 2014 / INSURANCE ADVOCATE

them to unsubscribe. Another reason why unsubscribes are not that bad is because they give you a more accurate picture of who is actually interested in your products and services. If you send out 1000 emails, all 1000 of them get opened and 50 people have unsubscribed, then that leaves you with 950 people who have opened and read your message and found it useful. If you were to follow up this email with a phone call, you can now save time and effort by contacting only the people who are truly interested in what you have to offer. Myth 3 Don’t send more than one marketing email per week. A major MYTH! THE TRUTH: Hiding behind the idea of not wanting to come across as pushy or annoying, most businesses don’t send enough emails! In their search for the perfect email frequency, marketers tend to not send enough messages at the acquisition stage of the customer journey. Think about how easy it is to delete an email nowadays. We tick 10-15 at a time, click delete and they are gone. So how many of your emails have been deleted before even being opened? With this in mind, you can easily deduce that the more emails you send the better the chances of

them being opened and read. And if people don’t want to receive communications they can always unsubscribe, clearing your list and leaving only the really hot leads and prospects. Myth 4 You don’t need to send marketing emails to people once they buy from you. The biggest Myth: we at Paradiso Insurance have a whole on-boarding process once a prospect becomes a client and YES it makes a huge difference to help maintain that relationship and grow that bond. THE TRUTH: I often hear how if someone has purchased from you, you should not send them any more communications. This could only end badly — real badly. If you don’t remind customers about your business, educate them on other insurance products you sell, if you don’t make an effort to retain them, if you don’t try to stay ‘top of mind’ for your service, then you will probably lose that customer. In today’s time you need to be front and center of your clients — if not, direct writers will work their way in and it will not end well for your agency. The key here is that the types of communications you send to a prospect are different from the types of communications you send to an existing client. You don’t need to send them a sales pitch, but maybe a discount voucher to prompt loyalty and customer satisfaction, or a gift card, an update on upcoming events, industry news, etc. It’s so important to keep your agency in front of your customer. You will need two different strategies and two different types of content, but ultimately, unless you are emailing your clients, you are under constant threat that your competitors will. Direct writers spend billions of dollars to get in front of our clients and we need to be creative in how we remain in front of them. Myth 5 Always send out emails with pictures. THE TRUTH: Are you a graphic designer? I personally have a graphic

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[ THE SOCIAL NOTEBOOK ] designer and feel every agency needs one so you can have a consistent brand. If you are not, I would suggest you refrain from sending emails with images. Your logo and branding within the email template are great; however there are too many ways you can fail when it comes to sending emails with images, so it’s just not worth the risk. What if the picture is not good enough quality or the browser suppresses the image so that your email looks incomplete? There are too many ifs. To clarify, I do not intend to imply that you should never send images, but do so cautiously, and have agency photos go out in your emails so it adds a personal touch to your email if you do. The absolute worst thing you can do is to put your offer or headline in an image — many readers won’t ever see the image. I’m sure, like us, you’ve received emails that contain huge images that you never even download. As someone who works with marketing automation and email marketing every day as an agency owner, I truly believe that quality sales opportunities and leads can still be generated through email, as long as you’re doing it effectively. Know the real facts and learn how to spot the email marketing myths. Spend money and time investing in your own personal email campaign and if it’s done right and watched and corrected you will have email success. So don’t listen to these consultants who say email marketing is DEAD – it’s simply not true! It’s alive and well if done properly. [IA] Christopher Paradiso, CPIA, is President of Paradiso Financial & Insurance Service. He has been acknowledged by several insurance publications as a leader in the industry for his use of digital marketing and social media to help brand his agency and promote other small businesses within his community. Chris has also been recognized for his charity work with The Connecticut Children’s Medical Center. In 2011, Chris introduced “Paradiso Presents LLC,” a social media program aimed at teaching small agencies to not only survive, but compete in today’s complex online marketing world. Chris resides in Stafford Springs, CT with his wife and two children, Mia and Gianni.

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[ FACE TO FACE ]

Text in the City

s someone who has travelled quite extensively throughout the country on both business and pleasure, so many times I have been driving around and said, “Don’t people in this city know how to drive?!?!” Whether it is because of those who are texting and driving, or aggressively driving, or just trying to get home, it has become quite apparent to me firsthand that drivers in certain cities are just so much worse than in others. Now, because my column is read in many cities and I do not want to make any enemies (the editor has told me Michael Loguercio many a time to “treat thy neighbor as thyself ”… did you ever hear Rodney Dangerfield’s version of this?) I will not divulge what cities I personally feel have the worst drivers; however, I will reveal what cities statistically have proved to be the world’s safest to drive in! To begin with, fuggedaboudit if you live on the coast, no matter whether it is on the left side or the right, as this is not where the safest drivers live. Recently, Allstate released its “10th Annual Allstate America’s Best Drivers Report”, and according to their own data, they claim that six of the country’s safest cities for drivers are in what they refer to as “fly-over country”, to get to where you are going (years ago New Jersey used to be called that!). The closest city on the list to the coast was over two hundred miles away from the beach, and was located in CA: Visalia City (how many of you have been there?). Mike Roche, Allstate’s Executive Vice President of Claims, stated that “A big part of our job at Allstate is to help our customers prevent bad things from happening. With that in mind, our actuaries reviewed millions of records to develop this year’s report which presents new data to equip them with better driving awareness tools. Allstate is showing drivers that factors like population, a city’s density and precipitation may contribute to their driv28 October 13, 2014 / INSURANCE ADVOCATE

By Michael Loguercio

ing safety to reveal important lessons on the road. As a Colorado resident, I am especially proud to report that the nearby college town of Fort Collins, Colo. has been named “America’s Safest Driving City” for the fourth time by Allstate. This doesn’t exactly come as a surprise, as the city has been in the top 10 every year since the report’s inception, but it is still impressive nonetheless.” Drivers in the city of Fort Collins, Colo., will experience an auto collision once in every 14.2 years, according to the Allstate report. This proves to be 29.6% less likely than the national average of one in every 10 years. So here is our “Top Ten List” of the safest cities to drive in within the United States: 10. Olathe, KS Experience an auto collision every 12.1 years, 17.5% less likely than the national average 9. Madison, Wis. Experience an auto collision every 12.2 years, 17.8% less likely than the national average 8. Laredo, Texas Experience an auto collision every 12.2 years, 18.3% less likely than the national average 7. Visalia, Calif. Experience an auto collision every 12.4 years, 19.1% less likely than the national average 6. Montgomery, Ala. Experience an auto collision every 12.4 years, 19.4% less likely than the national average 5. Huntsville, Ala. Experience an auto collision every 12.6 years, 20.3% less likely than the national average 4. Kansas City, Kas. Experience an auto collision every 12.9 years, 22.4% less likely than the national average 3. Boise, Idaho Experience an auto collision every 14 years, 28.4% less likely than the national average 2. Brownsville, Texas Experience an auto collision every 14.2 years, 29.5% less likely than the national average

…and the number one safest city in the United States to drive in is: 1. Fort Collins, Colo. Experience an auto collision every 14.2 years, 29.6% less likely than the national average Well, that’s what’s happening around the country, and until next time when we will be talking about Syracuse I Day, the Massachusetts Big Insurance Event, and a few others, “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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[ ON M Y RADAR ]

By Barry Zalma

When an SIR Isn’t SIR Doesn’t Say What Insurer Thought

n this case the California Court of Appeal was asked to once again apply the well-established principle that any limitation on the coverage provided by a liability insurance policy must be

liability insurance policies contain SIR clauses that expressly and unambiguously make payment of an SIR obligation a condition of any obligation under the policy, including any duty to defend, and the

Given the language of the policy, an insured could, in the opinion of the court, reasonably interpret it as providing a defense to covered claims as soon as such claims are tendered and before any SIR has been paid.

Barry Zalma

expressed and consistent with the reasonable expectations of the insured. Simply put, people who write insurance policies should say what they mean and do so clearly and unambiguously. The commercial general liability policy involved in American Safety Indemnity Co. v. Admiral Insurance Co., D061587 (Cal.App. Dist.4 09/27/2013) had a provision labeled “Self-Insured Retention (SIR)” that makes the insured liable for the first $250,000 in damages payable to any third party claimant. The policy also makes it clear the insured’s payment of defense costs count toward meeting the insured’s SIR obligations. However, the SIR clause did not expressly make payment of the SIR a condition of the insurer’s broader obligation to provide a defense when an arguably covered claim is tendered. Rather, the SIR clause expressly applies only as a limitation on the insurer’s duty to indemnify the insured for covered damages for which the insured is found liable. Given the language of the policy, an insured could, in the opinion of the court, reasonably interpret it as providing a defense to covered claims as soon as such claims are tendered and before any SIR has been paid. The Court of Appeal noted that other 30 October 13, 2014 / INSURANCE ADVOCATE

Court of Appeal recognized that SIR provisions have been enforced according to their terms.

FACTUAL BACKGROUND Between the late 1990s and 2002, Zephyr Newhall, LP, and its partner Zephyr Partners, LLC (collectively Zephyr), worked with developer D.R. Horton, Inc. [Los Angeles Holding Company; hereafter Holding], to build housing on a tract of land in Santa Clarita which Zephyr owned. Holding hired Ebensteiner Co. (Ebensteiner) to grade the tract pursuant to plans created by Leighton and Associates, Inc. (Leighton), a geological engineering firm. As part of their grading contract, Ebensteiner agreed to indemnify Holding against liability for any loss attributable to Ebensteiner’s breach of duty even if Holding’s conduct also contributed to the loss. On or about March 11, 2002, a backcut slope failure occurred as a direct result of the grading, creating a 140- by 100-foot landslide and tension cracks that visibly extended to within 50 feet of existing upslope homes. Another similar backcut slope failure, resulting in a 70- by 200-foot slide, occurred April 4, 2002. At the time of the work, Holding was

insured by defendant and respondent Admiral Insurance Company (Admiral), while Ebensteiner was insured by plaintiff and appellant American Safety Indemnity Co (ASIC). The respective policies limited coverage to $1 million per occurrence. The Admiral policy contained a provision which designated it “excess” over the ASIC coverage; the ASIC policy contained a similar excess insurance disclaimer for those instances where the ASIC policy was not primary. The ASIC policy also covered Holding as an “additional insured.” Holding tendered its defense of the Fessler claims to ASIC, which initially declined the tender. Holding then filed a bad-faith lawsuit against ASIC. Holding and ASIC settled the bad-faith lawsuit. Under the terms of the settlement, ASIC agreed to pay Holding’s defense costs and to not thereafter dispute its duty to defend Holding. ASIC paid a total of $2,237,068.73 in defense costs on behalf of Holding and the two Horton entities. By way of an order granting ASIC’s motion for summary adjudication, the trial court determined that, as a matter of law, Admiral owed the Horton entities a duty to defend them in the Fessler action. In particular, the trial court determined that under the terms of the Admiral policy, although the SIR provision required that the Horton entities pay the first $250,000 in any damages recovered by a third party, Admiral’s duty to defend the Horton entities was independent of the policy’s SIR provisions. The trial court awarded ASIC a total of $1.9 million in reimbursement of the defense costs it had paid plus interest.

DISCUSSION In the case of insurance, subrogation takes the form of an insurer’s right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid. The doctrine of equitable subrogation is broad enough to include every instance

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[ ON M Y RADAR ] in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter. The essential elements of an insurer’s cause of action for equitable subrogation are as follows: (a) the insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer; (b) the claimed loss was one for which the insurer was not primarily liable; (c) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of its insured to protect its own interest and not as a volunteer; (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; (g) justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) the insurer’s damages are in a liquidated sum, generally the amount paid to the insured. The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured’s claim, and succeeds only to the rights of the insured. The subrogated insurer is said to “stand in the shoes” of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. In its principal argument on appeal, Admiral contends it owed the Horton entities no duty of defense and, hence, ASIC was not entitled to any subrogation because, contrary to the trial court’s determination, the SIR provision in Admiral’s

Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. Selfinsurance is equivalent to no insurance. As such, it is repugnant to the very concept of insurance.

policy applied not only to its duty to indemnify but also to its duty to defend. Admiral’s Policy Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. Self-insurance is equivalent to no insurance. As such, it is repugnant to the very concept of insurance. If insurance requires an undertaking by one to indemnify another, it cannot be satisfied by a self-contradictory undertaking by one to indemnify oneself. The Admiral policy does not expressly and unambiguously make its duty to defend the Horton entities subject to the SIR. Rather, the SIR endorsement expressly provides the contrary by limiting the requirement to indemnify. In light of this unambiguous limitation on the scope of the SIR, it is not surprising that there is no other provision of the SIR that nonetheless extends the scope of the SIR to include the costs of defense.

ZALMA OPINION The SIR written by Admiral failed to effectively create a limitation on the coverage provided by its policy because it did not expressly, and consistent with the reasonable expectations of the insured, tell the insured it owed no defense costs until the insured paid the first $250,000 in defense or indemnity costs. Since it did not, its failure to create accurate policy wording cost it almost two million dollars. Insurers often take portions of one policy and move it to another. Popular policy wordings are adopted from the Insurance

Services Office or the work of other insurers. In this case, had Admiral used one of the policy wordings that effectively required the payment of the SIR before the insurer had any duty, this suit and appeal would have had a different result. When Polices are not written carefully it is not wise to take a strong position against payment. [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. Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide. The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store /ProductDetails.aspx?productId=21462 4, or 800-285-2221 which is presently available. Mr. Zalma’s e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv or at the bottom of the home page of his website at http://www.zalma.com. INSURANCE ADVOCATE / October 13, 2014 31

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[ TECHBI T E S ]

By Paul B. Dzielinski

Insurance Companies (Even Small Ones) Are Not Immune from Cyber Risk

t seems as though every time you read the newspaper or watch the evening news, there is a story about another corporation’s website being hacked and their customer data compromised. Many busi-

business functions is increasingly reliant on information systems and the Internet, resulting in increased risk that could cause severe damage to a company’s business functions and operations.

Company IT staff and management are still learning how to combat these attacks. In fact, most companies only become aware their system has been compromised when an FBI agent notifies them. Reacting to an attack after it happens is one thing, but preventing attacks is the much harder part. Paul B. Dzielinski

ness owners, especially small ones, take a head-in-the-sand approach and think, “This won’t happen to us. We’re a small company and hackers aren’t interested in us.” The truth is, every business is a target. As a business owner, you need to be aware of the threats and proactive in protecting your corporate and customer data. It takes more than firewall and malware protection software to prevent information breaches. Company IT staff and management are still learning how to combat these attacks. In fact, most companies only become aware their system has been compromised when an FBI agent notifies them. Reacting to an attack after it happens is one thing, but preventing attacks is the much harder part. Part of the problem arises from within the companies themselves. First, executives may not want to invest a substantial amount of money in security if they don’t think an attack may happen to their company. Second, the chief information security officer may be reporting to the wrong person. The chief information security officers should report directly to the CFO. The CFO “owns” risk management in most companies and information security is part of enterprise risk management. Cyber threats constantly evolve with higher levels of intensity and complexity. The ability to achieve objectives and operate 32 October 13, 2014 / INSURANCE ADVOCATE

Key Cyber Risk Management Concepts Management of cyber risks needs to be incorporated into existing risk management and governance processes. This is more than just a checklist of requirements; rather it is managing cyber risks to an acceptable level. The Department of Homeland Security has published a list of key risk management concepts: Cyber risk management discussions should be elevated to the CEO level. CEO engagement in defining the risk strategy and levels of acceptable risk enables more cost effective management of cyber risks that is aligned with the business needs of the organization. Regular communication between the CEO and those held accountable for managing cyber risks is a must. The CEO of a corporation should take an intense interest in the ﬁrm’s cyber security. Here are five questions CEOs should ask about cyber risks: 1. What is the current level and business impact of cyber risks to our company? 2. How is executive leadership informed about the current level and business impact of cyber risks to the company? 3. How does our cyber security program apply industry standards and best practices? 4. How many and what types of cyber

incidences do we detect in a normal week? What is the threshold for notifying executive management? 5. How comprehensive is our cyber incident response plan? How often is it tested? Implement industry standards and best practices, don’t just rely on compliance. A comprehensive cyber security program leverages industry standards and best practices for IT systems to detect potential problems. Compliance requirements help to establish a good cyber security baseline to address known vulnerabilities. Using a risk-based approach to applying cyber security standards and practices allows for more comprehensive and cost effective management of cyber risk than compliance activities alone. Evaluate and manage your organization’s speciﬁc cyber risks. Identifying critical assets and associated impacts from cyber threats are critical to understanding a company’s specific risk exposure, whether financial, competitive, reputational, or regulatory. Risk assessment results are a key input to identify and prioritize specific protective measures, allocate resources, form long-term investments, and develop policies and strategies to manage cyber risks to an acceptable level. Provide oversight and review. Executives are responsible for managing and overseeing enterprise risk management. Cyber oversight activities include the regular evaluation of cyber security budgets, IT acquisition plans, IT outsourcing, cloud services, incident reports, risk assessment results, and top level policies. Develop and test incident response plans and procedures. Even a well-defended organization will experience a cyber incident at some point. When network defenses are penetrated, a CEO should be prepared to answer the question, “What is our Plan B?” Documented cyber incident response plans that are exercised regularly help to enable timely response and minimize impacts. continued on page 38

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[ COURTSI DE ]

By Lawrence Rogak

No Coverage for Damage Caused by Rainwater Entering Building Because of “Faulty Design” Provencal, LLC v Tower Ins. Co. of N.Y.

laintiff commenced this action seeking insurance coverage from Tower for the collapse of a retaining wall in its parking lot and water damage to the interior of its building as a result of a June 23, 2011 rainstorm. Tower claimed that the insurance policy does not provide coverage for these damages and disclaimed. This matter was scheduled for a trial before a jury on May 19, 2014 and the parties agreed that the facts were not in dispute and the court would decide the legal issues involved after submission of trial briefs. The parties stipulated to undisputed facts on May 19, 2014. The court has received submissions from both parties.

The construction of terms and conditions of an insurance policy that are clear and unambiguous presents a question of law to be determined by the court when the only issue is whether the terms as stated in the policy apply to the facts.

The relevant facts stipulated by the parties are the following: 1. A “Commercial Package” insurance policy issued by defendants to plaintiff was in effect on June 23, 2011 for the subject property; 2. On the morning of June 23, 2011 the location of the subject property experienced heavy rains; 3. On June 23, 2011 the subject property suffered interior water damage and the retaining wall located across from the building (across the driveway) collapsed that day; 4. The insured building did not collapse or in any way con-

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[ COURTS I D E ] tribute to the collapse of the retaining wall; 5. There was interior water damage in the building on June 23, 2011; 6. One source of the water damage was water entered the building through the roof drain air vents within the roof drain system; 7. The building’s roof and/or walls did not sustain any damage that allowed water to enter; 8. After the loss, plaintiff corrected the non-watetight connections within the roof drain system; 9. On June 23, 2011 water also flowed into the building over the curb and underneath the door saddle; 10. The cause of the retaining wall collapse was the force of runoff water from the neighbor’s property against the retaining wall. The large macadam parking area on the neighboring property slopes downward toward the top of the wall and effectively collects water and funnels it into the drainage basin adjacent to the upper wall. The center of the wall failure area coincides with the apex of this funnel where the plywood material was observed to be distorted due to excessive water pressure; 11. Plaintiff timely and properly reported the loss to defendants; 12. Defendants disclaimed coverage pursuant to a letter dated October 3, 2011; 13. As a condition of coverage, plaintiff ’s policy requires that plaintiff “take all reasonable steps to protect the covered property from further damage....” The only remaining factual issue involves the amount of damages caused by the claimed loss. However, the legal issue to be decided is whether the policy provides coverage when these undisputed facts are applied to the language of the policy. Defendants argue that there is no coverage when these facts are applied to the policy and plaintiff argues otherwise. The construction of terms and conditions of an insurance policy that are clear and unambiguous presents a question of law to be determined by the court when the only issue is whether the terms as stated in the policy apply to the facts. Briggs v

Allstate Ins. Co., 1 AD3d 392. Where the provisions of the policy are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement. GEICO v Kligler, 42 NY2d 863. An exclusion from coverage must be specific and clear in order to be enforced. Seaboard Surety Co v Gillette Co., 64 NY2d 304. An ambiguity in an exclusionary clause must be construed most strongly against the insurer. Guachichulca v Laszlo N. Tauber & Assoc., 37 AD3d 760. In this case, there is no coverage for the collapse of the retaining wall in question since it was not the direct result of the collapse of an insured building. Furthermore, the storm water runoff that caused the collapse of the retaining wall is an excluded loss since the policy excludes loss caused directly or indirectly by ﬂood and/or surface water, regardless of any other cause or event that contributes concurrently or in any sequence to the loss. Concerning the interior water damage sustained by plaintiff, there is no coverage for this damage since the premises did not suffer any damage from the storm to its roof or walls through which the rainwater entered. Since it is undisputed that the interior wall damage was caused by rainwater and that this rainwater did not enter the premises through damage to its roof or walls, there is no coverage pursuant to the policy’s rainwater limitation. Additionally, since the rainwater entered the premises through air vents within the roof drainage system, this damage is further excluded from the policy pursuant to its faulty design exclusion. Therefore, plaintiff ’s complaint is dismissed. Defendant is directed to settle a proposed order and judgment in accordance with this decision.[IA] 2014 NY Slip Op 51450(U) Decided on September 18, 2014 Supreme Court, Rockland County Berliner, J.

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[ TE CHBITE S ] continued from page 32

Coordinate cyber incident response planning across the entire enterprise. Early response actions can limit or even prevent possible damage. A key component of cyber incident response preparation is planning in conjunction with the chief information officer, business leaders, continuity planners, system operators, general counsel, and public affairs personnel. Maintain situational awareness of cyber threats. This involves timely detection of cyber incidents, along with the awareness of current threats and vulnerability specific to that organization and associated business impacts. Analyzing, aggregating, and integrating risk data from various sources and participating in threat information sharing with partners helps organizations identify and respond to incidents quickly and ensure protective efforts are commensurate with risk. What steps should company management take to avoid a security breach? • Incorporate the Latest Security Protection • Establish and Enforce Employee BYOD Security Policies • Have an Action Plan in Place to Respond to a Breach • Obtain Cyber Insurance Coverage Incorporate the Latest Security Protection. Rick Munoz, a senior IT executive for a major international management consulting firm, says there are certain key elements of security software defenses to provide in-depth secure data. “The most secure system in the world is a computer network unplugged from the internet, and powered off. This is obviously impractical, so we need to develop systems that will give a firm the most protection.” He continues, “There is no one-step solution to protecting data, you must use a variety of tools. I use the ‘Swiss cheese’ analogy with my clients. I tell them to think of IT security like a block of Swiss cheese. In its normal state it’s not transparent, but if you can line up all the holes in the cheese, you would be able to penetrate the cheese. So your IT security prevention needs to be designed to avoid situations where the holes are aligned.” One strategy Rick promotes is to use a web application firewall. This is a network type device between the external firewall and the internal web servers. Rick describes 38 October 13, 2014 / INSURANCE ADVOCATE

how this firewall works. “The web application firewall inspects all data as it goes through the network. It has the ability to identify common web exploits before they can penetrate into your system.” For companies that handle a great deal of customer-sensitive data, Rick recommends that his clients implement an entire suite of products to detect data loss prevention (DLP). DLP products examine exfiltrated data to look for patterns, both on an individual and aggregate basis. Rick gives the example of Social Security numbers. “If the DLP detects Social Security numbers being transmitted out of the company, it sends an alarm to the IT department,” he explains. He also mentioned that these systems need to be properly calibrated to avoid false positives. Rick believes this type of protection can prevent a “Snowden” problem: “Anyone requesting 20,000 data items in a short period of time would raise an alarm if the normal data request in the same time period is substantially smaller.” Establish and Enforce Employee BYOD Security Policies. Many organizations allow employees to use their own personal computers, laptops, smartphones and other personal mobile devices (Bring Your Own Device) for storing, transmitting and receiving sensitive company and customer data. Allowing devices from multiple manufacturers using multiple operating systems creates an inherent lack of control by the IT and security personnel over the security of data. This lack of control invites more frequent data breaches, privacy violations and exposure to computer viruses, malware and data theft. What makes this even more troublesome is the fact that most people do not implement even the most rudimentary security precautions, such as using a secure password. Have an Action Plan in Place to Respond to a Breach. If you wait until you have a data breach to decide how to handle one, then you are way behind the eight ball. Your organization needs to have a plan in place which is clearly spelled out and supported throughout the organization. Prepare and distribute an outreach plan to all of the organization’s constituents: customers, law enforcement and the general public. Internal coordination is essential to make sure that accurate information about a potential breach can be shared without adding to any legal or brand liabilities.

Obtain Cyber Insurance Coverage. Data breaches can have serious ﬁnancial effects. In addition to business interruption losses, regulatory and credit card company fines, legal defense costs and civil damages, there are also potential Federal and state laws which can impose fines for data disclosure, and outline requirements to publicly disclose data breaches to the affected parties and law enforcement. Cyber insurance is now readily available for both first party (e.g. breach notification costs) and third party risks (e.g. litigation defense and indemnity). In the past, this coverage in some limited form may have been available under various insurance contracts. But in recent years, many insurers have incorporated cyber exclusions in their policies, so the best form of protection is a standalone policy specifically designed for the unique exposures of cyber liability. Now that you understand the seriousness of cyber threats to your organization and the risk management steps you can take to protect your data, you should look at whether or not this exposure can be an opportunity to develop new products for your customers. Cyber insurance is a rapidly growing market with huge growth potential. According to Experian, less than one-third of all corporations in the U.S. buy any cyber insurance coverage, and according to an article published in June 2013 by Betterley Risk Consultants, the current cyber insurance premium is over $1.3Billion.[IA] Paul Dzielinski is senior vice president with U.S. RE Corporation. U.S. RE is an international financial services firm with operations in reinsurance brokerage, consulting, investment banking, underwriting, claims, risk, and captive management. You can reach Paul at 845.920.7155 or pdzielinski@usre.com.

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