October 26, 2014 by C Acunto

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VOLUME 125, NUMBER 18 / October 26, 2014

A CINN Group, Inc. Publication

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

DEMOTECH: INDUSTRY LOSS RESERVE STUDIES

“Interesting” not Meaningful

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Contents

October 26, 2014 | volume 125 number 18

[COVER STORY ]

[ AD FEATURES]

MSO: Too Many Cooks in the Kitchen?

LICONY: From Investments to Job Creation and More, The Life Insurance Industry is a Major Economic Engine for New York State

PREMONITION: An Unfair Advantage?

DEMOTECH: Industry Loss Reserve Studies “Interesting” not Meaningful Joseph L. Petrelli

[FEATURES] 4

Foreword: Standing Strong Steve Acunto, Publisher

Insight: How About Free? Free Would be Nice! Peter H. Bickford

In the Associations: Israel Bonds’ Luncheon Draws 250+

Face to Face: Management System Envy… is Bigger Really Better? Michael Loguercio

On the Level: Position Your Business for Future Opportunities N. Stephen Ruchman, CPIA

On My Radar: No Damage to Vexatious Litigant Barry Zalma

Looking Back: November 1989

Courtside: Court of Appeals, In Novel Case, Adopts “Likely to Succeed” Standard for Unappealed Legal Malpractice Cases Lawrence Rogak

Classiﬁeds

Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / October 26, 2014 3

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[ FORE WORD ]

Steve Acunto

Standing Strong

reater New York Insurance Companies celebrated its 100th anniversary the first week of November in a style that fit the modest, but unquestionably upbeat swing of this highly successful enterprise. The dinner included 300 elected and regulatory officials, brokers, company executives and industry leaders gathered at New York’s historic Union League Club one block from GNY’s Madison Avenue headquarters. “Since 1914. Standing Strong” was communicated as the theme articulated via a diorama styled work of art that presented the Company’s milestones. During the program, Senator James L. Seward, Chairman of the New York State Senate Insurance Committee, welcomed guests and presented a proclamation by the New York State Senate and New York Executive Deputy Superintendent of Insurance, Robert Easton, offered the congratulations of the Department of Financial Services on achieving the landmark centenary year and for being “boring” inasmuch as its results and record are predictably uneventful, i.e. problematic. Nice compliment, actually. Ms. Elizabeth Heck, President and COO of the Company, told attendees: “While the Company has evolved over the decades, Greater New York Mutual Insurance Company stayed true to its core beliefs. Those same core competencies provide a strong foundation for moving the Company forward into the next century.” Ms. Heck, who will succeed Warren Heck as CEO, pledged to sustain the high standards that have characterized the Company’s progress to date: “The GNY community thrives on high standards of excellence, efficient service, and, most important, on the expectation of business conducted with honesty and integrity. These characteristics marked our progress since 1914 and will mark it as we advance over the years ahead.” ELIZABETH HECK AND WARREN HECK STANDING IN FRONT OF THE COMPANY’S 100 TH ANNIVERSARY COMMEMORATIVE ART THEY HAD CREATED FOR THE EVENT.

Full Story in Next Issue.

Mr. Warren Heck, Chairman of GNY, who preceded Ms. Heck as President from March 1983 to March 2001 was honored by the Company and its guests during the evening, as he passed the 52 year mark of service to GNY and its community; he is the fourth Chairman of GNY and was easily able to offer a history and perspective on the founding and development of GNY from its startup days on New York’s lower east side to today’s growing enterprise with 360 employees, 12,000 policyholders and a presence in 15 states. Mr. Heck observed: “If ever there were a company dedicated to New York City, to the well-being of its residents and policyholders, we feel it is GNY Companies. As underwriters of New York Real Estate these many years we have protected our brokers’ and insureds with great dedication and have been rewarded handsomely with the loyalty of so many customers. GNY Companies’ celebration is, in a sense, a celebration of the success of New York insuring in the sectors in which we specialize.” As soon as this well run, reliable, A+ rated New York Real estate engine advises, we will publish the Save the Date for GNY’s 200th. It’s that solid and predictable. Congrats to the Hecks, the Board and the team at GNY, long a friend to independent brokers.[IA] 4 October 26, 2014 / INSURANCE ADVOCATE

VOLUME 125, NUMBER 18 OCTOBER 26, 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

How About Free? Free Would be Nice!

he year 1984 has significance on so many fronts but none greater than its import regarding access to information. Contrast 1984 as George Orwell’s target year in his futuristic classic about subverting control over all communications through “Big Brother,” with 1984 as the year the first Macintosh computer was

of Public.Resources.Org, and a leading proponent of placing filed data in the public domain free of charge. His initial success was with the SEC and its EDGAR database of filings and disclosures of public companies. The SEC resisted the call for free access arguing that there was limited demand for this information and it would

Peter H. Bickford

introduced and the dawning of the Internet Age. The tension between controlling and accessing information was succinctly summarized by Stewart Brand, the founder of the Whole Earth Catalogue, who famously noted in the 1990s that: “On the one hand information wants to be expensive, because it’s so valuable. . . . On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time.” In the decades that followed, free has become the norm over expensive – at least in most circles. Free is almost expected when it comes to the availability of information on the Internet. You can search almost any topic and get tons of information – helpful, unhelpful, accurate or questionable – without any cost whatsoever. Mitchell Kapor, the designer of Lotus 1-23, one of the first mega-apps, observed that: “Getting information off the Internet is like drinking from a ﬁre hydrant.” Free access to information, however, has flowed more slowly from the regulatory community, which cited and in some instances continues to cite the cost of providing free access as an impediment. One of the first to contest the regulators’ premise was Carl Malamud, founder

be prohibitively expensive to make the data readily available. Malamud got a grant from the National Science Foundation, bought the reports from the SEC and posted them on a public website. Today SEC filings are readily available at no or nominal cost to anyone. Reported court cases and statutes at both the Federal and State level soon followed suit. Prior to the digital age, you either had to have access to a major public library or to a law library that purchased volumes of “official” cases and statutes from “authorized” compilers such as West Publishing (and more recently, LexisNexis). These volumes were not cheap, as any law firm manager would know. Today, although West (now a unit of Thomson Reuters), LexisNexis and others continue to successfully sell access to cases, statutes and other public data with the addition of proprietary value-added enhancements, the basic data are now almost universally available online somewhere. With only an elementary expertise in searching the Internet, you can find complete copies of Federal and state statutes, cases and the rulings and regulations of governmental agencies. But not everything!

Unfortunately there are gaps and exceptions to this free access to public information, and some of that is right here in the Tri-State area in our “open and transparent” insurance regulatory world. Consistent with the practice of states nationwide, Connecticut, New Jersey and New York each provide free access to case law for its state courts and each state’s complete statutes through government sponsored websites. Assuredly, therefore, the regulations or administrative codes of these states would also be accessible online. After all, these are the formally promulgated rules for carrying out and enforcing the statutory directives relating to the business. Our local states, however, are quite inconsistent when it comes to providing access to their insurance regulations. At one end of the spectrum is Connecticut, whose full and complete insurance regulations are accessible through the Connecticut Insurance Department website. In the middle is New Jersey. The New Jersey Department of Banking and Insurance website contains a link to a “Free Public Access” site for the NJ Administrative Code, which includes insurance regulations. However, this site is “maintained” by LexisNexis and access to the site requires you to agree to the LexisNexis lengthy “terms and conditions,” many of which raise questions about the free ability to use the data for any practical research purpose. And then there is New York. There is no access to a full and complete set of inforce insurance regulations available on the NY Department of Financial Services website. None! True, the DFS website has lots of information on newly adopted or revoked regulations, and an index to all in-force insurance regulations, but nowhere does the site include full access to a complete set of in-force regulations. For that, one has to subscribe to commercially available (i.e., expensive) resources or have access to a library that does. While I have not done a 50-state survey, I checked a few of the larger states and found that the insurance regulations were continued on page 8

6 October 26, 2014 / INSURANCE ADVOCATE

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Wholesale 4310 Greeting Card Dealer 7390 Beer/Ale Dealer 7999 Hardware Store 8018 Wholesale Store/NOC 8021 Meat, Fish Dealer-Wholesale 8032 Dry Goods, Clothing, Shoe 8047 Drug Store 8048 Fruit & Vegetables 8111 Plumbers Supplies Dealer-Wholesale Restaurant 9061 Clubs 9071 Full Service Restaurants 9072 Fast Food Restaurants– Including Drivers 9074 Bars & Taverns Social and Health Services 8854 Home Health Care – Prof. Employees 9051 Home Health Care – Non Prof. Employees 8857 Counseling – Social Work – Traveling Oil and Gas Dealer 5193 Oil Burner Installation 8350 Fuel Oil & Gas Dealer 8353 Gas Dealers, LPG & Drivers

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[ INSIGHT ] make a complete set of in-force insurance regulations fully accessible, without restrictions and free of charge to anyone seeking such access online. It makes no sense today for an agency responsible for the regulation of insurance to provide all kinds of information available for public access – press releases, newsletters, bulletins, consumer information, licensing forms, and the like – but not provide full access to the actual regulations it promulgates and enforces.

continued from page 6

freely accessible on their insurance department or state government websites, including Illinois, Florida, Pennsylvania, Texas and California. Interestingly, the site providing the California regulations is maintained through an independent for-profit service, the same as New Jersey, but without the “terms and conditions” trap. It is time for NJ and particularly NY to catch up to the current digital age and

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It is time for NJ and particularly NY to catch up to the current digital age and make a complete set of in-force insurance regulations fully accessible, without restrictions and free of charge to anyone seeking such access online.

While we are talking about websites, a brief word about the insurance-related websites of the Tri-State departments. The Connecticut site is far and away the best organized, most helpful site of the three. It is also the simplest to navigate and with its Quicklinks tab it is easy to find all kinds of insurance and government related information. The site for the New Jersey Department of Banking and Insurance is somewhat less friendly, harder to navigate, and with less accessible basic information. The site for New York’s Department of Financial Services is by far the least friendly of the three and hardest to navigate. Perhaps it is coincidence, but I note that in the Tri-State area, the site focused exclusively on insurance – Connecticut – is the simplest, most user friendly with the broadest access to information of the three. The two States that have combined banking and insurance into one agency are less friendly with narrower scopes of access. Hmm. [IA]

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ADVERTORIAL

Too Many Cooks in the Kitchen? DURING THE HOLIDAY SEASON, the kitchen becomes the center of activity, filled with family and friends. Practicing kitchen and food safety is always important, but especially during the holidays when more people are involved in the process. Holiday tragedies can be avoided by following simple safety tips. Offering tips to help clients avoid loss and time in the emergency room is another value-added service of the professional insurance agent. According to the National Fire Protection Association (NFPA), cooking fires are the leading cause of home and related injuries. By far, the most home cooking fires occur on Thanksgiving. For example, in 2010, there were 1370 cooking fires, or nearly three times as many as on other days of the year (www.nfpa.org). Three of the most common kitchenrelated injuries seen around the holidays are burns, food poisoning, and lacerations. Guests may be unfamiliar with appliances, and it may not always be easy to tell when an electric cooktop burner is on or if it is hot. Open gas flames can be especially hazardous. Small children should be kept away from the oven and stove. Deep-frying is a popular method of cooking turkeys. To be safe, the turkey should be completely dry and thawed prior to putting it in the hot oil. If moisture comes in contact with the 350 degree oil, the oil can splatter and burn skin, or cause a fire. NFPA estimates that deep fryer fires cause 5 deaths, 60 injuries and $15 million in property damage each year. The frying should be done outside, and should never be left unattended. There are also newer oil free fryers that are safer. Raw meat must be handled carefully. Turkeys should be thawed in the refrigerator. When using a quick thaw method in cold water, the water should be changed frequently to avoid a build up of bacteria. Cross contamination can be avoided by washing utensils and preparation surfaces after working with meat, or by using different cutting boards for

NFPA estimates that deep fryer fires cause 5 deaths, 60 injuries and $15 million in property damage each year.

meats and vegetables. Stuffing cooked outside the turkey is more likely to be thoroughly cooked. Food should be refrigerated as soon as possible after it is served. If foods such as dips and shrimp are left out for a period of time, they should be kept on ice. Keep knives and other sharp objects away from the edge of counters or tables, and small fingers. Carving should be done by someone who is experienced. Holiday dinners usually mean fancy china and glassware that are easily breakable. Careful handling can help to avoid the heartbreak of destroying Grandmaâ&#x20AC;&#x2122;s prize crystal, as well as an emergency room visit. Leaving cabinet doors and drawers open can lead to bumps and bruises. Additional appliances may be needed for

the holiday preparations. Avoid dangling or stretching cords where they can be accidentally pulled or tripped over. Clean up spills promptly, and keep floors clear of children and toys to avoid slip and fall or tripping hazards, especially when carrying a platter full of food. When possible, young children should play outside or at least away from the kitchen area. In addition to cooking and kitchen hazards, holidays mean increased travel. It is estimated that 39,000,000 people travel on Thanksgiving, with approximately 90% driving to their destinations (www.statisticbrain.com). Thanksgiving is one of the deadliest days to drive, especially after eating and drinking all day. Another problem is that people are often traveling on unfamiliar roads. Holiday memories should be happy, and not tragic. Helping clients avoid loss is another sign of the true insurance professional.

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[ IN THE ASSOCIATIONS ]

Israel Bonds Luncheon Draws 250+ Fishlinger, Barton and Granum Honored

he annual Development Corporation for Israel/Israel Bonds Insurance Division luncheon was held on October 28th at Gotham Hall in New York City. Dr. Larry Barton, Chancellor, and O. Alfred Granum, Professor of Management, The American College, and William Fishlinger, Chairman & CEO of Gramercy Risk Holdings, were honored for their professional achievements and civic endeavors. The luncheon’s keynote speaker was

Ambassador Ido Aharoni, Consul General of Israel in New York. Israel Bonds’ President & CEO, Izzy Tapoohi, praised the insurance industry for “having been a pillar of the New York Israel Bonds effort for decades.” Over 250 insurance professionals representing more than 30 companies attended the luncheon, which resulted in $18 million in Israel Bond investments.

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10 October 26, 2014 / INSURANCE ADVOCATE

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[ FACE TO FACE ]

LIC

By Michael Loguercio

Management System Envy…is Bigger Really Better?

o when shopping for an agency management system, what exactly are you looking for and what, precisely, are you trying to accomplish? Bigger…better…than what? As you are well aware, there are many extenuating factors that may (and most like-

most likely be met with excessive gunfire in a fight when all they brought was a knife…and a very old and dull one at that! What happens when I am speaking with agency owners is that they tell me they know perfectly well that they are “the boss” and that they can of course direct

My response is always the same: although I certainly hear you loud and clear and completely understand your concerns, Mr. Owner, when the appropriate system is selected for your business’s specific needs, these fears and subsequent objections are typically mitigated and overcome. Michael Loguercio

ly will) contribute to the ever changing landscape of the independent agency, which in turn will affect the process and timeline of when and how your organization may shop for an agency management system. Most of the agency principals that I speak with around the country (location does not have any bearing on the issues) typically portray the same tales of woe with respect to their technology desires: they feel that their system is a legacy program that needs a facelift (and by that I mean more than a regular regiment of Botox applications, yet much more than applying lipstick to a pig), they are not so willing to part with what they believe will be an overly stuffed bag of cash equal to a high level executive’s salary, do not want to allocate the time and resources necessary to re-train their entire staff on a new system, certainly do not want to run the risk of losing years’ worth of integral and sensitive data, and last (but by far not at all the least): they do not want to walk into their agency back office and say, “Ok, everyone step away from your computers, as this is a raid! We are taking out your old management system and replacing it with a brand new one!” Why don’t they want to kick down their back office door and declare this to those for whom they sign their weekly paychecks? Because they know that if they do, they will 12 October 26, 2014 / INSURANCE ADVOCATE

their staff however they feel appropriate with respect to their business, however they do not want to upset their folks and business, and in their minds rightly so, by introducing a new system that may cause anxiety, lost production, lost sales, lost revenue, lost data, and very possibly loss of employees. My response is always the same: although I certainly hear you loud and clear and completely understand your concerns, Mr. Owner, when the appropriate system is selected for your business’s specific needs, these fears and subsequent objections are typically mitigated and overcome. One way that I recommend (and have seen this method successfully implemented within many agencies) is to do this by completely involving your staff in the buying process...right from the beginning. Although you as the agency owner will always reserve the right to make the final decision, by involving your staff you have their buy-in from the onset. This way, when you gently declare that moving to a new system is a mandate that will be systemic within your organization, they will be the first on board to accept it. Another fear that is not accurate is the notion that your agency needs to manage two agency management systems together for months until you are able to phase the

legacy program out and fully implement the new program. This is simply not the case when the proper system is selected. Sure, you may want to do this for a few weeks as you review the converted material, however months-on-end is not necessary or recommended. Additionally, many agents fear that their present agency management system will hold their data hostage, and that they will not be able to easily obtain it for the conversion to the new program. Please keep in mind that this is YOUR data, YOUR information, and that your current vendor should make this readily available to you…and not charge you an exorbitant amount of money in fees in order to release it to you. Your management system is a tool that when correctly utilized, does just that: it “manages” your business information…it is NOT your business information. Years ago, switching from one system to another was not that easily accomplished and was a very arduous task indeed. However now, with many systems, this bearish process has become quite rudimentary. What is important to realize is that changing agency management systems should not be difficult, should not cause data loss, lost sales, lost revenue, and certainly not a loss of staff (because of their inability to accept change of technology within the organization). It should be a rather simple process that allows you, the independent agent, to continue your normal course of business and maintain the same level of doing what you do best: selling insurance. When shopping for an agency management system, in addition to the usual needs and requirements that every agency typically has, there are other areas (besides the obvious) that I suggest. For instance, I always recommend that you search for a system that will easily and seamlessly integrate with and work well together with your real time comparative rating program. In addition, please keep in mind that if your business includes a real time quoting module that is accessed by the concontinued on page 14

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LICONY

ADVERTOR IAL

LICONY

From Investments to Job Creation and More, The Life Insurance Industry is a Major Economic Engine for New York State

hrough times of economic crisis and financial boom, the life insurance industry is an important pillar in the nation’s and New York State’s economy. This engagement in the national and state economy is not a federal or a state regulated mandate, but rather a demonstration of the industry’s strong belief in the future of our great country and our great state.

assets in New York’s economy. About $309 billion of this investment is in stocks and bonds that help finance state and municipal infrastructure, utilities, public and private construction – all of which generate thousands of jobs and innumerable services in New York. The industry also has provided $27 billion in mortgage loans on farm, residential and commercial properties.

National Contributions Consider the most recent data reports from the American Council of Life Insurers (ACLI) that show $5.2 trillion – 90 percent of the industry’s total assets – is invested in the U.S. economy making life insurers one of the largest sources of investment capital in the nation. The industry is the largest single source of bond financing for American business, holding 17 percent of all U.S. corporate bonds. The life insurance industry is also a long-term investor according to the ACLI. Of the $749 billion in government bonds held by life insurers, the overwhelming majority, $706 billion, are in long-term obligations. Life insurers provide long-term capital to the commercial mortgage market, financing more than $271 billion of U.S. commercial mortgages, or $1 of every $8 invested in U.S. commercial mortgages.

Job Creation in New York The life insurance industry supports approximately 160,000 jobs directly and indirectly, according to recent Life Insurance Council of New York, Inc. (LICONY) research. Stated another way, the industry generates 11 additional jobs for every 10 direct industry jobs.

New York State Investments Here in New York State, the investment story is just as compelling. According to the ACLI, the life insurance industry has invested approximately $376 billion of its

Community Investments Recent LICONY analysis indicates that as part of their New York State investments, life insurers have deployed approximately $10 billion in community investments across the state*. The nature of these community investments demonstrates the industry’s commitment to New Yorkers not only by providing protection for those critical losses covered by life insurance products, but also in ensuring that the strength of the industry is used to benefit the entire population of this great state. A Supporter for Good The nature and size of its contributions to the economy illustrate the vital role the industry plays and underscore its positive

impact on families and businesses across the nation and state. New York’s policymakers have a stated objective to protect families and promote business. For its part, the life insurance industry supports policy initiatives that foster achievement of those objectives.[IA] Thomas E. Workman is the President and Chief Executive Officer of the Life Insurance Council of New York, Inc. LICONY is the principal voice of the life insurance industry in New York. LICONY works to create and maintain a legislative, regulatory, and judicial environment that encourages its members to conduct and grow their life insurance businesses here in New York State. For stories about New Yorkers who have benefitted greatly from purchasing the products of life insurers, go to www.licony.org and click on “Published Articles” in the NEWSROOM box on the homepage. Source for all ACLI information: ACLI 2014 New York Facts, www.acli.com * Community investments include obligations of state government, its agencies, municipalities or other instrumentalities (e.g., dormitory authority bonds); investments in securities issued by businesses located in state empire zones or in federal empowerment zones or enterprise communities; NY state real estate investments; mortgages in connection with the financing of housing, the construction or rehabilitation of which is undertaken in conjunction with the federal low income housing tax credit; and philanthropic grants to community organizations.

O: (212) 986-6181 F: (212) 986-6549 551 Fifth Ave., 29th Floor, New York, NY 10176 website: www.licony.org INSURANCE ADVOCATE / October 26, 2014 13

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[ FACE TO FACE ] continued from page 12

sumer via your agency website or Facebook fan page, you want a management system that will allow for the automatic movement of the quote and risk information from the consumer entry portal, to the real time comparative rater, and directly into your agency management system…all without any manual data input from your agency staff: this is not only a complete waste of valuable resources, but may also cause a huge errors and omissions exposure concern due to the fact that you can easily transpose, or completely eliminate, important risk information. In addition, you should also be cognizant of some other features that are now available, such as the ability for seamless integration with an e-signature module that automatically allows for ACORD form applications that were automatically completed via the comparative rating system and domiciled within the client file of the management system, to be electronically forwarded to the prospect for an electronic signature, and with the click of a button be instantly returned back to the agency management system, whereby the agency may then email it directly to the underwriter. Other notable features that you probably want to consider are text messaging with non-editable, fully documented bi-texting communication; “drag and drop” technol-

ogy for the electronic storage of documents, policies, and other risk pertinent information; daily downloads of not only coverage and risk info but also commission and potential claim information; Microsoft Outlook integration; mobile access portability; interface with your accounting software such as QuickBooks; full reporting capability; and most importantly so that you provide your staff with the support that they deserve, easily accessible training and customer service support. Of course, here in this piece I have provided you with a very high level, “30,000 foot view” version (I say 30k’ level because I’m writing this article while on an airplane at 32,000’ traveling to our Dallas office for a national sales meeting to review new enhancements to our EZLynx agency management system) of what to consider when searching for a new agency management system. If you are considering pursuing a new agency management system and would like to maybe just chat about what options are available out there, please feel free to give me a call as it would be my pleasure to discuss this with you and your staff. So the past few weeks have been very exciting and extremely busy on the convention scene in this thing of ours, as I have attended conferences such as the CT IIAA, featuring Governor Dan Malloy as its keynote speaker; Syracuse I Day with Sugar Ray Leonard; and IIAA NY I Day

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 26, 2014 / INSURANCE ADVOCATE

with Boomer Esiason; and MAIA Big Event with Boston Mayor Martin J. Walsh. It was a pleasure to speak with so many of you, and thank you for the very kind words that you had about this column, and for the EZLynx programs that you are enjoying the use of in your agency. Well, until next time when we will be chatting about turkey dinner and large balloons floating down Broadway, from my family to yours, I wish you a very happy, healthy and safe Thanksgiving and Holiday Season! 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 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 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.

INA 10-26-14_INA 10-26-14 11/20/14 10:38 AM Page 15

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[ ON TH E LEVEL ]

By N. Stephen Ruchman, CPA

Position Your Business for Future Opportunities

have been a professional independent agent for nearly five decades. The job is challenging. But, I can say without hesitation that the compensation of running my own agency has extended far beyond the financial benefits, and I encourage anyone with an entrepreneurial spirit, the desire to truly help people, and

you send it. Build centers of influence. These will be the sources of future clients. In college, I had a professor who taught Economics 444, the culmination of all the classes we had taken. He had a book with snippets of wisdom, and in it was: “Be kind to the accountants and attorneys, for they shall

I believe the future of the independent agency system is good because establishing and growing an agency is one of the most rewarding endeavors I’ve ever known. I count my blessings for the path I chose and the good life my career has given to me and my family. I wouldn’t trade my career for the world. N. Stephen Ruchman

the willingness to work hard, to consider becoming an independent agent. That said, I’ve learned some lessons and gathered some from friends and colleagues who have also built successful agencies that I think are worth sharing. Regardless of where they come from, these lessons are invaluable to anyone building a business: Respect your field and those who you work with. It irks me when agents say they have customers. I never considered anyone I worked with a “customer”: I have always had “clients.” Direct writers have customers. We, as professional insurance agents, have clients. My clients always held me in the same esteem as they would their attorney and their accountant. Since we will get sued just as these would, we may as well consider ourselves professionals. I’ve never heard of a lawyer or attorney who had a customer. Those are for the direct writers. Be careful what you put in writing in an email. Like most of our digital communication these days, email lives forever. If you are writing an important letter, it pays to have a person you trust review it before sending. If you are really angry when you are writing the letter, wait three days before 16 October 26, 2014 / INSURANCE ADVOCATE

inherit the earth. Boy was he right—a lot of my clients have come from referrals from this group. Build a loyal staff. My staff was like an extended family. There are agents who believe that a corporate atmosphere means you don’t get close to staff. I believe this is a mistake. Knowing and developing a rapport with your employees is part of being professional, and they will follow suit with their own loyalty and professionalism to you and your business. Get honest feedback. Mayor Ed Koch always went to the public and asked “How am I doing?” This is a great philosophy. You can obtain honest, valuable information that can help you grow. With these tenets, you can build a strong agency, with a book of business and referrals that allow you to maintain your position regardless of how big you choose to grow your business. As a strong agency, you will have the opportunity at some point to purchase, merge and/or sell the business that you have made your livelihood. Merger and acquisition opportunities arise at different points in a business’s lifetime. I have come to this crossroad a few times, and have some lessons to share about this as well:

Do your due diligence. Regardless of size, when we have the opportunity to buy a business, we negotiate with the current owners over price, employee agreements, etc. But, one thing often neglected is a review of the major accounts. When the merger occurs, inevitably claims or other problems on some of those accounts arise because such a review was never done on the individual clients. Have your underwriting manager or key underwriters review the accounts to be acquired to make sure they are written to the same standards that your current office maintains. Don’t be absent. If you decide to open up a satellite office, make sure you have controls in place to monitor sales and all transactions, including monetary exchanges. Without reliable management in place, a satellite office inevitably will cost you a lot of time and money. Most agents are better off building a practice from their own location, unless they have strong management for their additional location(s). If you plan to manage more than one office, consider the distances you will have to travel to oversee them. Get to know your partners before committing. Young kids today have the right idea: Live with someone before you get married. When looking at partnerships, or even at just sharing an office with another agency, have a trial period beforehand. You won’t know what you’re getting until you’ve been with each other for a while. Just because you are friends on the golf course doesn’t mean you’ll make great business partners. Plan for perpetuation. Most of us never think of our exit plan because we don’t think we’ll ever get there. But the truth is nobody is immortal or invincible. Perpetuation planning is important for the survival of any agency. The plan can be a strictly internal matter or involve another agent with whom you’ve had a good relationship. Develop a plan for your key personnel to take over, even if you don’t expect it to ever happen. Be patient. Elvis said, “Only fools rush in.” Emotion, anticipation, and even anxiety can cause an agent to make hasty decisions. When it comes to negotiation, time

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[ ON T H E LEVEL ] is not your enemy … leading to the next piece of advice: Don’t skimp on legal advice/consultants. You know what they say about an ounce of prevention. It’s so important to get the proper legal advice from attorneys who know the insurance business—and that also goes equally for accountants. Remember lesson #1? … Getting good advice is key for due diligence. Do some honest soul searching. If you see fit to sell your business to a large national broker, in most cases the current stockholders or officers are given a contract for an agreed upon period of time. If you don’t meet the requirements of the buy/sell agreement, you have a good chance of being fired. Think ahead: Even though you may be able to meet challenges, there could be unforeseen circumstances, economic, weather or other conditions that force underwriting restrictions that make retaining your book of business harder than you anticipate. Think twice about the terms of the agreement and do serious soul searching. This is reality, not

your dreams. Use PIA. PIA’s staff of 80 includes several attorneys (as well as technical experts) reviewing contracts and answering agents’ questions. I, myself, have benefitted from PIA’s expert advice and I have always considered them a partner in business. Among the many relevant benefits it offers, PIA’s Industry Resource Center includes the Agency Transition Toolkit, which connects agents and brokers looking to sell, purchase or merge with another insurance firm. Through this program, PIA members can get in contact with the right people, with strict confidentiality, and allowing them a choice as to whom they wish to contact. I believe the future of the independent agency system is good because establishing and growing an agency is one of the most rewarding endeavors I’ve ever known. I count my blessings for the path I chose and the good life my career has given to me and my family. I wouldn’t trade my career for the world. [IA]

N. Stephen Ruchman, CPIA, is a retired partner of B&B Coverage LLC, and founder of Ruchman Associates Inc., the agency he started in 1961. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and has sat on, or chaired, nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. A graduate of Michigan State University, with a major in insurance, Ruchman is past president of the Peninsula Counseling Center and a member and past president of the Rockville Centre Chamber of Commerce board of directors. He is division chair for the Insurance Division of the United Jewish Appeal and has served on the business advisory board of The First National Bank of Long Island. He can be reached via email at nsruchman@gmail.com.

Join NAPIA and Gain a Competitive Edge! The National Association of Public Insurance Adjusters (NAPIA) gives its members an edge on the competition by providing strategic advocacy, continuing education, marketing tools and other benefits required to succeed professionally, including: Seminar & Conference Registration Discounts Member Company Listing on Website Continuing Education (CE) Credits Discounts on E&O Insurance Legal Representation Legislative Updates NAIC Liaison

For a limited time, the Association is offering a savings on membership dues that allows public adjusters to join at 50% off the annual rate. Don’t delay! Join NAPIA soon to take advantage of great member benefits at half the cost. For more details or to apply, visit www.napia.com or call 703-433-9217. INSURANCE ADVOCATE / October 26, 2014 17

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[ ADVERTORIAL ]

An Unfair Advantage? Big data yields surprising results in litigation

n March 1, 2014, Alvin Benton Esq. won Case #2013CA-008850-O in Orange County, Florida before Hon. Margaret Schreiber. The analysts at legal analytics startup, Premonition, weren’t surprised. “It’s the 32nd time in a row that he’s won in front of her,” CIO Toby Unwin explained. Can the results of litigation be predicted in advance based solely on the Attorney and who they are appearing in front of? “Not entirely,” Unwin explains,“ but it has approximately a 30% influence. Over the course of several cases it adds up to significant savings for clients.” Premonition has a unique database that pulls records directly from individual courthouses and pools them where they can be analyzed. “That in itself is a breakthrough,” CEO Guy Kurlandski explains. “Until now, unless you had a Federal, or appealed, case there was no Central system for searching cases, so you had to find 99% of them by hand at individual courthouses around the country. Premonition can search many courts simultaneously.” Data like this can produce interesting results. Using advanced algorithms to spot trends, Kurlandski claims the system usually finds at least one outlier, like Benton, before each Judge. “We had a client in Reno, Nevada. After crunching the data on over 15,000 cases we found an Attorney with 22 straight wins before that Judge. The next Lawyer down was at seven. On closer examination we found a lot of anomalies with that Attorney/Judge pairing … these things are more common than you might think.”

“…peer recognition and billing rate aren’t correlated with Courtroom success.…” – Toby Unwin, CIO, Premonition

How good are Attorneys? “It’s a complicated question. They themselves don’t know and it differs per Judge,” says Unwin. “We’ve found that peer recognition and billing rate aren’t correlated with Courtroom success. The top UK law firms consistently rehire proven losers because, until now, nobody’s been keeping score.” “Alvin Benton is only an Associate at Holland & Knight, yet he’s the best Lawyer there for certain Judges. However, if you called the firm and asked for their best Attorney for Judge Schreiber, they’d probably give you a Senior Partner at vastly higher rates who isn’t even top 100 before that Judge. It sounds crazy to say, but law firms (that aren’t clients) don’t even know how good their own people are, let alone the Attorneys and Judges they’re up against.” Unwin says. Former Insurance defense attorney, Brett Schlacter, agrees. “Facts and law have lost too many times. As objective as Judges

“If you have to hire an attorney anyway, why not hire a good one?” – Guy Kurlandski, CEO, Premonition 18 October 26, 2014 / INSURANCE ADVOCATE

try to be, at the end of the day they’re human and the quality of the Advocate definitely makes a difference.” How are insurers using Premonition? “We believe data driven litigation is a game changer,” Guy Carpenter, UK Managing Director, Donald McDonald, explains. “It’s amazing that law as an industry hasn’t had these kinds of metrics applied to it before. Better litigators means fewer losses, means lower premiums. It’s an exciting area,” he continues. “We’re also exploring using Premonition’s general Court data in areas like Medical Malpractice. Thirty-five percent of malpractice claims come from repeat litigants, so why not screen them out at the beginning? We’re exploring programs with drastically reduced premiums for clients that litigate intelligently.” “You have to hire an Attorney anyway, why not hire a good one?” Kurlandski asks. “Many insurers track their internal Counsel results, but have no idea when it comes to outside Counsel, or new geographic areas. Premonition offers what some are calling a very, very unfair advantage in litigation, i.e. putting the right Attorney before the right Judge.”[IA]

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[ ADVERTORIAL ]

Premonition LLC is a Miami, Florida based legal analytics company. It specializes in Attorney selection based upon Win Rate per Judge and case type, which it can offer via reports or Attorney leasing. Premonition assists in Arbitrator and Expert Witness selection based upon win rates and prior litigation records. Premonition also supplies bespoke litigation data including malpractice litigant lists and Judicial analytics. www.LosingslsExpensive.com

“…data driven litigation is a game changer… better Litigators means fewer losses, means lower premiums.”

Guy Kurlandski, Premonition CEO, is a serial entrepreneur who has created a diverse group of businesses that include household product supplies, advertising, an art gallery and clothing lines. Mr. Kurlandski also held the position of President of a large newspaper, printer and distributor. He is the principal of Print Management LLC and SETASI LLC (a private equity firm); a Partner at PlayNTrade (video game retail); Co-principal of Lionheart Capital Management; CEO of Oceanview 7 LLC (construction developments in the Florida Keys); COO of Litigas LLC (a legal services firm); and a consultant to various newspaper and print plants both domestically and abroad. He speaks three languages and lives in Miami, Florida.

Toby Unwin, Premonition CIO, started his career as a head hunter at Harvey Nash PLC, a leading UK Public recruitment company. He left there to form NetSearch with a consortium of five top recruitment companies and a leading jobs website as investors. NetSearch was one of the most profitable Internet businesses in Europe and subsequently sold for $160M. Mr. Unwin is the author of bestselling books, owns 10 patents and serves as the Republic of Austria’s Honorary Consul in Orlando. He sits on numerous boards including Maximum Life Medical Research Foundation and the Central Florida Ballet. As an accomplished pilot, he holds a world airspeed record. He speaks five languages and is International Advisory Counsel to NeJame LaFay, Attorneys at Law.

– Donald McDonald, UK Managing Director, Guy Carpenter

INSURANCE ADVOCATE / October 26, 2014 19

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[ COVER ] By Joseph L . Petrelli, President, Demotech

DEMOTECH: INDUSTRY LOSS RESERVE STUDIES

“Interesting” not Meaningful

20 October 26, 2014 / INSURANCE ADVOCATE

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[ COVER ]

nsurance literature is replete with articles, analyses, studies and discussion documents related to industry loss and loss adjustment expense (L&LAE) reserves, the impact of L&LAE reserve adequacy on insurance pricing cycles, as well as the correlation between inadequate L&LAE reserves and the failure rates of carriers. However, we found negligible justification for the terminology or analysis of “industry L&LAE reserves” nor a rigorous discussion of the impact of under-reserving L&LAE on solvent carriers, or the resultant overstatement of reported income associated with under-reserving. In an effort to initiate thoughtful review and dialogue on these issues, Demotech undertook this study to investigate two questions: 1. Is the term “industry loss and loss adjustment expense reserves” a meaningful one? 2. Has the relationship between underreporting of L&LAE and the resulting overreporting of income been thoroughly discussed? If not, why not?

Some of the research on industry loss and loss adjustment expense reserves A review of previous research and articles on this subject indicates the focus of researchers is either an industry-wide analysis of the relative adequacy of L&LAE or the relationship of inadequate L&LAE reserves to the failure of carriers. In Charles Bryan’s May 2014 review of Stan Khury’s paper “Testing the Reasonableness of Loss Reserves: Reserve Ratios,” Bryan reminded us that the actuary’s increased role in setting and evaluating loss reserves came about during the late 1980s after changes to the required components of actuarial opinions were instituted by the National Association of Insurance Commissioners (NAIC). The NAIC had revised these requirements following a report issued by the U.S. House of Representatives which highlighted deficiencies in the evaluation of loss reserves regarding the issue of solvency. Bryan noted an A.M.

Best report that stated “Deficient loss reserves (intrinsically linked with inadequate product pricing) and rapid growth were the most dominant causes of insolvencies.” In recent annual reports (2010, 2011, 2012 and 2013) entitled “U.S. P&C Industry Statutory Reserve Study,” Aon Benfield studied industry-wide, rather than individual company, reserves by looking at an aggregation of NAIC Annual Statement data. In its June 3, 2014 report, Aon Benfield reported the overall industry redundancy of $6.5 billion is equivalent to 1.1% of booked reserves. Further, they noted that the industry-wide redundancy in personal lines of $9.3 billion was less than the $10.1 billion reported at year-end 2012. In its “GC Briefing, Industry Reserve Update – Which Way is the Cycle Turning?” issued in April 2014, Guy Carpenter focused on industry-wide trends when it noted, “Seventy percent of the improvement for accident year 2012 can be attributed to two lines: homeowners and private passenger auto.” In the May 31, 2012, issue of PropertyCasualty360, Meyer Shields, an analyst at Stifel Nicolaus, suggested that the (then) industry reserves of $573.7 billion were but $5 billion [less than 1%] above the minimum adequate level. (Ruquet) In their report “What May Cause Insurance Companies to Fail – and How This Influences Our Criteria,” Brennan, Clark, and Vine discovered seven key factors that led to company failure. Two major factors were underpricing and underreserving. They cited one example of California-based workers’ compensation insurance companies becoming insolvent following rate deregulation: “The underpricing and inadequate reserving that ensued came to light late in the decade and resulted in several companies that were heavily concentrated in the market becoming insolvent.” They then went on to discuss global P&C companies that failed due to industrywide underpricing and the resulting inadequate reserves. Darrell Leadbetter and Suela Dibra referenced a study by the Financial

Joseph L. Petrelli

Is the term “industry loss and loss adjustment expense reserves” a meaningful one?

Services Authority (FSA) in the United Kingdom in “Why Insurers Fail: The Dynamics of Property and Casualty Insurance Insolvency in Canada.” This FSA study analyzed failed insurers across life and non-life sectors within fifteen countries of the European Union and concluded that over 60 percent of the failed insurers “showed poor underwriting or reserving as a contributing factor” to their failure. Further, in their investigation of the 35 P&C insurance companies that had become insolvent in the Canadian insurance market between 1960 and 2005, Leadbetter and Dibra determined that “inadequate pricing and deficient loss reserves are the leading cause of insurer insolvency.”

Our Take: Concentration of L&LAE Reserves Renders Industry Analysis Interesting But Not Meaningful Our analysis of the L&LAE reported and recorded by Property and Casualty continued on page 22

INSURANCE ADVOCATE / October 26, 2014 21

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[ COVER ] continued from page 21

Has the relationship between underreporting of L&LAE and the resulting overreporting of income been thoroughly discussed?

(P&C) insurers focused on the 2,1371 insurers reporting financial information to the NAIC that reported their loss and loss adjustment expenses reserves at year-end 2013 were greater than zero. We excluded 559 carriers with reported L&LAE of zero or less. Our analysis considered L&LAE reserves on a net basis, by carrier. We did not review P&C L&LAE reserves by group, holding company, family of companies or other basis. Projections of L&LAE reserves, actuarial or otherwise, were outside the scope of the study.

Seven P/C Companies with Highest Reserve Totals Loss and Loss Expense Reserves as of December 31, 2013 Reserves Reported $ Millions 26,433.9 18,649.6 17,305.1 15,796.1 14,552.9 13,894.1 12,608.5 119,240.2

Insurer State Farm Mutual Automobile Insurance Continental Casualty Company Liberty Mutual Insurance Company National Indemnity Company Allstate Insurance Company Zurich American Insurance Company National Union Fire Insurance Company Total Source: SNL Financial

Number of Companies Accounting for Percentage of 2013 P/C Industry Loss and LAE Reserves 1

Percentage of P/C Indus Pe Industry L&LAE Reserves eserves

As you will observe, had we reviewed loss and loss adjustment expense reserves on a net basis by group or family of insurers, the concentration of L&LAE reserves might have been interpreted differently. We chose a carrier level basis of review because we believe that each carrier exists within a group or family of carriers to play a unique role.2 Of the 2,137 active P&C insurers comprising the P&C industry, seven insurers recorded and reported 20% of industry L&LAE reserves. That is, seven companies reported $119,240,160,000 of the $596,700,000,000 that was described as “industry loss and loss adjustment expense reserves.” Breaking down the numbers further, we find that: • Ten carriers, the seven above plus three others, reported 25% of the industry’s L&LAE reserves. • Less than one-half of one percent of the 2,137 carriers reporting net L&LAE reserves carried 25% of industry L&LAE reserves.

Percent of Total 4.4% 3.1% 2.9% 2.6% 2.4% 2.3% 2.1% 20.0%

0.75

0.5

0.25

0 10

114

149

204

297

493

2137

N b off Companies Number C i

1 Although 2,696 companies reported financial results at year-end 2013, 559 had net Loss and LAE reserves of zero or less. As such, the percentage of companies in this discussion is conservatively stated, i.e., one out of 2,137 is greater than one out of 2,696, with 2,137 equal to the 2,969 reporting carriers minus 559 carriers with L&LAE of zero or less. 2 Although ratings assigned to groups of insurers may reflect overall group L&LAE inadequacy or redundancy as opposed to individual carrier positions, the carrier information reported to regulators and interested third parties was intentionally promulgated by management. We assume there was a reason for doing so.

22 October 26, 2014 / INSURANCE ADVOCATE

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[ COVER ]

2013 Loss Reserve Concentration: Company by Company Analysis % of Loss & LAE Reserves 4.4% 3.1% 2.9% 2.6% 2.4% 2.3% 2.1% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% Source: SNL Financial

Number of Companies State Farm Mutual Automobile Insurance Continental Casualty Company Liberty Mutual Insurance Company National Indemnity Company Allstate Insurance Company Zurich American Insurance Company National Union Fire Insurance Company 7 10 12 16 20 25 32 42 53 68 87 114 149 204 297 493 2,137

• Thirty two carriers, one and one-half percent of the reporting entities, recorded 50% of industry L&LAE reserves. • One hundred and fourteen carriers, about five percent of the carriers, recorded 75% of industry L&LAE reserves. This concentration indicates to Demotech that a relatively small percentage of the carriers comprising the P&C industry constituted a significant component of “industry loss and loss adjustment expense reserves.” As shown in the table and pie chart below, the L&LAE reserves reported by the largest single carrier exceeded the combined L&LAE reserves reported by the 1,605 smallest carriers in terms of L&LAE reserves. These 1,605 carriers comprised 75% of the industry by count. We think this bears repeating: 1,605 of the 2,137 insurers reviewed held loss and loss adjustment expense reserves that if combined, were less than the dollar amount reported solely by State Farm Mutual Automobile Insurance Company. In an industry that has this distribution of L&LAE reserves, does a high level analysis of “industry L&LAE reserves” create value? Or is the term “industry loss and loss adjustment expense reserves” a misnomer due to the concentration of L&LAE reserves in a relatively small number of insurers? Demotech believes that the concentration of loss and loss

% of Companies Reviewed 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.33% 0.47% 0.56% 0.75% 0.94% 1.17% 1.50% 1.97% 2.48% 3.18% 4.07% 5.33% 6.97% 9.55% 13.90% 23.07% 100.00%

adjustment expense reserves in a small number of companies reduces analyses and studies of industry L&LAE reserves to a level that is interesting but can hardly be considered informative or indicative of the situation of any specific individual carrier.

The Impact of Adverse L&LAE Reserve Development on Reported Income Loss and LAE reserving and reported income are but two components of a thorough, all-encompassing rating agency analysis of an insurer. Today, more than ever before, there appears to be a move toward qualitative areas of analysis, such as general financial and operational management with a focus on corporate governance and Enterprise Risk Management (ERM). The adequacy of capital, business profile, current or historical financial metrics are viewed as the output of a corporate governance process as much as they are the reported dollar amount in a statutory financial statement. If this is the direction in which regulators, rating agencies, reinsurers, Wall Street analysts and other third parties are heading, the discussion of reported financial results is as much about how continued on page 24

INSURANCE ADVOCATE / October 26, 2014 23

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[ COVER ] Company State Farm Mutual Automobile Insurance Company Smallest 1,605 Companies (based on reported L&LAE reserves) Remaining 531 P/C Companies Source: SNL Financial

Reported L&LAE ($M) 26,433.9 26,387.2 543,879.2

Distribution of 2013 Reported L&LAE Reserves by Company

State Farm Mutual Automobile Insurance Company

Smallest 1,605 Companies (based on p L&LAE reserves)) reported

Remaining 531 P/C Companies

Source: SNL Financial continued from page 23

the results were achieved or calculated, i.e., “process,” as it is about “what was recorded in the reported financial statements.” In this environment, governance, managerial processes and execution of the business model are now as important, perhaps even more important, than reported operating results. This said, the influence of inadequate L&LAE reserves on the integrity of an insurer’s balance sheet has been discussed in numerous articles and research papers with a focus on the correlation between inadequate L&LAE reserves and the failure rate of insurers. However, it is Demotech’s observation that the impact

of inadequate L&LAE reserves, overreporting of pretax profit or underreporting of pretax loss, has not received the explicit discussion that it deserves as regards solvent carriers. Every dollar of adverse one-year L&LAE reserve development reported in calendar year 2013 was a dollar of overstatement in pretax operating income in calendar year 2012. Similarly, a carrier that reported favorable L&LAE reserve development in the year subsequent had understated its pretax operating income in the prior calendar year. The integrity of earnings is higher when a carrier overestimates L&LAE and reports favorable reserve development. To initiate a preliminary discussion, Demotech reviewed the

Impact of Unfavorable Reserve Development for P/C Carriers Rated A or Better Aggregate of 28 P/C Insurers with Adverse Reserve Development (Statutory Results $000)

Pre-Tax Operating Income Gain/(Loss) as Reported Self-Reported Adverse One Year Loss & LAE Development in following year Prior Year Pre-Tax Operating Income Gain/(Loss) Adjusted For Self-Reported Adverse One Year Development Source: SNL Financial

24 October 26, 2014 / INSURANCE ADVOCATE

2008

2009

2010

4,258,862

2,410,817

(2,113,852)

2,829,115

5,844,506

1,429,747

(3,433,689)

2011

2012

343,251

762,734

1,229,668

2,577,244

1,296,955

(3,343,520)

(2,233,993)

(534,221)

INA 10-26-14_INA 10-26-14 11/20/14 10:39 AM Page 25

[ COVER ] Impact of Favorable Reserve Development for P/C Carriers Not Receiving an A Level Rating Aggregate of 49 P&C Insurers (Statutory Results $000)

2008 Pre-Tax Operating Income Gain/(Loss) as Reported Self-Reported Favorable One Year Loss & LAE Development in following year Prior Year Pre-Tax Operating Income Gain/(Loss) Adjusted For Self-Reported Favorable One Year Development

2009

2010

2011

2012

609,595

485,026

355,270

150,038

98,841

(89,676)

(201,414)

(142,455)

(90,505)

(81,816)

699,271

686,440

497,725

240,543

180,657

Source: SNL Financial

statutory financial statements of thousands of insurers to identify those that had: 1. Received an unqualified statement of actuarial opinion as regards its year-end L&LAE reserves for five consecutive years; 2. Received an unqualified year-end audit from its auditors for five consecutive years; 3. Self-reported at least five consecutive years of adverse L&LAE reserve development. Our thought process is this: If reported L&LAE reserves are adequate, the integrity of earnings is high. If adequately reserved carriers are assigned ratings at an A level or above, then reported operating results, in and of itself, may be sufficient to address the requirements of rating services. Conversely, if the reported results associated with L&LAE reserves do not appear to favorably impact the ratings assigned by rating services, then it seems reasonable to believe that operational, managerial or governance related procedures and processes are more important, or more heavily weighted, than one of the most fundamental objectives of an insurance enterprise: estimating its L&LAE reserves adequately. We identified 28 insurers with ratings at an A level or above that self-reported at least five consecutive years of adverse one year L&LAE development at year-end 2013. As such, each prior period’s pretax operating income may have been overstated by the subsequently reported amount of adverse reserve development. For this group of 28, the average annual reduction in the group’s reported pretax operating income would have been more than $2.7 billion. Annual figures for the group are summarized in the table below. Refer to Appendices 1, 2 and 3 for details by company of each of the 28 companies in each of the five years studied. Demotech then reviewed the same database of statutory financial statements to identify insurers that had: 1. Received an unqualified statement of actuarial opinion as regards its year-end L&LAE reserves for five consecutive years; 2. Received an unqualified year-end audit from its auditors for five consecutive years; 3. Self-reported at least five consecutive years of favorable L&LAE reserve development. We identified 49 carriers that were assigned ratings below an A level despite self-reported favorable L&LAE reserve development in each of the latest five calendar year reporting periods. As such, the integrity of their pretax operating income was fully intact. Refer to Appendices 4, 5 and 6.

Should loss and LAE reserve adequacy be more heavily weighted in the ratings assignment process? What are your thoughts? Although Demotech did not prepare a statistical analysis of the two groups, a scan of the names of the companies in each group indicates that the first group – those self-reporting adverse reserve development and therefore having reported pretax operating income with less integrity – tended to be larger, publicly traded stock companies. Among them are eight members of American International Group, six members of QBE Group, Fireman’s Fund, which is affiliated with Allianz, and Continental Insurance Company in CNA Group. The only large company on this list that is not affiliated with a publicly traded company is Auto Owners, a mutual. In contrast, those that reported favorable L&LAE reserve development over the same five calendar years and thereby demonstrated greater integrity in their initial report of pretax operating income than their below-A ratings might suggest, tended to be smaller, mutual companies or risk retention groups. That’s not to say that big companies are in trouble or small insurers are all overestimating reserves. For the A-rated companies that underreported reserves, the dollar amount of the adverse L&LAE reserve development, whether measured as a percentage of reported L&LAE, admitted assets, earned premium or surplus, did not appear to be material for the larger, publicly traded carriers. It impacted the integrity of reported income but could in no way be considered a threat to the solvency of the reporting entity. In this type of environment, it seems reasonable to assume that rating agencies, regulators and Wall Street analysts have focused on governance, operational management and qualitative considerations, including the implementation and execution of enterprise risk management procedures, to differentiate the stronger carriers. However, Demotech is unwilling to concede bigger is always better. It appears to us that as the conversation of a regulatory focus continued on page 26

INSURANCE ADVOCATE / October 26, 2014 25

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[ COVER ] continued from page 25

or a rating agency review turns to capital adequacy, business model, execution, financial and managerial operations, including ERM, as opposed to balance sheet fundamentals, L&LAE reserve adequacy or integrity of reported earnings, some insurers will be downgraded solely due to the change in the rating agency review processes. This transition may disproportionally impact smaller, privately held or mutual insurers which have consistently practiced conservative loss reserving but may not have the resources or the interest to garner the highest ERM and governance scores from rating agencies. We are also concerned that users of ratings may believe that the ratings assigned by rating agencies are more focused on L&LAE reserve adequacy and other balance sheet fundamentals than may be the case. If, or maybe as, downgrades may be based on subjective qualitative criteria, users of ratings should be made aware of this.

Putting it All Together We began our research with two questions: 1. Is the term “industry loss and loss adjustment expense reserves” a meaningful one? 2. Why hasn’t the relationship between underreporting of L&LAE and the concomitant overreporting of income been thoroughly discussed? Our review of 2,137 companies found that the term “industry loss and loss adjustment expense reserves” is interesting yet meaningless because less than 10 percent of the insurers comprising the industry account for 85 percent of the industry’s L&LAE reserves. Given this level of concentration, “industry loss and loss

adjustment expense reserves” would appear to be the L&LAE reserves of a small number of larger carriers. As to underreporting of L&LAE reserves and the overreporting of pretax operating income, we believe three interesting observations emerged from our preliminary research: 1. Industry research and studies have focused on underreserving and its impact on carrier insolvency. Our analysis of this research shows that explicit acknowledgements of underreserving as an overstatement of income were negligible. This phenomenon is not restricted to insolvent carriers. 2. Chronic underreserving at a level that overstates reported pretax operating income does not appear to adversely impact the ability of larger, publicly traded stock insurers to be assigned A level ratings or above. Concurrently, a conscious effort to report adequate L&LAE reserves appeared insufficient to enhance the ratings assigned to smaller, privately held carriers, smaller mutual insurers or risk retention groups. 3. Rating agency review and analysis techniques and procedures appear to heavily consider criteria other than L&LAE reserve adequacy, such as capital adequacy, business model, financial and operational management and corporate governance.

Initiating a Dialogue Demotech undertook this research to initiate a dialogue between insurers, regulators and other informed third parties continued on page 28

Companies with Five Consecutive Years of Self Reported Adverse One Year Development Securing Ratings at an A Level or Above Statutory Pre Tax Operating Income Gain/(Loss) as Reported

Company AIG Property Casualty Company American Home Assurance Company Auto Owners Insurance Company Cherokee Insurance Company Coast National Insurance Company Commerce and Industry Insurance Company Continental Insurance Company Daily Underwriters of America Everest National Insurance Company Everest Reinsurance Company Fireman's Fund Insurance Company General Casualty Company of Wisconsin General Casualty Insurance Company Generali U.S. Branch Hoosier Insurance Company Insurance Company of the State of Pennsylvania National Farmers Union Property and Casualty Company National Union Fire Insurance Company of Pittsburgh, PA. New Hampshire Insurance Company Nuclear Electric Insurance Limited QBE Insurance Corporation QBE Reinsurance Corporation QBE Specialty Insurance Company Regent Insurance Company Safety National Casualty Corporation Southern Guaranty Insurance Company Unigard Indemnity Company Unigard Insurance Company Total for Companies Above All Figures $000's Omitted

26 October 26, 2014 / INSURANCE ADVOCATE

Group American Intnl Group American Intnl Group Auto Owners Group Farmers Ins Group American Intnl Group CNA Ins Group Everest Reins Holdings Group Everest Reins Holdings Group Allianz Ins Group QBE Ins Group QBE Ins Group QBE Ins Group American Intnl Group QBE Ins Group American Intnl Group American Intnl Group QBE Ins Group QBE Ins Group QBE Ins Group QBE Ins Group Millea Holdings Inc Group QBE Ins Group QBE Ins Group QBE Ins Group

2008 164,617 1,267,677 295,288 32,819 20,422 219,926 111,328 5,383 3,595 292,077 198,751 221,702 18,011 (1,773) 10,133 206,630 12,124 1,275,750 111,394 (323,704) (12,905) (64,112) (2,129) 23,063 75,622 25,313 7,803 64,058 4,258,862

Appendix 1

Statutory Pre Tax Operating Income Gain/(Loss) as Reported 2009 2010 2011 2012 (31,339) (107,991) 42,367 16,655 34,428 (1,213,377) 223,480 198,003 281,383 208,253 (118,736) 290,836 9,399 8,430 7,444 11,168 15,473 13,766 13,442 12,058 174,790 (325,149) 87,260 81,962 47,826 (368,915) 40,793 30,470 3,787 388 2,332 29 (3,182) (5,939) (9,482) (140) 485,021 202,126 (294,436) 382,999 897,273 188,664 (243,935) (838,436) 93,617 28,660 (36,449) (8,257) 1,275 893 (4,660) (1,404) (1,741) (1,354) 474 66 640 512 (4,173) (1,354) (23,872) (56,710) 29,144 (5,266) 3,322 1,600 (10,931) (3,065) 111,797 (697,595) 430,583 1,027,171 103,426 (117,148) 29,929 (7,848) 80,057 11,170 100,497 (351,080) (55,076) (44,929) (45,196) (30,399) 84,255 29,079 10,823 (10,804) 3,963 17,154 28,648 (12,151) 1,871 1,466 (6,360) (1,911) 81,228 106,930 101,893 (10,033) 2,010 1,261 (6,064) (1,690) 640 218 (3,468) (1,170) 8,545 4,687 (21,966) (3,676) 2,410,817 (2,113,852) 343,251 762,734

INA 10-26-14_INA 10-26-14 11/20/14 10:39 AM Page 27

[ COVER ] Companies with Five Consecutive Years of Self Reported Adverse One Year Development Securing Ratings at an A Level or Above Statutory Self Reported Adverse One Year Loss & LAE Development

Appendix 2

Statutory Self Reported Adverse One Year Loss & LAE Development 2009 2010 2011 2012 2013 114,335 261,368 31,477 47,650 32,302 906,629 1,904,075 216,863 340,959 231,983 62,573 21,347 21,974 51,408 75,531 4,833 2,124 1,400 6,436 5,298 158 780 263 26 168 251,540 575,008 69,249 104,831 71,065 6,971 32,044 100,869 24,333 179,434 639 1,037 1,041 2,609 1,823 4,393 3,792 11,354 7,109 17,658 84,617 77,874 55,604 61,832 91,398 146,452 209,411 248,067 538,436 5,104 7,189 337 8,939 21,730 19,866 1,232 81 1,109 2,943 2,337 135 578 1,209 2,417 3,798 822 49 947 2,490 1,948 114,335 261,368 31,477 47,650 32,302 2,465 160 2,425 6,111 5,064 868,958 1,986,392 239,225 362,145 245,493 114,335 261,368 31,477 47,650 32,302 73,076 157,974 34,796 521,121 29,122 19,861 20,973 19,088 53,645 48,107 11,342 6,186 7,926 23,540 15,581 3,951 1,651 9,755 21,956 18,892 1,849 110 1,501 4,074 3,116 19,442 57,964 74,288 256,940 111,293 1,438 111 1,455 3,848 3,116 616 37 716 1,811 1,558 4,929 307 5,174 11,544 11,296 2,829,115 5,844,506 1,229,668 2,577,244 1,296,955

All Figures $000's Omitted

Companies with Five Consecutive Years of Self Reported Adverse One Year Development Securing Ratings at an A Level or Above Statutory Prior Year Pre Tax Operating Income Gain/(Loss) Adjusted For Self Reported Adverse One Year Development

Appendix 3

Statutory Prior Year Pre Tax Operating Income Gain/(Loss) Adjusted For Self Reported Adverse One Year Development 2008 2009 2010 2011 50,282 (292,707) (139,468) (5,283) 361,048 (1,869,647) (1,430,240) (117,479) 232,715 260,036 186,279 (170,144) 27,986 7,275 7,030 1,008 20,264 14,693 13,503 13,416 (31,614) (400,218) (394,398) (17,571) 104,357 15,782 (469,784) 16,460 4,744 2,750 (653) (277) (798) (6,974) (17,293) (16,591) 207,460 407,147 146,522 (356,268) 52,299 687,862 (59,403) (782,371) 214,513 93,280 19,721 (58,179) 16,779 1,194 (216) (7,603) (1,908) (2,319) (2,563) (1,943) 9,311 591 (435) (6,663) 92,295 (285,240) (88,187) (18,506) 9,659 3,162 (825) (17,042) 406,792 (1,874,595) (936,820) 68,438 (2,941) (157,942) (148,625) (17,721) (396,780) (77,917) (23,626) (420,624) (32,766) (76,049) (64,017) (98,841) (75,454) 78,069 21,153 (12,717) (6,080) 2,312 7,399 6,692 21,214 1,761 (35) (10,434) 56,180 23,264 32,642 (155,047) 23,875 1,899 (194) (9,912) 7,187 603 (498) (5,279) 59,129 8,238 (487) (33,510) 1,429,747 (3,433,689) (3,343,520) (2,233,993)

2012 (15,647) (33,980) 215,305 5,870 11,890 10,897 (148,964) (1,794) (17,798) 291,601 (843,540) (28,123) (3,741) (3,732) (3,302) (37,568) (8,129) 781,678 (40,150) (380,202) (78,506) (26,385) (31,043) (5,027) (121,326) (4,806) (2,728) (14,972) (534,221)

All Figures $000's Omitted

INSURANCE ADVOCATE / October 26, 2014 27

INA 10-26-14_INA 10-26-14 11/20/14 10:39 AM Page 28

[ COVER ] Companies with Five Consecutive Years of Self Reported Favorable One Year Development Assigned Ratings Below an A level Statutory Pre Tax Operating Income Gain/(Loss) as Reported

Company AgSecurity Insurance Company American Healthcare Indemnity Company Anchor General Insurance Company Armed Forces Insurance Exchange Bondex Insurance Company Buckeye State Mutual Insurance Company Bunker Hill Insurance Company BusinessFirst Insurance Company Cameron Mutual Insurance Company Celina Mutual Insurance Company Century Casualty Company Club Insurance Company Colorado Farm Bureau Mutual Insurance Company Community Hospital Alternative for Risk Transfer (A Reciprocal RRG) Conifer Insurance Company Eastern Dentists Insurance Company RRG Ever Greene Mutual Insurance Company Forestry Mutual Insurance Company Frank Winston Crum Insurance Company Galen Insurance Company Great Plains Casualty, Inc. Housing and Redevelopment Insurance Exchange Illinois Casualty Company (A Mutual Insurance Company) Juniata Mutual Insurance Company Lawyers Mutual Insurance Company of Kentucky Members Insurance Company Miami Mutual Insurance Company Michigan Professional Insurance Exchange Midrox Insurance Company Motors Insurance Corporation Mt. Morris Mutual Insurance Company MutualAid eXchange National Mutual Insurance Company National Security Fire & Casualty Company National Unity Insurance Company Northwest Dentists Insurance Company Northwest G.F. Mutual Insurance Company Ocean Harbor Casualty Insurance Company Physicians' Insurance Program Exchange Safeway Property Insurance Company Standard Mutual Insurance Company Waco Fire & Casualty Insurance Company Wayne Cooperative Insurance Company Wayne Mutual Insurance Company Wisconsin County Mutual Insurance Corporation Wisconsin Reinsurance Corporation Wolverine Mutual Insurance Company Yosemite Insurance Company Zale Indemnity Company Total for Companies Above

Group Oklahoma Farm Bureau Group Doctors Co Group Anchor Ins Holdings Group

Buckeye Ins Group Plymouth Rock Ins Group RetailFirst Group Cameron Mut Group Celina Group

Conifer Holdings Group Everett Mut Group

Carolina Motor Club Group Celina Group

GMAC Ins Holding Group

Celina Group National Security Group Oregon Dental Group Ocean Harbor Group Safeway Ins Group

Wayne & Washington Mut Group Wisconsin Cnty Mut Group Wisconsin Re Group Fortress Group Zale Corp Group

2008 (834) 4,718 2,880 2,418 202 (6,328) 2,516 2,344 (13,414) 1,839 307 1,313 2,536 5,354 611 1,705 385 2,265 (1,542) 733 519 1,114 (230) 23 578 (325) 955 4,166 203 535,557 38 (3,885) 1,815 (7,512) 3,605 854 (579) 3,122 (510) 6,872 (886) 1,578 403 (983) 3,753 (3,737) (1,560) 51,772 2,865 609,595

Appendix 4

Statutory Pre Tax Operating Income Gain/(Loss) as Reported 2009 2010 2011 (1,398) 991 925 6,994 27,748 23,328 (260) (1,171) 604 3,933 (400) (12,339) 333 176 (26) 321 (1,643) (1,925) 2,951 4,414 (13,343) 1,999 (2,039) 268 (5,589) (610) (6,429) 687 (360) (2,035) 167 (383) 289 1,106 890 662 (5,414) (118) (703) 6,107 6,384 8,164 362 87 (3,107) 1,580 3,346 4,362 192 343 324 1,796 693 545 1,208 413 (1,892) 634 530 1,435 808 1,218 1,140 732 1,601 (128) 2,755 (181) (1,906) 598 283 (381) 195 200 54 (451) (260) 87 619 (382) (1,789) 7,308 5,315 7,213 (189) 100 (50) 393,377 255,492 118,042 894 (954) 491 (2,142) (413) (835) 672 (357) (1,947) 5,235 5,721 (4,047) 5,299 3,183 2,711 (193) (606) 1,022 (555) (1,614) (1,098) 1,808 1,272 (2,624) 1,907 66 1,216 3,620 3,031 2,056 (112) (1,575) 582 94 1,210 (71) 545 1,871 415 325 (1,075) 2,430 6,252 3,220 622 1,128 (515) (6,092) (243) (675) (1,570) 33,766 36,042 27,815 3,264 4,759 7,576 485,026 355,270 150,038

2012 33 1,355 (901) (6,038) 152 (2,246) 2,754 39 3,115 211 267 586 (3,327) 10,337 (1,415) 1,994 319 (2,301) 586 (153) 1,398 (811) 12 292 152 (253) 3 9,740 408 30,639 751 (687) 250 (726) 3,066 297 502 6,117 1,178 3,085 (3,194) (203) 650 2,751 1,492 2,516 698 25,439 7,911 98,841

All Figures $000's Omitted

continued from page 26

about the utility of L&LAE reserves on an industry basis and the relationship between the relative level of L&LAE reserves carried by an insurer and the concomitant impact on its reported pretax income. Some of the questions that we suggest are: • Should L&LAE reserve adequacy and its concomitant impact on the integrity of earnings be more heavily weighted in the ratings assignment process? • Are the observations, summarized in Appendices 1 through 6, sufficient to conclude that L&LAE reserve development is not the singularly critical criterion in the assignment of ratings? • Were you aware that larger, well known, respected carriers could sustain high ratings despite self-reporting of L&LAE reserve inadequacy? 28 October 26, 2014 / INSURANCE ADVOCATE

• Were you aware that carriers with a long history of L&LAE reserve adequacy could be assigned ratings below an A level? Your thoughts, comments, perspectives and opinions are both welcomed and encouraged.

Disclaimers This study is not intended to be, and should not be construed to be, a statement of actuarial opinion regarding loss and loss adjustment expense reserves or any other type of statement of actuarial opinion. This study was compiled from sources that Demotech, Inc. believes to be reliable. However, Demotech makes no representations or warranties as to the accuracy, reliability or completeness of such information, and the information should not be relied upon in making business, investment or similar decisions. continued on page 30

INA 10-26-14_INA 10-26-14 11/20/14 10:39 AM Page 29

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[ COVER ] Companies with Five Consecutive Years of Self Reported Favorable One Year Development Assigned Ratings Below an A level Statutory Self Reported Favorable One Year Loss & LAE Development

Group Oklahoma Farm Bureau Group Doctors Co Group Anchor Ins Holdings Group

Buckeye Ins Group Plymouth Rock Ins Group RetailFirst Group Cameron Mut Group Celina Group

Conifer Holdings Group Everett Mut Group

Carolina Motor Club Group Celina Group

GMAC Ins Holding Group

Celina Group National Security Group Oregon Dental Group Ocean Harbor Group Safeway Ins Group

Wayne & Washington Mut Group Wisconsin Cnty Mut Group Wisconsin Re Group Fortress Group Zale Corp Group

Appendix 5

Statutory Self Reported Favorable One Year Loss & LAE Development 2009 2010 2011 2012 2013 (642) (1,482) (2,723) (3,308) (2,052) (6,880) (23,627) (28,074) (311) (1,592) (2,270) (181) (1,112) (476) (452) (5,181) (1,239) (2,671) (4,150) (3,955) (16) (57) (147) (214) (91) (2,506) (3,151) (1,858) (3,232) (1,607) (846) (798) (1,225) (1,286) (1,275) (2,297) (814) (639) (570) (25) (7) (2,408) (1,461) (1,962) (275) (1,132) (680) (1,045) (834) (626) (4) (131) (750) (353) (502) (54) (209) (208) (88) (68) (3,601) (4,816) (5,036) (3,536) (3,820) (1,901) (5,330) (8,363) (8,560) (6,498) (38) (192) (138) (904) (1,309) (1,838) (3,388) (3,877) (3,071) (2,989) (34) (23) (22) (13) (16) (3,854) (2,863) (2,187) (1,011) (1,666) (2,537) (1,007) (1,300) (465) (626) (371) (631) (1,054) (1,025) (167) (196) (155) (183) (674) (92) (4,002) (3,287) (3,295) (3,043) (2,721) (3,270) (2,954) (2,508) (2,437) (2,567) (262) (112) (100) (74) (51) (684) (1,660) (908) (874) (1,675) (44) (199) (128) (196) (76) (943) (566) (871) (695) (521) (3,553) (3,153) (4,608) (7,663) (4,522) (259) (288) (228) (246) (215) (4,587) (101,422) (38,745) (13,963) (17,475) (169) (240) (1,632) (547) (598) (847) (463) (650) (355) (460) (1,069) (642) (987) (787) (591) (2,488) (2,451) (1,191) (225) (259) (2,336) (2,309) (2,018) (3,297) (1,158) (2) (178) (591) (1,708) (1,364) (209) (303) (565) (194) (73) (6,683) (7,444) (4,581) (3,592) (2,432) (2,402) (1,557) (1,177) (1,692) (1,041) (165) (309) (45) (277) (24) (1,009) (970) (1,982) (1,537) (2,973) (6,298) (7,043) (1,510) (3,907) (2,527) (310) (753) (109) (831) (1,070) (2,086) (1,053) (1,865) (967) (703) (4,320) (3,394) (1,738) (2,949) (1,167) (2,313) (1,201) (1,770) (610) (940) (1,451) (1,035) (814) (378) (779) (1,800) (2,662) (3,292) (880) (2,785) (14) (543) (502) (1,029) (764) (89,676) (201,414) (142,455) (90,505) (81,816)

All Figures $000's Omitted

continued from page 28

Demotech did not independently verify the accuracy or reliability of the information. This analysis was based upon financial statements promulgated using statutory insurance accounting principles as prescribed or permitted by the National Association of Insurance Commissioners. An analysis of financial statements based upon generally accepted accounting principles may have other implications. The statutory insurance accounting information underlying our analysis was created, compiled and self-reported by the carriers. As part of this analysis, Demotech did not review or seek to draw conclusions about the sizes or ownership structures of: â&#x20AC;˘ The 28 companies with ratings of A or above that self-reported favorable L&LAE reserve development in each of the latest five calendar year reporting periods; 30 October 26, 2014 / INSURANCE ADVOCATE

â&#x20AC;˘ The 49 companies with ratings below A that self-reported adverse reserve development in each of the latest five calendar year reporting periods. [IA]

This study is not intended to be, and should not be construed to be, a statement of actuarial opinion regarding loss and loss adjustment expense reserves or any other type of statement of actuarial opinion.

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[ COVER ] Companies with Five Consecutive Years of Self Reported Favorable One Year Development Assigned Ratings Below an A level Statutory Prior Year Pre Tax Operating Income Gain/(Loss) Adjusted For Self Reported Favorable One Year Development

Group Oklahoma Farm Bureau Group Doctors Co Group Anchor Ins Holdings Group

Buckeye Ins Group Plymouth Rock Ins Group RetailFirst Group Cameron Mut Group Celina Group

Conifer Holdings Group Everett Mut Group

Carolina Motor Club Group Celina Group

GMAC Ins Holding Group

Celina Group National Security Group Oregon Dental Group Ocean Harbor Group Safeway Ins Group

Wayne & Washington Mut Group Wisconsin Cnty Mut Group Wisconsin Re Group Fortress Group Zale Corp Group

Appendix 6

Statutory Prior Year Pre Tax Operating Income Gain/(Loss) Adjusted For Self Reported Favorable One Year Development 2008 2009 2010 2011 (192) 84 3,714 4,233 11,598 30,621 55,822 23,639 5,150 (79) (59) 1,080 7,599 5,172 2,271 (8,189) 218 390 323 188 (3,822) 3,472 215 1,307 3,362 3,749 5,639 (12,057) 4,641 2,813 (1,400) 838 (13,407) (3,181) 851 (4,467) 2,971 1,367 685 (1,201) 311 298 367 642 1,367 1,315 1,098 750 6,137 (598) 4,918 2,833 7,255 11,437 14,747 16,724 649 554 225 (2,203) 3,543 4,968 7,223 7,433 419 215 365 337 6,119 4,659 2,880 1,556 995 2,215 1,713 (1,427) 1,104 1,265 1,584 2,460 1,004 1,373 1,323 611 5,116 4,019 4,896 2,915 3,040 5,709 2,327 531 285 710 383 (307) 1,262 1,855 1,108 928 (281) (252) (132) 283 1,898 1,185 489 (1,094) 7,719 10,461 9,923 14,876 462 99 328 196 540,144 494,799 294,237 132,005 207 1,134 678 1,038 (3,038) (1,679) 237 (480) 2,884 1,314 630 (1,160) (5,024) 7,686 6,912 (3,822) 5,941 7,608 5,201 6,008 856 (15) (15) 2,730 (370) (252) (1,049) (904) 9,805 9,252 5,853 968 1,892 3,464 1,243 2,908 7,037 3,929 3,076 2,333 123 858 407 2,119 7,876 7,137 2,720 3,836 713 1,298 1,980 1,246 1,103 1,378 790 3,397 8,073 9,646 4,958 3,571 (1,424) 2,329 1,255 (5,482) (109) 792 139 (1,192) 53,572 36,428 39,334 28,695 2,879 3,807 5,261 8,605 699,271 686,440 497,725 240,543

2012 2,085 2,947 (449) (2,083) 243 (639) 4,029 64 3,390 837 769 654 493 16,835 (106) 4,983 335 (635) 1,212 14 2,072 1,910 2,579 343 1,827 (177) 524 14,262 623 48,114 1,349 (227) 841 (467) 4,224 1,661 575 8,549 2,219 3,109 (221) 2,324 1,720 3,454 2,659 3,456 1,477 28,224 8,675 180,657

All Figures $000's Omitted

RESEARCH SOURCES Aon Benfield Analytics. “U.S. P/C Industry Statutory Reserve Study: Based on Schedule P data as of December 31, 2011.” Aon Benfield Analytics, June 2012. PowerPoint. —. “U.S. P/C Industry Statutory Reserve Study: Based on Schedule P data as of December 31, 2012.” Aon Benfield Analytics, 13 June 2013. PowerPoint. —. “U.S. P/C Industry Statutory Reserve Study: Based on Schedule P data as of December 31, 2013.” Aon Benfield Analytics, 3 June 2014. PowerPoint. —. “U.S. P/C Industry Statutory Reserve Study: Based on Schedule P data as of December 31, 2010.” Aon Benfield Analytics, 15 June 2011. PowerPoint. Brennan, Michelle, Rodney A. Clark & Michael J. Vine. “What May Cause Insurance Companies to Fail — and How This

Inﬂuences Our Criteria.” 13 June 2013. standardandpoors.com. Web. 9 May 2014. Bryan, Charles A. “A Review of Stan Khury’s ‘Testing the Reasonableness of Loss Reserves: Reserve Ratios.’” n.d. casact.org. Web. 15 May 2014. Guy Carpenter & Company. “GC Brieﬁng, An Update from Global Strategic Advisory: Industry Reserve Update — Which Way is the Cycle Turning?” April 2014. guycarp.com. Web. 10 July 2014. Leadbetter, Darrell & Suela Dibra. “Why Insurers Fail: The Dynamics of Property and Casualty Insurance Insolvency in Canada.” The Geneva Papers (2008): 464-488. Document. Ruquet, Mark E. “Analyst: Industry ‘Flirting with Inadequacy’ on Reserves.” 31 May 2012. propertycasualty360.com. Document. 31 May 2014.

INSURANCE ADVOCATE / October 26, 2014 31

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[ ON M Y RADAR ]

By Barry Zalma

No Damage to Vexatious Litigant There Must Be Damages for Coverage

iability insurance policies are designed to protect those insured against claims seeking damages from the insured. Some suits, however, seek equitable remedies and no damages. In such a case, where damages are neither

also asserts claims for damages sounding in breach of contract and bad faith. The trial court granted summary judgment in favor of Allstate and denied appellant’s motion for summary judgment. In so doing, the trial court determined that

In Ohio, the scope of the allegations in the pleading filed against the insured determines whether an insurance company has a duty to defend the insured.

Barry Zalma

alleged nor proven, the availability of coverage for defense is questionable. The question was brought again in Ohio by a vexatious litigator. In 2007 James C. Helfrich (Appellant) commenced a civil action against various defendants in the Licking County, Ohio, Court of Common Pleas. In April 2007, the Licking County defendants filed a counterclaim against appellant seeking a declaration that appellant was a vexatious litigator pursuant to an Ohio statute. Appellant forwarded a copy of the counterclaim to Allstate seeking coverage under two separate policies of insurance. Allstate denied coverage and refused to provide appellant with a defense in the Licking County action. On March 4, 2011, the trial court entered judgment against appellant on the counterclaim and declared him to be a vexatious litigator. Appellant subsequently dismissed his complaint. On August 19, 2011, the trial court ruled that appellant had engaged in frivolous conduct and ordered appellant to pay the Licking County defendants’ attorney fees in the amount of $118,451.08. Appellant subsequently sued Allstate seeking a declaration that Allstate had a contractual duty to indemnify and defend him in the Licking County action, pursuant to a policy of insurance. Appellant 32 October 26, 2014 / INSURANCE ADVOCATE

Allstate did not owe a duty to provide either a defense or indemnification to appellant in the Licking County litigation. The trial court also determined that the denial of coverage was consistent with the policy terms and not in bad faith. In Helfrich v. Allstate Insurance Co., 12AP559 (Ohio App. Dist.10 09/30/2013) an Ohio appellate court resolved the dispute. ASSIGNMENTS OF ERROR I. The Trial Court Erred in Denying the Plaintiff ’s Motion for Summary Judgment. II. The Trial Court Erred in Granting the Defendant’s Motion for Summary Judgment. ANALYSIS An insurance policy is a contract between the insurer and the insured. The rules of construction of an insurance contract are well-settled. The interpretation of that insurance contract is a question of law to be decided by a judge. Where language in a contract of insurance is doubtful, uncertain or ambiguous, the language will be construed strictly against the insurer and liberally in favor of the insured. If a contract is clear and unambiguous, then its interpretation is a matter of law, and there is no issue of fact to be determined. Appellant seeks recovery under two

policies of insurance with Allstate: a Landlord Package policy, and a Personal Umbrella Package policy. The Landlord Package policy reads in relevant part as follows: Subject to the terms, conditions and limitations of this policy, Allstate will pay compensatory damages which an insured person becomes legally obligated to pay because of * * * personal injury * * * arising from a covered occurrence. *** “Personal injury” means damages resulting from: ** * c) libel; slander; humiliation; defamation of character; invasion of rights of privacy. Appellant argued that Allstate is required to provide a defense even if there are no damages alleged, where the insured is sued as a result of a “personal injury,” even if damages are not alleged. In Ohio, the scope of the allegations in the pleading filed against the insured determines whether an insurance company has a duty to defend the insured. The insurer must defend the insured in an action when the allegations state a claim that potentially or arguably falls within the liability insurance coverage, but the insurer need not defend any action or claims within the complaint that are clearly and indisputably outside the contracted coverage. The policy specifically states that a personal injury “means damages.” Accordingly, absent damages, a claim is not a personal injury as the term is defined in the policy. Damages are a necessary and indispensable element of every personal injury covered under the policy. There is simply no other reasonable interpretation of the policy. Damages are unavailable in an action brought pursuant to the vexatious litigator statute. To the extent that appellant argues that the damages requirement in the policy is satisfied by the attorney fees leveled against him for frivolous conduct, the court of appeals in Siemientkowski v. State

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[ ON M Y RADAR ] Auto. Mut. Ins. Co., 8th Dist. No. 87299, 2006-Ohio-4122, held that the award of costs and attorney fees imposed against insureds for frivolous conduct in a prior litigation do not constitute an “injury” covered by the insured’s homeowner’s insurance policy. Accordingly, Allstate owed no duty to appellant under the policy to indemnify or defend appellant in the Licking County action. The Personal Umbrella Package policy contains different coverages, including personal injury. Unlike the Landlord Package policy, the Personal Umbrella Package does not specifically state “personal injury means damages.” However, the duty to defend arises only when the pleading filed against the insured potentially or arguably falls within the liability insurance coverage. The Personal Umbrella Package policy employs the phrase “when we pay” in defining the limits of liability insurance coverage. Accordingly, liability insurance coverage is tied inextricably to instances where the insured may be legally required to pay damages. Thus, the court found that, in the absence of a prayer for damages, the counterclaim filed in the Licking County action did not state a claim against appellant that arguably or potentially fell within the coverage provided by the Personal Umbrella Package policy. Accordingly, Allstate did not owe appellant a duty to defend him in the Licking County action. Moreover, even if the court were to accept appellant’s argument that the duty to defend under the Personal Umbrella Package policy arises whenever the insured is sued for a personal injury, the court finds that the counterclaim filed in Licking County does not allege a personal injury. There was no question that the counterclaim alleged a meritorious claim under the vexatious litigator statute. Indeed, the court of appeals affirmed the trial court judgment against appellant on the counterclaim. It does not and the appellate court refused to impose a duty to defend based on allegations outside the complaint, where the allegations in the complaint are not vague or ambiguous and do not state a claim potentially or arguably within policy coverage. The court will relieve Allstate of its duty to defend only if the claim(s) alleged

Such conduct clogs the court dockets, results in increased costs, and oftentimes is a waste of judicial resources— resources that are supported by the taxpayers of this state. in the pleadings are clearly and indisputably outside the contracted coverage. The purpose of the vexatious litigator statute is clear. It seeks to prevent abuse of the system by those persons who persistently and habitually file lawsuits without reasonable grounds and/or otherwise engage in frivolous conduct in the trial courts of this state. Such conduct clogs the court dockets, results in increased costs, and oftentimes is a waste of judicial resources — resources that are supported by the taxpayers of this state. The unreasonable burden placed upon courts by such baseless litigation prevents the speedy consideration of proper litigation. The vexatious litigator statute vindicates the right of the courts and the taxpayers of this state to be free from the delay and expense associated with baseless litigation, whereas common-law defamation vindicates an individual’s right to be free from false statements that injure the individual’s character or reputation. The two claims are nothing alike. The context in which the allegations of the counterclaim are framed, including the prayer for declaratory relief and the absence of a prayer for damages, the court could come to no other conclusion. Allstate was justified in denying coverage under the Personal Umbrella Package policy and in refusing to defend appellant and the appellate court concluded that Allstate was entitled to judgment as a matter of law on appellant’s claims for breach of contract and bad faith. ZALMA OPINION This is a perfect example of the Yiddish term “chutzpah” or “unmitigated gall.” After being found to be a vexatious litigator by a trial and appellate court, he sued his insurer for defense of the suit he lost

as a vexatious litigator where it was clear that no one sought damages against him so that there was no way that coverage could apply. The appellate court should have assessed additional damages against him for bringing a vexatious and worthless suit against Allstate.[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” availableat http://shop.americanbar.org/e Bus/Store/ProductDetails.aspx?produ ctId=214624, 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 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 26, 2014 33

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INSURANCE ADVOCATE / October 26, 2014 35

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[ COURTSI DE ]

By Lawrence Rogak

Court of Appeals, in Novel Case, Adopts “Likely to Succeed” Standard for Unappealed Legal Malpractice Cases Grace v Law (2014 NY Slip Op 07089) We are presented with an issue of first impression for this Court: What effect does a client’s failure to pursue an appeal in an underlying action have on his or her ability to maintain a legal malpractice lawsuit? We hold that the failure to appeal bars the legal malpractice action only where the client was likely to have succeeded on appeal in the underlying action. I. In October 2002, plaintiff John W. Grace began receiving treatment for an eye condition at the Veteran’s Administration Rochester Outpatient Clinic (VA Clinic) from ophthalmologist Dr. Shoba Boghani. Plaintiff ’s July 2003 appointment with her, however, was cancelled and not rescheduled for approximately one year. When plaintiff returned in August 2004, another VA oph-

36 October 26, 2014 / INSURANCE ADVOCATE

thalmologist scheduled a consultation for plaintiff with Rochester Eye Associates. During that appointment, plaintiff was diagnosed with neovascular glaucoma, which ultimately left him blind in his right eye. At some point, plaintiff apparently learned that his blindness may have been prevented had it been detected earlier. In June 2006, plaintiff retained Robert L. Brenna, Jr. and Brenna, Brenna & Boyce, PLLC (the Brenna defendants), to bring an administrative proceeding against the Veteran’s Administration (the VA) for malpractice due to its alleged failure to diagnose the eye condition and follow up with plaintiff after the VA canceled his July 2003 appointment. When delays occurred in the proceeding that the Brenna defendants brought on plaintiff ’s behalf, they recommended that plaintiff retain Michael R. Law

and Phillips Lytle LLP (the Law defendants) to pursue a medical malpractice action against the VA. In January 2008, plaintiff, represented by the Law defendants, filed an action in federal court against the United States and the VA under the Federal Tort Claims Act for medical malpractice and negligence in cancelling his July 2003 appointment (hereinafter the underlying action). At some point, the Law defendants learned that Dr. Boghani was not employed by the VA but was instead an employee of the University of Rochester (University), one of their existing clients. Because of this conflict, they informed plaintiff that they could no longer represent him. The Brenna defendants resumed representation of plaintiff. On December 8, 2008, an order was signed by the District Court, directing

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[ COURTS I D E ] the substitution of counsel. The VA was granted leave to commence a third-party action against Dr. Boghani and the University. Plaintiff amended his complaint to add Dr. Boghani and the University as defendants. Dr. Boghani and the University moved for summary judgment dismissing the claims against them as time-barred. The VA also moved for summary judgment based upon lack of jurisdiction, alleging that it was not liable to plaintiff because Dr. Boghani was not its employee. Holding that plaintiff ’s claims against Dr. Boghani and the University were timebarred, the United States District Court for the Western District of New York granted defendants’ motion for summary judgment (see Grace v United States, 754 F Supp 2d 585, 602 [WD NY 2010]). The court determined that Dr. Bohgani was an independent contractor, not an employee of the VA, and thus, jurisdiction was lacking for plaintiff ’s claim that it was liable for Dr. Boghani’s actions. The court granted the VA’s motion for summary judgment to that extent (see id. at 597-598). Plaintiff ’s remaining claim for malpractice based on the VA’s failure to reschedule his appointment, however, survived the VA’s motion. Thereafter, Brenna sent plaintiff a letter which stated that plaintiff was unlikely to succeed on the remaining claim against the VA, and that a trial on that claim would be lengthy and, due to expert costs, expensive. Plaintiff thus directed the Brenna defendants to discontinue the underlying action. Subsequently, plaintiff retained his current counsel to sue the Brenna defendants and the Law defendants for legal malpractice in failing to timely sue Dr. Boghani and the University. The Law defendants answered that plaintiff was estopped from commencing this action because he failed to appeal the underlying action. They later moved for leave to amend their answer to assert a statute of limitations defense, and upon amendment, for summary judgment in their favor, dismissing the complaint. The Brenna defendants also moved for summary judgment. They argued that plaintiff voluntarily discontinued the underlying action, thus forfeiting any right he may have had to pursue this legal malpractice action, and that they were not responsible for the Law defendants’ failure to initially sue Dr. Boghani and the University because they

did not initiate the action. Supreme Court granted the Law defendants’ motion to amend their answer, denied their motion for summary judgment, and denied the Brenna defendants’ motion for summary judgment. Both defendants appealed. The Appellate Division, with one justice dissenting, affirmed the Supreme Court order (Grace v Law, 108 AD3d 1173 [4th Dept 2013]). The court observed that while this is an issue of first impression in New York, a per se rule that failure to appeal in an underlying action bars a legal malpractice claim has been rejected by several of our sister states. The court concluded that “defendants failed to establish that plaintiff was likely to succeed on appeal . . . and, therefore, that their alleged negligence was not a proximate cause of his damages” (id. at 1176). The court determined that the record was insufficient to hold that defendants’ “representation of plaintiff did not preclude him from prevailing in the underlying lawsuit or upon appeal” (id.). In denying the Law defendants’ motion for summary judgment, the court held that “the continuous representation doctrine applied to toll the statute of limitations” (id. at 1177).[FN1] The Appellate Division granted defendants’ motions for leave to appeal to this Court, and certified the question of whether the order was properly made. II. While this Court has not had occasion to enunciate the appropriate standard for bringing legal malpractice lawsuits in the circumstances presented here, the Appellate Division Departments have examined similar circumstances (see Rupert v Gates & Adams, P.C., 83 AD3d 1393 [4th Dept 2011]; Rodriguez v Fredericks, 213 AD2d 176 [1st Dept 1995]). Those decisions — presented in the settlement context — generally stand for the proposition that an attorney should be given the opportunity to vindicate him or herself on appeal of an underlying action prior to being subjected to a legal malpractice suit. Defendants contend that a plaintiff forfeits his or her opportunity to commence a legal malpractice action when he or she fails to pursue a nonfrivolous or meritorious continued on page 38

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[ COURTSIDE ] continued from page 37

appeal that a reasonable lawyer would pursue (see Sands v State of New York, 49 AD3d 444, 444 [1st Dept 2008]; see also MB Indus., LLC v CNA Ins. Co., 74 So 3d 1173 [LA 2011]; Rondeno v Law Office of William J. Vincent, 111 So 3d 515, 524 [LA 4th CCA 2013]). In contrast, plaintiff urges us to adopt a “likely to succeed” standard. Courts applying the “likely to succeed” standard analyze whether a client can commence a legal malpractice action without taking an appeal in the underlying action based upon the likelihood of success on that underlying appeal. In Hewitt v Allen (118 Nev 216 [Nev 2002]), the Supreme Court of Nevada held that the voluntary dismissal of an underlying appeal does not constitute abandonment where the appeal “would be fruitless or without merit” (id. at 216). The United States District Court for the District of Nevada interpreted Hewitt to mean that a defendant would have to show that the pending appeal was “likely” to succeed (UHaul Co. of Nevada, Inc. v Gregory J. Kramer, Ltd., 2013 WL 4505800, at *2 [D. Nev. 2013]). Florida courts have held that “[w]here a party’s loss results from judicial error occasioned by the attorney’s curable, nonprejudicial mistake in the conduct of the litigation, and the error would most likely have been corrected on appeal, the cause of action for legal malpractice is abandoned if a final appellate decision is not obtained” (Segall v Segall, 632 So 2d 76, 78 [Fla 2d DCA 1993]; see Technical Packaging, Inc. v Hanchett, 990 So 2d 309, 316 [Fla 2d DCA 2008]; Eastman v Flor-Ohio, Ltd., 744 So 2d 499, 504 [Fla 5th DCA 1999]). Defendants argue that the “likely to succeed” standard should not be adopted because it requires courts to speculate on the outcome of the underlying appeal. They posit, nevertheless, that even were we to adopt the “likely to succeed” standard, plaintiff could have succeeded on an appeal of the underlying action and, thus, should not be allowed to sue them for legal malpractice. Here, the Appellate Division adopted the likely to succeed standard employed by our sister states with a proximate cause element[FN2]. We agree that this is the proper standard, and that prior to commencing a legal malpractice action, a party who is likely to succeed on appeal of the underlying 38 October 26, 2014 / INSURANCE ADVOCATE

action should be required to press an appeal. However, if the client is not likely to succeed, he or she may bring a legal malpractice action without first pursuing an appeal of the underlying action. On balance, the likely to succeed standard is the most efficient and fair for all parties. This standard will obviate premature legal malpractice actions by allowing the appellate courts to correct any trial court error and allow attorneys to avoid unnecessary malpractice lawsuits by being given the opportunity to rectify their clients’ unfavorable result. Contrary to defendants’ assertion that this standard will require courts to speculate on the success of an appeal, courts engage in this type of analysis when deciding legal malpractice actions generally (see Davis v Klein, 88 NY2d 1008, 1009-1010 [1996] [“In order to establish a prima facie case of legal malpractice, a plaintiff must demonstrate that the plaintiff would have succeeded on the merits of the underlying action but for the attorney’s negligence”]; see also Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442-443 [2007]; McKenna v Forsyth & Forsyth, 280 AD2d 79, 82 [4th Dept 2001]). We reject the nonfrivolous/ meritorious appeal standard proposed by defendants as that would require virtually any client to pursue an appeal prior to suing for legal malpractice. III. Applying the likely to succeed standard to the merits of this case, the Appellate Division reached the correct result. On this record, defendants failed to provide sufficient evidence to determine that plaintiff would have been successful on appeal in demonstrating that Dr. Boghani was a VA employee, rather than an independent contractor counsel was required to name as a defendant separate from the VA (see Lone v United States, 910 F2d 46, 50 [2d Cir 1990], cert denied 499 US 95 [1991]; see also United States v Orleans, 425 US 807, 813 [1976]). As support, defendants submitted the contract between the VA and the University, which indicates, among other things, that Dr. Boghani was required to work at the VA Clinic six days per month, was under the general direction of the VA, and the University paid Dr. Boghani’s salary but was reimbursed by the VA. This information is insufficient to definitively deter-

mine whether Dr. Boghani was a VA employee, and thus, the Appellate Division correctly held that defendants failed to meet their summary judgment burden on this issue. Regarding the Law defendants’ motion for summary judgment on the ground that plaintiff ’s claims against them are timebarred, the statute of limitations in a legal malpractice action is three years from the accrual of the claim (see CPLR § 214). Plaintiff commenced this action on December 5, 2011. The Law defendants claim that plaintiff should have known as early as September 26, 2008, that they would no longer be able to represent him and that the Brenna defendants would be taking over the case. Plaintiff, however, claims that he did not learn of the substitution of counsel until December 8, 2008, when the official stipulated order substituting counsel was issued by the District Court. “[T]he rule of continuous representation tolls the running of the [s]tatute of [l]imitations on the malpractice claim until the ongoing representation is completed” (Shumsky v Eisenstein, 96 NY2d 164, 167168 [2001]). Plaintiff has raised a triable issue of fact as to whether the doctrine of continuous representation tolled the statute of limitations because it is unclear when the Law defendants’ representation of plaintiff ended. Therefore, the Appellate Division properly denied the Law defendants’ motion for summary judgment based on the statute of limitations. Accordingly, the Appellate Division order should be affirmed, with costs, and the certified question answered in the affirmative.[IA] 2014 NY Slip Op 07089 Decided on October 21, 2014 Court of Appeals Abdus-Salaam, J.

Footnotes FN1: The dissenting justice concluded that a nonfrivolous appeal standard should be applied, and because plaintiff’s claims in the underlying action were not frivolous, he should be required to appeal prior to bringing the legal malpractice suit. FN2: Utah courts too consider proximate cause in analyzing this issue (see Crestwood Cove Apts. Bus. Trust v Turner, 164 P3d 1247 [Utah 2007]).

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