November 11, 2013 by C Acunto

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VOLUME 124, NUMBER 19 / November 11,2013

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

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Contents

November 11, 2013 | volume 124 number 19

[COVER STORY ] 18

Comp Costs Climbing Betty Flood and Katlin Nash

COMP

[FEATURES] 4

Foreword: A wave of sentiment… Steve Acunto, Publisher

Insight: Imaginary Games Peter H. Bickford

Exposures and Coverages: Improve and Better Improvements & Betterments Coverage Jerome Trupin, CPCU

On the Level: One or Two - It’s Your Call Jamie Deapo

In the Associations: Big “I” 2013 Best Practices Study Released

On My Radar: When Is A Letter is a Suit? Barry Zalma

In the Associations: PIA Management Services partners with FloodBroker.com

Classiﬁeds

Looking Back: September 17, 1988

In the News: Applied Systems Donates $30,000 to InVEST

www.insurance-advocate.com

COSTS CLIMBING

FOR ADVERTISING OR SUBSCRIPTION INFORMATION Call 914-966-3180 insurance-advocate@cinn.com Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / November 11, 2013 3

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[ FORE WORD ]

Steve Acunto

A wave of sentiment…

s we go to press, a wave of sentiment is washing up in Washington to advocate the extension of TRIA and the results, so far, seem to be favorable for the insurance community which, not ordinarily in favor of Government intervention the business, sees this particular backstop as an important one for the entire industry. Speaking with Tal Piccione, President of U.S. RE, who was called to Washington for his advice and counsel, we gained the impression that the industry view point was being received with some sympathy but that, as refinements in the entire program are being studied, that the industry input is being solicited and is valued by regulators and those covering the issue... In this issue we have an article prepared by our Albany staff discussing Workers’ Compensation increases and their net effect on the State. While the market is a pretty sound and sane one in our view, this pricing will have many implications. Read the article and be the judge...On our Associations pages we notice the results of the Big I’s latest study on Best Practices affecting agents and brokers. It is absolutely essential for agents and brokers to write to the Big I or to go online and dig up this entire report which we summarize in the Association section. Speaking of Associations, PIA has now signed up a deal with a flood insurance enterprise to facilitate agents writing of this business. Again, see our “In the Associations” section for information...Earlier in the month of November—a balmy month—we had the privilege of seeing our friend Gary Ropiecki, CFO of Torus Insurance who reports that that company’s recent consolidation has gone well to date. [IA]

VOLUME 124, NUMBER 19 NOVEMBER 11, 2013

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

CINN G R O U P, I N C .

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

4 November 11, 2013 / INSURANCE ADVOCATE

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

Imaginary Games

ports broadcasting legend, Bill Mazer, died recently. Mazer was one of the pioneers of sports radio talk show, with a career spanning 60 years – 40 in the Metropolitan New York area including 20 years hosting “Sports Extra” on WNEW-

the hole backhanded by the shortstop whose long throw was scooped up by the first baseman to catch the runner by a halfstep. Great stuff! Great imagination! Who needed live coverage when you had Bill Mazer to make the calls?

The massive bail out of AIG is often cited as justification for the march towards federalization of insurance solvency regulation. What has been ignored in this effort, however, is that the insurance operations of AIG were not financially stressed and were not the impetus for the bailout. Peter H. Bickford

TV. Mazer was known particularly for his encyclopedic memory for all kinds of sports trivia, which earned him the moniker “Amazin’.” But my connection with Mazer was quite different, going back to Buffalo, NY in the Mid-1960s. During my first two years of college I worked on a delivery truck for the old Courier Express, Buffalo’s then morning newspaper. The delivery trucks would line up at the newspaper’s loading dock around 2 a.m. to wait for the bundles of papers to start rolling off the presses. The timing of each day’s run could vary significantly depending on breaking stories or other factors, so often there could be long waits. A fond memory of these waits was the frequent visits to the loading dock by Bill Mazer following his late night broadcasts. These visits were highly anticipated, as he would regale us with stories about sports figures large and small. Often these visits followed his broadcasting of Buffalo Bison baseball games. The Bisons were a tripleA minor league team, and its away games were broadcast locally by an announcer following game action off a ticker-tape (I told you this was a long time ago!). Mazer was a master at inventing tension and drama from the most routine of plays. A simple ground out could come across the ticker as 6-3 (shortstop to first base), but as broadcast by Mazer in could become a drive deep into

These imaginary calls never changed the outcome of a play or of a game. The descriptions may have been embellished but the games were real. And he never disrespected the game or the players. Too bad the same cannot be said for the International and Federal financial regulatory communities. Primarily as a result of the 2008 financial crisis, Federal and International financial regulators have been on a rampage to create stricter controls and capital requirements over financial institutions. The investment and banking communities were the natural and logical targets of these efforts. However, largely because of the near collapse of AIG, insurance also became a prime target. The massive bail out of AIG is often cited as justification for the march towards federalization of insurance solvency regulation. What has been ignored in this effort, however, is that the insurance operations of AIG were not financially stressed and were not the impetus for the bailout. In the aftermath of the Great Recession, the cause of AIG’s near meltdown and the effectiveness of state regulation have been successfully muffled in the noise about the need for strong regulatory controls over financial institutions. Lost is the fact that the excesses of a federally supervised non-insurance unit of AIG trading in credit default swaps caused the need for a bailout, and that the bulk of the bailout

funds ultimately were used to pay back trading partners in the financial community, not to bolster insurance reserves. While the bailout funds did not directly inure to the benefit of AIG’s insurance operations or its policyholders, the strength and value of its insurance units were the main resource that allowed AIG to substantially repay its debt to the Feds. Even at the height of media coverage of the AIG bailout in September 2008, the Wall Street Journal reported on an A.M.Best study, noting: “AIG’s millions of insurance policyholders appear to be considerably less at risk. That’s because of how the company is structured and regulated. Its insurance policies are issued by separate subsidiaries of AIG, highly regulated units that have assets available to pay claims. In the U.S., those assets can’t be shifted out of the subsidiaries without regulatory approval, and insurance is also regulated strictly abroad.” (WSJ, 9/16/08) And quite recently, in June 2013, the Government Accountability Office in its report titled “Impacts of and Regulatory Response to the 2007-2009 Financial Crisis” concluded “The effects of the financial crisis on insurers and policyholders were generally limited, with a few exceptions. . . . Actions by state and federal regulators and the National Association of Insurance Commissioners (NAIC) among other factors, helped limit the effects of the crisis.” These supporting voices, however, have been drowned out by the shouts of state regulatory critics such as Representative Ed Royce of California whose advocacy on behalf of a Federal charter option has come at the cost of disparaging State regulation and regulators; or the international community’s Financial Stability Board, which has long sought the centralization of insurance regulation in the US for the benefit of non-US institutions. The Federal and International Weapon of Mass Regulation of choice to force centralization of insurcontinued on page 8

6 November 11, 2013 / INSURANCE ADVOCATE

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[ INSIGHT ] institutions that are too important for existing regulatory frameworks. The result will be to subject designees to extra layers of capital requirements and regulatory scrutiny – all at the expense, of course, of existing State regulation. It is not just that institutions with significant insurance operations designated as “systemically important” would now be subject to Federal — and possibly International — solvency standards on top of existing State requirements. It is the growing marginalization and

continued from page 6

ance regulation in the US and eliminate or reduce state insurance regulation, is through the SIFI (Systemically Important Financial Institution) and G-SIFI (Global Systemically Important Financial Institution) designations. Based on flawed conclusions about the causes of the AIG bailout, these groups relentlessly push to designate insurance entities as financial

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It is not just that institutions with significant insurance operations designated as “systemically important” would now be subject to Federal -- and possibly International -solvency standards on top of existing State requirements. It is the growing marginalization and ridicule of state regulation and regulators as a means to achieve a Federal and International takeover at the expense of factual accuracy.

ridicule of state regulation and regulators as a means to achieve a Federal and International takeover at the expense of factual accuracy. These anti-state positions rest on a false premise and a failure to acknowledge the success of state regulation in avoiding the major consequences of the financial crisis. What is ultimately driving the marginalization of state regulation of insurance is not the old Federal/State battle that has been fought for decades; it is not the findings of investigations such as Congressman Dingell’s 1990 report “Failed Promises: Insurance Company Insolvencies;” it is not any failure of state solvency regulation during the 2008 financial crisis. No, the driving force turns out to be a failure in Federal regulatory oversight of a non-insurance unit of AIG. How ironic! In the world of Bill Mazer, you may embellish the facts, but you do not change them. You may use your imagination in reporting a game, but you do not disrespect the game or the players. An out is an out; a hit is a hit; a score is a score whether routine or spectacular. The Feds and the FSB and many of their supporters are not simply embellishing existing facts. They are ignoring the record, disrespecting the players and creating imaginary games from imaginary facts. Bill Mazer would not approve. [IA]

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[ EXPOSURES AND COVERAGES ]

By Jerome Trupin, CPCU

Improve and Better Improvements & Betterments Coverage

mprovements and Betterments (I&B) coverage in commercial property insurance policies is something you studied when preparing for the broker’s exam and probably haven’t paid much attention to since. That can be a big mistake. I&B can involve millions of dollars. In one high profile loss, a restaurant’s I&B claim was over $17,000,000. Even a moderate-size firm with fewer than 50 employees and just functional furnishings in its office, spent close to $1,000,000 on the build-out of the space. You ignore I&B at your client’s peril—and perhaps yours. Standard practice in the metropolitan New York area is for commercial tenants to lease raw space and build it out to suit their needs by installing interior walls, doors, and decoration at their own expense. That’s why I&B are so important. Let’s start by looking at the definition of I&B in the ISO commercial property: Improvements and betterments are fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and (b) You [the insured] acquired or made at your expense but cannot legally remove.1 A tenant does not own the I&B. By definition they are a part of the building that the insured occupies as a tenant and that it cannot legally remove. Once they are installed, they become the building owner’s property. The value is automatically added to the insurable value of the building and the building owner can collect on its insurance for the damage to them by an insurable peril. The tenant’s business personal property coverage does not cover I&B per se; it covers the tenant’s use interest in the I&B. The amount that each varies with the exact circumstances: 1. Nothing, if another party pays for the repairs or replacement. (This avoids duplicate payments to both

Standard practice in the metropolitan New York area is for commercial tenants to lease raw space and build it out to suit their needs by installing interior walls, doors, and decoration at their own expense.

the landlord and the tenant.) 2. The actual cash value of the I&B if the tenant-insured does the repairs. If the tenant carries replacement cost coverage, it can collect the replacement cost for the I&B when it repairs or replaces them. (I strongly recommend replacement cost, if the tenant intends to restore the premises after a loss.) 3. If the I&B are not repaired or restored, the tenant-insured can collect remaining value of the cost to originally install the I&B. The remaining value is calculated by multiplying the original cost by the time remaining from the date of the loss until the expiration of the lease and dividing by the time from the installation of the I&B until the expiration of the lease. If the lease contains an option to renew—and many do—the expiration date of the last extension is the date used for the expiration of the lease, even if the insured has not yet exercised that option. And, since the policy doesn’t say otherwise, even if the insured continued on page 12

1 Form # CP 00 10 10 12 © Insurance Services Office, Inc., 2011. Just to keep us on our toes, this definition is not included in the definition section of the form, but in the “Your Covered Business Personal Property” in the coverage section.

10 Novemeber 11, 2013 / INSURANCE ADVOCATE

Jerome Trupin

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

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[ EXPOSURES AND COVERAGES ] continued from page 10

will most likely not renew. An example may make this clearer. Legal Eagles (LE), a fictitious law firm, leased its current offices on July 1, 2005. This lease runs for ten years and contains an option to renew for another ten years. On July 1, 2010, LE reconfigured and remodeled the interior of the office at a cost of $500,000. It also purchased $700,000 of new desks, chairs, tables, etc. On July 1, 2013, a fire totally destroyed the office. The lease provided that if the building damage amounted to more than 50%, the building owner could terminate the lease. Because rents in the area had increased, the building owner exercised its option to end the lease. Therefore, the I&B installed by LE were not replaced. The building owner can collect for the actual cash value of the I&B under its policy—I&B become part of the building as soon as they are installed. It could collect replacement cost if it replaced the I&B. The tenant can collect the actual cash value of the desks, chairs and tables as part its business personal property loss. (It could collect replacement cost if they were replaced even at another location.) But if the I&B are not replaced, the tenant can only collect a portion of the value of the I&B. As stated above, that would be cal-

The total expected time of use was 15 years and the tenant had use of the I&B for three years, so 12/15th of the original cost is unexpired. The insured can collect $400,000; that’s 12/15th of the original cost of $500,000.

culated by multiplying the original cost ($500,000) by the length time from the date of the loss (7/1/13) until the expiration of the lease renewal option (7/1/25), that is 12 years, and divided by the length of time from the date of the installation of the I&B (7/1/10) until the expiration of the lease renewal option (7/1/25), that is 15 years. To put it in insurance terms, the tenant can collect for the “unexpired” portion of its use interest in the I&B. The total expected time of use was 15 years and the tenant had use of the I&B for three years, so 12/15th of the original cost is unexpired. The insured can collect $400,000; that’s 12/15th of the original cost of $500,000.

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Setting the Right Amount of Insurance for I&B is Vital If the tenant carries replacement cost coverage2 and expects to repair any damage to the I&B, the amount of insurance should be the replacement cost of the I&B. If the policy is written on an actual cash basis, it’s more complicated. A tenant that expects to repair the damage and whose coverage is written ACV, needs at least an amount of insurance equal to the ACV of cost to replace all the I&B. However the “unexpired” portion of the I&B might exceed the ACV in the case of a long-term lease. Since extensive damage might result in the termination of the lease, you should compare the “unexpired” portion of the I&B with the ACV of the I&B and select an amount of insurance equal to the higher.3 Coinsurance provisions and seasonalincrease additional coverage provide other reasons to select the correct amount of insurance. If the policy is subject to coinsurance, the value of the I&B is included in the total value on which coinsurance is based, whether or not the I&B are damaged. This can result in substantial coinsurance penalty. If the policy contains a seasonal increase provision, and most BOPs do, improvement and betterments are included in the total values to determine if the seasonal increase, generally 25%, will apply. Many insureds have learned to their dismay that the amount they can collect for damage is reduced by the operation of the coinsurance provision because they neglected to include I&B values when determining the amount of insurance needed to satisfy the coinsurance formula. Although many BOPs do not contain coinsurance provisions, the seasonal increase provision, common in BOPs, is triggered only if the amount of insurance equals 100% of the average value of the preceding twelve months values. A large New continued on page 14 2 When the replacement cost option is selected, ISO forms specifically provide replacement cost coverage for I&B. Not every form does. This is often the case with businessowners policies and surplus lines policies. Check the form to be sure. 3 If the current replacement cost of the I&B is less than the original cost, the same type of discrepancy can occur with replacement cost coverage.

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[ EXPOSURES AND COVERAGES ] continued from page 12

York City bookstore on Columbus Circle was destroyed by fire. The amount of insurance carried was inadequate to cover the loss. The public adjuster told the insured not to worry, the seasonal increase provision would provide an additional 25% in coverage. Not so fast replied the insurer. The value of I&B are part of the business personal property values. When they were added in, the amount of insurance did not come close to 100% of the values for the preceding 12 months. The insured did not get the benefit of the 25% increase in insurance.

Some Items are Not I & B Often a commercial lease will make the tenant responsible to repair building components such as plate glass windows, HVAC equipment, etc. That doesn’t make them I&B. They are part of the building that the tenant leased. They should be covered as building items. Because making the tenant responsible for plate class windows is so common, ISO and some other insurers have provided coverage as part of business personal property in some policies. The ISO BOP policy reads: Covered Property Exterior building glass, if you are a tenant and no Limit of Insurance is shown in the Declarations for Building property. The glass must be owned by you or in your care, custody or control (emphasis added).4 The ISO commercial property form doesn’t include this provision, but there is an endorsement, Building Glass – Tenant’s Policy CP 14 70 06 07 that can be used to

This was a serious problem in many of the World Trade Center 9/11 losses. The $17,000,000 loss mentioned at the beginning was one of those losses. The insurance company originally took the position that there was no coverage for the I&B because they were not made at the insured’s expense. add similar coverage.

What if the Building Owner Paid to Install the I&B? It often happens that the building owner pays for the I&B as an inducement to the potential tenant5. The lease, however, will often obligate the building owner to repair or replace only structural items, not the I&B. Can the tenant collect under its insurance if it replaces the damaged I&B? This was a serious problem in many of the World Trade Center 9/11 losses. The $17,000,000 loss mentioned at the beginning was one of those losses. The insurance company originally took the position that there was no coverage for the I&B because they were not made at the insured’s expense. The insured’s attorney responded with a long letter, the gist of which was that if the building owner had not reimbursed the tenant for the cost of the I&B, the tenant would have demanded a lower rental. Therefore, he asserted, the

tenant had effectively paid for the I&B. The case settled so we don’t have the benefit of a court’s opinion. Diana Reitz, CPCU, an editor for the FC&S Online bulletin doesn’t agree. In discussing questions she and her staff receive about I&B paid for by the owner she writes: …I maintain that “acquired or made” means that the tenant must have actually paid for them, had them installed, or personally installed them. But often subscribers counter that the term should encompass a tenant paying a higher rent because the property was built-out by the owner. I don’t think that qualifies. After all, how can we prove that the additional rent actually subsidized the build-out? How much of the rent should be allocated to the basic real property and how much to the fixtures and alterations that made the space suitable for the tenant’s use?6 I don’t agree. The policy doesn’t say that the insured must have paid the full value of the I&B, only that they were made at its expense. The I&B had value and the insured would almost certainly have received some reduction in rent if it had paid for the I&B; even if it weren’t dollar for dollar. That, in my opinion, satisfies the requirement for “made at the insured’s expense.” But when you’re arranging insurance for a client, don’t rely on “opinions.” Find out the facts regarding payment for the continued on page 16

4 Businessowners Coverage Form BP 00 03 01 10 © Insurance Services Office, Inc., 2009 5 Building owners are more willing to pay for I&B than to reduce the rent even when the net amount to be received by the building owner is effectively the same. The reason is that the appraised value of a building is in part determined as a multiple of its rent roll, which increases the amount of mortgage the owner can obtain as well as increasing the selling price. Furthermore, future percentage increases in rent will be based on the higher rental if the owner paid for the I&B rather than reducing the rent. 6 Diana B. Reitz, CPCU “Coverage For Tenant Improvements And Betterments” February 28, 2011 http://www.propertycasualty360.com/2011/02/28/coveragefor-tenant-improvements-and-betterments (accessed 10/30/13)

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What if the Lease is Cancelled, but I&B aren’t Damaged? There’s yet another facet to the I&B riddle. What if lease is cancelled due to damage to the building, but insured’s I&B aren’t damaged? That might result in cancellation of the tenant’s lease if there’s sufficient damage to the building it occupies, even though there’s little or no damage to the insured’s I&B. Can the insured suffer a financial loss loss? Of course it can. Cancellation of the lease means the loss of the use value of the I&B. Can the insured collect under its business personal property coverage for this loss? Of course not. To paraphrase the basketball concept of no harm, no foul—no damage, no insurance coverage. Can we close the gap? Yes, leasehold interest coverage. Leasehold interest insurance is even less common than proper I&B coverage. I&B coverage is part of the standard forms, so it’s a question of setting the correct amount of insurance and determining what’s covered as I&B versus what requires building coverage. Few policies contain coverage for leasehold interest; some add a limited amont for it in a coverage enhancement endorsement, but most don’t even do that. In brief, leasehold interest insurance covers the loss an insured sustains when a lease is cancelled due to damage to the premises by a covered cause of loss. (It can cover more situations than the loss of the use value of I&B, including tenants’ lease interest, bonus payments, and prepaid rent.) It’s a complicated topic. I’ll discuss it in detail next month. [IA]

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[ COVER ]

By Betty Flood and Katlin Nash

COMP COSTS CLIMBING

18 Novemeber 11, 2013 / INSURANCE ADVOCATE

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[ COVER ]

lbany, N.Y.—New York State increased its maximum workers’ compensation benefits significantly in 2007, but the perception that higher benefits explain New York’s high overall comp costs is inaccurate, a new analysis of the state’s workers’ comp benefit levels show by the Workers’ Compensation Policy Institute. “There does not appear to be any direct correlation between high benefit levels and high compensation costs,” says the study, New York’s workers’ comp: High benefits, higher costs by the Workers’ Compensation Policy Institute. “The Workers’ Compensation Policy Institute is a think tank that examines how the workers’ comp system influences local taxes and services. The Institute focuses on nonpartisan policy research, issues, and ideas pertaining to workers’ comp e n s at i on policy in New York State, especially on how these policy issues affect public entities and New York’s taxpayers. The Institute conducts surveys, analyzes data, evaluates workers’ compensation issues, and ‘thinks outside of the box’ to develop insights to share with municipal leaders, policy makers, journalists, and other opinion leaders. The Institute seeks to establish itself as the foremost expert in New York State on public entity workers’ compensation,” according to the Institutes website. “The Institute is a nonprofit organization governed by a Board of Directors comprised of New York State municipal leaders, and counseled by an Advisory Board which includes workers’ comp and municipal experts both within New York State and in the national arena. The Institute is a research affiliate of PERMA,” according to the Institutes website. “Prior to the reforms, employers and taxpayers in New York were paying the 10th highest premiums as a percentage of payrolls in the country. Despite these high costs,

injured employees received one of the lowest maximum benefits in the country: $400 per week,” said Paul Jahn, Executive Director for the Workers’ Compensation Policy Institute. Jahn has nearly thirty years of experience in the workers’ compensation field. “Since 2007, benefits have risen from $400 to $803.21 per week. Comparative costs have also risen from tenth highest to fifth highest in the nation,” continued Jahn. For the Legislative Session of 2013 Jeff Bishop, Communications Director for Senator James Seward (R, C, I-Cayuga) said, “On the workers’ compensation issue there were few reforms included in the budget that will modernize and simplify the program that do not impact workers’ benefits. As far as standalone legislation, not a lot.” In April, 2013 it was announced there would be a total of $1.2 billion in savings to employers that would occur as a result of the sweeping reforms to the state’s Workers’ Compensation and Unemployment Insurance systems that were included in the state budget. “For too many years, businesses in New York struggled under the burdensome requirements and costs of our state’s unemployment insurance and workers’ compensation systems,” Governor Andrew M. Cuomo said. “Two years ago we pledged to reopen New York’s doors to business and transform our economic climate to make our state friendlier to job creators and reduce the unnecessary bureaucracy and burdens facing businesses. While there is still work to be done, the sweeping reforms to the workers’ comp and unemployment insurance system included in the 2013-2014 budget are a major victory for our state’s businesses large and small, and will save our job creators more than one billion dollars.” “There will be $800 million in savings to businesses while increasing benefits to workers. Reforms to the workers’ compensation law will cut costs for employers, increase that minimum benefit to workers’ and overhaul the way the workers’ compensation system is managed,” said Rich Azzopardi, Press Secretary to Governor Cuomo. “The reforms will bring immediate savings to businesses by providing relief for self-insured businesses.” “The state will create one method for

GOV. CUOMO

“For too many years, businesses in New York struggled under the burdensome requirements and costs of our state’s unemployment insurance and workers’ compensation systems…” - Governor Andrew M. Cuomo

continued on page 20

INSURANCE ADVOCATE / November 11, 2013 19

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[ COVER ] continued from page 19

ELLEN MELCHIONNI

“New York consistently ranks first or second highest in the nation for the average total cost of a workers compensation insurance claim. In New York, a significant portion of the total claim cost is lost time—generally running 10 percent higher than the national average. New York also has a high percentage of lost time claims.” - Ellen Melchionni. President, New York Insurance Association

20 Novemeber 11, 2013 / INSURANCE ADVOCATE

collecting annual assessments from employers, thereby saving self-insured employers an estimated $500 million. This change will eliminate an overly complicated and bureaucratic system that was not only expensive for the state but also for employers. The new system will achieve administrative efficiencies and provide predictability to employers,” explained Rich Azzopardi. “The savings as a result of this reform to self-insured businesses, by region, are: Capitol $18,748,413; Central New York $25,788,853; Finger Lakes $99,940,865; Hudson Valley $14,695,105; Long Island $1,528,248; Mohawk Valley $4, 672, 260; New York City $258,378,618; North Country $6, 959,474; Southern Tier $38,947,703; Western New York $30,340,462. The total savings is $500, 00, 000,” said Azzopardi. “Previous law allowed payments in certain old and re-opened claims to be made out of a special fund known as the Fund for Reopened Cases. The Governor’s reforms closed this fund, eliminating the need for New York businesses to make payments into a fund that is unnecessary,” continued Azzopardi. “The Governor’s reforms include a series of measures to increase competiveness in the workers’ compensation marketplace that will help to drive down costs and provide relief to businesses.” “These changes will reduce annual workers’ compensation assessments on New York businesses by $300 million. The savings, detailed by region are: Capital 4.4% or $13,132,845; Central New York 2.8% or $8,257,898; Finger Lakes 4.5% or $13,441,707; Hudson Valley 9.2% or $27,495,102; Long Island 12.5% or $37,371,306; Mohawk Valley 1.4% or $4,071,596; New York City 57.4% or $172, 109, 053; North Country 1.1% or $3, 244,915; Southern Tier 2.1% or $6,372,360; Western New York 4.8% or $14,503, 218; and the statewide total savings is 100% or $300,000,000,” said Rich Azzopardi. “Providing a path to resolution for companies involved in the Group Self Insurance Trust crisis will provide relief for 10,000 businesses across New York State, who are currently saddled with an estimated $850 million in liabilities,” continued Rich Azzopardi. “The crisis resulted from deceptive business practices among several insur-

ance entities that offered low-cost premiums to companies, yet failed to maintain adequate funds for workers’ comp benefits. When the fraud was discovered and it became clear the trusts were insolvent, thousands of New York’s businesses were socked with high and often unmanageable costs. The Governor’s reforms created a bonding program that will assist the selfinsured employers resolve their liabilities. The Governor’s reforms assist the state’s most vulnerable injured workers, increasing the minimum benefit from $100 to $150.” “In addition, during this summer the Workers’ Compensation Board began accepting injury reports electronically from insurers using a national standard. This will cut paper-handling costs, greatly improve system oversight and guarantee benefits are paid timely to injured workers. As a result of the Governor’s reforms, New York is reforming the electronic filing process and leveraging technology to implement an aggressive agenda of structural change in the workers’ compensation system,” said Azzopardi. “We thank Governor Cuomo for including a 50% increase in the minimum workers’ compensation benefit in his Executive Budget and ensuring its enactment in the final agreement. This increase, which is the first adjustment in six years, will help workers who are injured on the job make ends meet. When coupled with the minimum wage increase and boost in the minimum unemployment insurance benefit, New York is making real strides in recognizing the hardships faced by low wage earners each day,” said Mario Cilento, President of the New York State AFL-CIO. “New York consistently ranks first or second highest in the nation for the average total cost of a workers compensation insurance claim. In New York, a significant portion of the total claim cost is lost time— generally running 10 percent higher than the national average. New York also has a high percentage of lost time claims,” said New York Insurance Association President Ellen Melchionni. “Wages are a key driver of the cost of workers compensation insurance, but the overall rate is multifaceted. Rising medical costs are a contributor. The fact that New York has the highest assessment in the councontinued on page 22

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[ COVER ]

“When the workers’ compensation system in New York was reformed in 2007, the system worked poorly for both employers and employees. The state maximum benefit level had been unchanged since July 2002, and costs were driven by lifelong benefits paid to a relatively few claimants who qualified for Permanent Partial Disability (PPD) classification.” - Paul Jahn, Executive Director Workers’ Compensation Policy Institute.

22 Novemeber 11, 2013 / INSURANCE ADVOCATE

continued from page 20

try, five times the national average, is a huge factor,” said Melchionni. “Legislation was passed earlier this year to streamline the assessment, but only time will tell what impact it will have on the assessment rate. There are increased costs for regulatory compliance. Fraud also drives up the cost of insurance. New York had the second highest number of questionable workers compensation claims in the nation in 2012 and is on pace for an even greater number in 2013.” “Governor Cuomo has acknowledged that additional work needs to be done related to workers compensation insurance. NYIA feels a thorough evaluation of cost drivers in the workers compensation system needs to occur, which would clearly highlight necessary modifications. In addition, in order to make the marketplace competitive and attract companies to write in New York, the state’s consistent artificial rate suppression needs to be addressed,” Melchionni said. “In enacting the 2007 reforms, policymakers voiced hope and belief that their approach-increasing benefits while enacting reforms to trim costs-would both raise benefits and lower costs,” according to the Workers’ Compensation Institute’s report. “They were only half right.” “The 2007 reforms accomplished their goal in making benefit levels in New York comparable to most other states. However, New York still does not have particularly high benefits levels-which means they are not sufficient to explain why New York’s premiums are the nation’s fifth highest,” the report said. “The Institute’s study compares maximum benefit levels across the states. Mississippi has the lowest maximum benefit, $449.12, and Iowa has the highest at $1,543. While there is an enormous gulf between Mississippi and Iowa, a majority of jurisdictions, New York included, have established their maximum benefits in a relatively tight band ranging from just over $750 to just under $1,000 per week,” the study notes. “When the workers’ compensation system in New York was reformed in 2007, the system worked poorly for both employers and employees,” said Paul Jahn, Executive Director for the Workers’ Compensation Policy Institute. “The state maximum benefit level had been unchanged since July

2002, and costs were driven by lifelong benefits paid to a relatively few claimants who qualified for Permanent Partial Disability (PPD) classification.” “The 2007 reforms sought to restore balance to the workers’ compensation system. By linking the maximum weekly benefit to the state’s average weekly wage, New York gave injured workers more adequate temporary compensation,” explained Paul Jahn. “To offset this increase in employer costs, the reform legislation capped PPD awards at 525 weeks of benefits. The state also put medical treatment guidelines in place, and granted employers easier access to pharmaceutical and durable medical equipment networks that are designed to reduce costs. In enacting the 2007 reforms, policymakers voiced the hope and belief that their approach increasing benefits while enacting reforms to trim costs-would both raise benefits and lower costs. They were only half right.” “Since 2007, New York’s benefits have risen from $400 to $803.21 per week. But comparative costs that were already high have risen even higher-from tenth highest to fifth highest in that nation,” continued Jahn. “Iowa has the highest maximum benefit at $1,543; Mississippi has the lowest at $449.12. While there is an enormous gulf between Mississippi and Iowa, a majority of jurisdictions (including New York) have established their maximum benefits in a relatively tight band ranging from just over $750 to just under $1,000 per week,” said Jahn. “What this analysis does not show is any clear, direct correlation between high benefit levels and high compensation coasts. Only Illinois is among both the five highest cost states and the five states with the highest benefit levels,” said Jahn. “Only Illinois, at fourth highest, has the same ranking for both costs and benefits. It should be noted that despite the lack of a direct correlation, the costliest states do tend to have higher than average benefit levels.” “In New York’s case, the disparity between benefit levels and costs is stark,” continued Jahn. “New York has the fifth highest cost to employers and pays employees the 29th highest maximum benefit level.” “While each state has its own workers’ continued on page 24

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[ COVER ] continued from page 22

compensation statute, common practices regarding how employees are compensated have evolved in recent years. Virtually every state adjusts its maximum benefit rate annually. The vast majority of states tie the benefit rate to the state’s average weekly wage. Almost every state pays employees a temporary total disability rate equal to two thirds of his or her individual average weekly wage,” explained Jahn.

“New York was one of the last states to move to a system that required an annual adjustment in the maximum benefit. Before the 2007 reforms, New York claimants had not seen an increase in the maximum benefit since 1992. The reform sought to ensure that benefits would be adjusted annually. As a result, the maximum benefit was increased annually until it reached a level of two-thirds of New York’s average weekly wage as determined by the Department of Labor,” continued Jahn.

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“By choosing a maximum benefit that is less than the state’s average weekly wage, New York avoided moving to one of the highest benefit levels in the country,” explained Paul Jahn. “Claimants with higher-than-average salaries receive less than two thirds of their average weekly wage in compensation. If New York elected to set its maximum benefit at the state’s average weekly wage, injured employees would receive a maximum of $1,204.82. This would represent the sixth highest maximum in the country.” “The increase benefits built into New York’s 2007 reforms have occasionally been perceived as a contributor to New York’s overall high workers’ compensation costs. Certainly, payers of workers’ compensation developed a sense of ‘sticker shock’ as maximum benefit levels more than doubled between 2007 and 2013,” said Jahn. “A close comparison of benefits among states undermines this perception. The 2007 reforms accomplished the goal of making New York benefits comparable to most other states,” continued Jahn. “However, New York does not have a particularly high benefit levels which do not account for its fifth highest in the nation premium level.” “Several factors are probably driving the disparity between the cost benefits and the much heavier burden of overall system costs. Two of these issues will be the focus of future analysis by Workers’ Compensation Policy Institute: In the last Oregon study, New York had the nation’s highest assessment tax by far, 20.2% of premium. This tax shrank slightly at the end of 2012 and it should go down much more due to reforms included in the state budget. This may impact New York’s standing in the next Oregon study. Schedule Loss of Use (SLU) awards have increased dramatically in New York due to the higher benefit level. While this study did not systematically review how states reimburse employees who return to work for permanency, we did note that many states have moved away from permanency schedules, while others award schedules at less than the total rate. These awards are quite common in the New York system and the Institute intends to do a national study on how they are awarded,” concluded Paul Jahn. [IA]

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[ ON TH E LEVEL ]

By Jamie Deapo

One or Two – It’s Your Call

ndependent agents and brokers face many challenges today. In the personal insurance arena competition is fierce and the choice that dealing with an independent agent provides also creates its greatest liability, as working with multiple companies creates increased agent/broker costs, workflow issues and a lack of carrier support that is not shared by captive agents or direct response companies. This creates significant challenges in satisfying many of today’s consumers who expect their insurance proJamie Deapo tection to be provided instantly and as low priced as possible. Agents and the carriers they represent need to streamline the new business process allowing it to match the speed and effectiveness currently available directly from carriers or through a captive agent. They also need the carriers they represent to provide their customers with today’s technology allowing those customers quick and effective service similar to what is available now through their competition. Insurance carriers need to look internally at their own operations improving workflow and making cuts to their overhead that drive down operating costs without affecting service. Agents can no longer bear the cost for ineffective systems and procedures that also puts them at a competitive disadvantage. Agent compensation has not been increasing. If anything it has been going down at a time when agencies are being asked to take on more of the workload associated with servicing their clients. Outdated, unnecessary and ineffective regulation and laws add cost and time to agent’s ability to properly service their client’s needs. These laws and regulations need to be changed for the system to operate in a cost effective manner. Getting carriers, regulators and legis28 Novemeber 11, 2013 / INSURANCE ADVOCATE

lators to make needed changes is significantly bolstered when the maximum number of independent agents and brokers work through one organization with a focused agenda. That organization must be run efficiently to be as effective as possible. It must be led by a board totally representative of the constituency it serves. It’s only purpose should be to advance the performance and success of independent insurance agencies and brokerages in New York. In addition to lobbying for the changes noted above, this organization must offer services to agents that help them run and improve their businesses. Independent agents are consummate entrepreneurs, responsible for every facet of their business. Because of the complexity of running an independent agency today most agencies need assistance in meeting the myriad needs of their agency. The current trend of baby boomer retirees leaving and very few new young workers being attracted to the insurance industry is just one example. Technology, human resources, employee training including CE, workflow management and branding are some additional examples of areas where independent agents want help. One strong agent focused association, operated by experienced, knowledgeable and dedicated staff could provide the best resources to meet these needs. We’ve seen it time and time again across the country As I mentioned earlier, agent’s commissions have not gone up and most agencies have to be very careful when they spend money to make sure they are getting the most value for what they spend. Having one association that effectively answered all members’ needs and requirements would allow independent agents to get the best value for their investment. The redundancy of cost associated with having two competing associations is counterproductive financially. Two separate associations are also not able to offer the maximum constituency necessary to effectively deal with carriers, regulators and legislators. Independent agents understand the economic logic here because it is the same logic that causes agents to merge with or

acquire other agencies. Combining entities makes the resulting firm more able to meet whatever need and gives them the influence of their larger size with carriers. The new agency can choose to retain the very best talent from the pool of employees available. Based on their increased size many times the new agency is able to more effectively align duties and improve workflow. The elimination of positions where there is redundancy immediately creates additional revenue that can be used to improve the overall operation. IIABNY has long held that one association representing the interests of independent insurance agents and brokers is the best way to advance their interests. I understand that conventional wisdom would suggest that I would be against the creation of one statewide independent agent association in New York. Its creation would totally disrupt the lives of me and my co-workers. It would cost some of us our jobs. Although that is true I honestly believe agents in New York would be better served and more effectively represented by one association. If we really want to push forward our mission to advance the performance and success of independent insurance agencies and brokerages in New York, than a merger makes total sense. I’ve heard a few people indicate that competition is good and forces both parties to work hard to keep their members. We believe very much in competition. Given today’s circumstance agent associations already compete with the internet, small business groups, clusters, other industry groups and more, so competition among agent/broker groups is not necessary. The idea of a merger is not new. It has happened in a number of other states already and it’s been discussed in New York many times before. The decision lies with independent agents who must decide whether their future would be better served by having one trade association in New York. [IA]

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INA 11-11-13_INA 11-11-13 11/24/13 11:37 AM Page 30

[ IN THE ASSOCIATIONS ]

Big “I” 2013 Best Practices Study Released

LEXANDRIA,Va.,—The Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) has released its 2013 Best Practices Study which found an increase in agencies with specializations, expansion of technology investment and an increase in profitability across most of the study’s six revenue groups. “The results of this year’s Best Practices Study reveal several positive findings for the independent agency system,” says Madelyn Flannagan, Big “I” vice president of agent development, research and education. “Most study participants have grown their business and invested in staff and technology.” Other findings from the 2013 Best Practices Study include: • Specialty or Niche Markets: Specialization has increased across agencies of all sizes. Developing an expertise or proficiency in a certain industry or product has shown to facilitate targeted leads and referrals, improve retention and provide a competitive edge for an agency. • Technology Investment: Many of the Best Practices agencies plan to invest in technology for the coming year. The top investment choice for agencies with revenue under $5 million will be in internet marketing and social media, while agencies with revenue over $5 million ranked investments in agency management systems first. Internet marketing and social media investments ranked fourth for the larger agencies, perhaps because many of these firms have already ventured into these fields. Across all revenue groups, the average number of agency staff members who devote time to social media activities is 1.3 employees and that accounts for approximately 10% of their time. • Service Staff Productivity: This year’s study took a new approach to measuring service staff productivity. Rather than identifying the average book of business serviced per 30 Novemeber 11, 2013 / INSURANCE ADVOCATE

“The results of this year’s Best Practices Study reveal several positive findings for the independent agency system. Most study participants have grown their business and invested in staff and technology.” - Madelyn Flannagan Big “I” vice president of agent development, research and education

account executive (AE) and customer service representative (CSR), the study combined all service positions—AE, CSR, processor, marketer/placer and claims—by line of business, and did not include administrative staff members like accountant or receptionist. This change provided clearer access to the total number of people the typical Best Practices agency use to service the revenue in its commercial, bonds, personal, group life-health and individual life-health books of business. The study also provides a salary range for each of the four service staff positions. • Organic Growth: As expected, organic growth has continued to improve dramatically since last year’s study. The average growth rate in total commission and fee revenue was 9.4% (up from 2.1%) for agencies with net revenue of less than $5 million, and 9.8% (up from 4.5%) for agencies with net revenue of more than $5 million. • Growth Strategies Worked: Between 2007 and 2010, when the soft market and an extremely weak economy made positive growth nearly impossible, Best Practices agencies continued to invest in growth strategies that would allow them to achieve organic growth and obtain a competitive edge as conditions improved. The results

of those strategies—which include hiring new producers and equipping them with new tools and resources, enforcing more producer accountability, focusing on specialty/niche areas and expanding marketing/advertising activities—has paid off. • Profitability: Strong revenue growth improved profitability. Although last year’s study results identified that growth was stronger than it had been in years, profit margins remained stubbornly flat thanks to waning contingent income growth. That trend has now reversed. This year’s results show that contingent income has grown an average of 21.8% for agencies with revenue totally less than $5 million, and an average of 10.7% for those with revenue of more than $5 million. At the same time, agencies did a much better job of controlling expenses so that operating profits grew faster than contingent income. The result? Smaller to mid-sized firms enjoyed an average ProForma EBITDA margin of 29.3%, while the larger firms averaged 22.7%. • Value Creation: Last year proved to be a solid year of value creation. The Rule of 20 scores, a simple growth and profitability balancing equation that provides a quick way to determine whether or not agency is creating value for its shareholders, were the highest they’ve been in several years. Small to mid-sized agencies earned an average score of 24.1, while agencies over $5 million earned 20.8. Generally speaking, an outcome of 20 or higher—regardless of growth and profitability—indicates that the agency’s shareholders can expect to earn 15-17% per year through stock price appreciation and/or shareholder distributions. “The 2013 results indicate that Best Practices agencies continue to grow and increase profitability, the key components of agency value,” says Robert Rusbuldt, Big continued on page 34

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[ ON M Y RADAR ]

By Barry Zalma

When Is A Letter is a Suit? Ninth Circuit: A State Can Insert a Definition Into a Policy After It Expired

he Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. (“CERCLA”), establishes a retroactive strict liability regime that imposes joint and several liability upon past and current landowners or operators of properties or facilities from which hazardous substances have been released or disposed into the environment. Insurance is a contract where the insurer promises to indemnify another against a contingent or unknown event. The terms, conditions and limitations of the contract are set at the time the terms of the contract of insurance are agreed to by the contract wording. Courts, faced with statutes that did not exist at the time the contract is executed. In Anderson Brothers, Inc. v. St. Paul Fire and Marine Insurance Co., 12-35346, 12-35454 (9th Cir. 08/30/2013) the Ninth Circuit was asked to determine if there was coverage under a Comprehensive General Liability (CGL) insurance policy for defense after the Environmental Protection Agency sent two letters to the insured. One letter was issued pursuant to Section 104(e) of CERCLA requiring the insured to respond to questions that necessarily established its liability under CERCLA. The second was a General Notice Letter identifying the insured as a potentially responsible party (PRP). The insured claimed the letters were “suits” requiring the insurer to defend. Anderson’s general liability insurer, St. Paul Fire and Marine Insurance Co. (“St. Paul”), declined to provide Anderson with a legal defense. Under the CGL policies in question, St. Paul has a duty to defend Anderson against “suits” for activities covered by the comprehensive general liability policies. St. Paul did not consider the letters sent to Anderson to be “suits” because the common understanding of “suits” at the time the CGL was written and issued, required that a “suit” be filed in a court of law. In light of CERCLA’s unique liability regime, which is designed to promote settlement with the EPA instead of litigation, 32 Novemeber 11, 2013 / INSURANCE ADVOCATE

Insurance is a contract where the insurer promises to indemnify another against a contingent or unknown event. The terms, conditions and limitations of the contract are set at the time the terms of the contract of insurance are agreed to by the contract wording.

the district court held that both letters were “suits.” Anderson is an Oregon corporation that owned and leased property, falling within the boundaries of the Portland Harbor Federal Superfund Site (“the Site”). St. Paul issued two CGL policies (“the Policies”) to Anderson, providing coverage for damages arising from “occurrences” that happened between January 1979–80 and January 1980–81, respectively. St. Paul’s relevant obligations under the Policies, which include a duty to defend Anderson, are as follows: The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of: . . . property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient .... The EPA listed the Site as a “Superfund” site in December 2000. See

65 Fed. Reg. 75179, 75182 (Dec. 1, 2000). Anderson sued St. Paul in district court, alleging that St. Paul breached its duty to defend under the Policies by refusing to provide Anderson with a legal defense in response to each of the two letters. After the parties filed cross-motions for summary judgment, the State of Oregon intervened on Anderson’s behalf in order to defend the constitutionality of the Oregon Environmental Cleanup Assistance Act, which provides a legislatively-imposed definition of “suit” in comprehensive general liability policies, as discussed below. The district judge granted Anderson’s motion for partial summary judgment from the bench, concluding that both letters triggered St. Paul’s duty to defend. The parties stipulated to the resulting damages in order to obtain a final judgment. St. Paul appealed.

THE ISSUE The Ninth Circuit limited its analysis to a determination whether either letter was a “suit, ” and, if so, St. Paul had a duty to defend Anderson. The Policies here are standard-form CGL policies replicating the 1973 standard form comprehensive general liability policy that was in use when the Policies were issued. The nature of the federal CERCLA regime is relevant to the contractual interpretation issues. CERCLA imposes strict liability on all entities that have owned or operated “facilities” at which hazardous substances were “disposed.” Once an entity is identified as a PRP, the EPA has broad authority to compel it to clean up a contaminated area or reimburse the Government for its past and future response costs. A PRP’s failure to cooperate with any reasonable order from the EPA at a contaminated site can result in significant civil liability. These broad powers give the EPA strong leverage to compel PRPs to settle. Indeed, encouraging early settlement between PRPs and environmental regulators is one of CERCLA’s central purposes.

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[ ON MY RADAR ] A PRP finds it important to participate in settlement talks at the earliest possible opportunity because non-settling PRPs may be held jointly and severally liable for the entire amount of response costs minus the amount of the settlement. Furthermore, non-settling PRPs may not file a contribution action against settling PRPs regarding matters addressed in the settlement. The majority of U.S. courts hold that a policyholder’s receipt of a PRP notice from the U.S. EPA is the functional equivalent of a suit. In 1999, the Oregon legislature enacted the Oregon Environmental Cleanup Assistance Act (“OECAA”). OECAA provides a definition for the term “suit,” and instructs courts to apply that definition when interpreting comprehensive general liability policies in cases involving administrative actions by the EPA. OECAA defines “suit” as follows: Any action or agreement by the . . . [EPA] against or with an insured in which . . . the [EPA] in writing directs, requests or agrees that an insured take action with respect to contamination within the State of Oregon is equivalent to a suit or lawsuit as those terms are used in any general liability insurance policy. Under Oregon law, at least in environmental cases, the word “suit” is ordinarily found to be ambiguous. Therefore, such a policy necessarily does not demonstrate any intent of the parties that would be contrary to OECAA’s statutory definition of the term. Since the Ninth Circuit could see no reason to believe that the Oregon Supreme Court would hold otherwise it decided to apply OECAA’s definition of “suit”. St. Paul, in its last attempt to avoid the duty to defend of a suit that was not a suit and not filed in any court argued that applying OECAA’s definition of “suit” would violate the Contracts Clauses of the United States and Oregon Constitutions because the statutory definition would alter its contractual commitments under the Policies. The Ninth Circuit, intent on imposing an obligation on St. Paul that was never intended at the time the policies were issued, found that under Oregon common law, if a contractual term is found to be ambiguous, it is generally interpreted

The Ninth Circuit failed to recognize the general and ordinary meaning of the word “suit” and adopted the definition placed decades after the policy was issued to make the clear and unambiguous meaning of the term “suit” in the 1980’s when the policy was issued to be made ambiguous by an Oregon statute.

against the insurer. Interpreting the ambiguity in the letters in Anderson’s favor both letters triggered the duty to defend. Each letter put Anderson on notice of the EPA’s belief that Anderson was responsible for the release or disposal of hazardous substances at the Site and of its intent to pursue compensation for Anderson’s alleged role in such releases or disposals. Both the 104(e) Letter and the General Notice Letter were “suits” within the meaning of the Policies. In addition, the letters alleged facts sufficient to alert Anderson to its potential liability for environmental contamination under CERCLA. St. Paul, therefore, breached its duty to defend Anderson.

ZALMA OPINION The Ninth Circuit failed to recognize the general and ordinary meaning of the word “suit” and adopted the definition placed decades after the policy was issued to make the clear and unambiguous meaning of the term “suit” in the 1980’s when the policy was issued to be made ambiguous by an Oregon statute. Allowing the broad powers CERCLA gives to the EPA to compel PRPs to settle they need insurers to fund the settlement. Indeed, encouraging early settlement between PRPs and environmental regulators is one of CERCLA’s central purposes. This is not an action requiring an insurer to defend since there is no real suit to defend. It is a court compelling a CGL insurer, under the guise of a duty to

defend, to help its insured settle with the EPA. Clearly the duty to defend is broader than the duty to indemnify and since no “suit” was filed and there will probably never be a judgment requiring indemnity, decisions making a letter from the EPA a “suit” is merely an attempt to pass the EPA’s extortion to an insurer. [IA] Barry Zalma, Esq., CFE, has practiced law in California for more than 40 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. Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/ Getting-the-Whole-Truth_p_254.html. Mr. Zalma recently published the ebooks, “Zalma on California Claims Regulations – 2013 ; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com INSURANCE ADVOCATE / November 11, 2013 33

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[ IN THE ASSOCIATIONS ] continued from page 30

“I” president & CEO. “Overall, we are pleased, but not surprised, that the independent insurance agency system remains strong and stable.” Every three years, the Big “I” collaborates with Reagan Consulting to select “Best Practices” firms throughout the nation for outstanding management and financial achievement in six revenue categories (less than $1,250,000; $1,250,000 to $2,500,000; $2,500,000 to $5,000,000; $5,000,000 to $10,000,000; $10,000,000 to $25,000,000; and more than $25,000,000). Agencies are nominated by either a Big “I”affiliated state association or an insurance company and qualified based on -operational excellence. Financial and benchmarking information for the participating agencies are also reviewed and updated. The Best Practices Study was initiated by the Big “I” in 1993 as the foundation for efforts to improve agency performance and create higher valued agencies. The survey and study of leading independent

34 Novemeber 11, 2013 / INSURANCE ADVOCATE

“Overall, we are pleased, but not surprised, that the independent insurance agency system remains strong and stable.”

Mutual Agency Corporation, Main Street America Group, Ohio Mutual Insurance Group, Travelers and Westfield Insurance. The complete report can be purchased as an e-book or in paper form.[IA]

- Robert Rusbuldt Big “I” president & CEO

insurance agencies documents the business practices of these “best” agencies and urges others to adopt similar practices. Sixteen insurance companies and four industry vendors provide financial support for the research and development of the Best Practices study – Agency Business Solutions/Amerisure Insurance, Applied Systems, Beyond Insurance, Central Insurance Cos., Chubb, CNA, EMC Insurance Companies, Encompass Insurance, Erie Insurance, Great American Insurance Group, The Hanover Insurance Group, Harleysville Insurance, Imperial PFS, InsurBanc, Kemper Preferred, Liberty

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com

INA 11-11-13_INA 11-11-13 11/24/13 11:37 AM Page 35

[ IN THE ASSOCIATIONS ]

PIA Management Services Partners with FloodBroker.com

LENMONT, N.Y.—PIA Management Services Inc. announced it has partnered with Rochester, N.Y.-based FloodBroker.com to offer member agencies a unique sales tool to facilitate the sale of flood coverage and provide critical documentation of the agency’s efforts to do so. This exclusive agreement will provide members of the Professional Insurance Agents Associations of Connecticut, New Hampshire, New Jersey and New York State with a customized link installed on their own agency’s website to encourage current and prospective clients to consider and purchase flood coverage. The web portal leads consumers to flood insurance information, and with a simple application it will generate a quote for the customer, as well as a qualified lead for the agency to engage. For a reasonable monthly fee, a member agency’s website becomes a part of the exclusive FloodBroker.com network from which they can offer online quotes to all of their clients—while documenting against E&O losses. “After our members experienced the damaging storms of Irene, Lee and Sandy, PIA has continued to look for ways to help our members as storms of this magnitude appear to be increasing in frequency,” said

PIA Management Services President and CEO Mark LaLonde, CPIA, CIC, AAI. “We identified FloodBroker.com as a valuable resource to help agents sell coverage and provide them with important documentation and defense should an unfortunate E&O claim occur after a disaster strikes.” “FloodBroker.com was conceived as a tool to help agencies and property owners, and we are confident from research and extensive testing that agents and insureds alike will benefit from being a part of the network,” said Evan Spindelman, president of FloodBroker.com. “We are pleased to have the PIA endorsement and to work with the respected associations, which agents trust to bring them the best products and services available.” FloodBroker.com collects data from the application, produces a quote and forwards the information to the PIA member agency, which can identify appropriate carriers and follow up with the client. In most cases, property owners can answer the brief underwriting survey to get a free, noobligation, real-time flood insurance quote. If the policy can’t be rated online, the PIA member agency will work with the property owner to provide them a flood insurance quote quickly.[IA]

John Miklus is New AIMU President

EW YORK, NY –John A. Miklus has been named the new president of the American Institute of Marine Underwriters (AIMU), it was announced by AIMU chairman Roger F. Ablett. AIMU is the trade association representing the U.S. ocean marine insurance market. Miklus succeeds James M. Craig, president of AIMU since 2003, who will retire December 31, 2013. A senior ocean marine insurance and reinsurance executive, Miklus most recently was senior vice president at Guy Carpenter & Co., where he managed reinsurance client

relationships for several leading U.S. marine insurers, as well as global marine insurance companies based in Japan, South Korea and China. Miklus began his insurance career as an inland/ocean marine underwriter trainee at The Hartford Insurance Group in 1982 and held several positions at Hart Re Company before becoming senior vice president & marine treaty underwriter. A graduate of Bowdoin College, Miklus also has served as an instructor for AIMU educational courses. [IA]

www.insurance-advocate.com

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38 Novemeber 11, 2013 / INSURANCE ADVOCATE

Applied Systems Donates $30,000 to InVEST

LEXANDRIA, Va—InVEST, the insurance industry’s premier classroom-to-career education program, is pleased to announce that Applied Systems has donated $30,000 to the program. “Applied Systems’ commitment to the InVEST program with this generous gift of $30,000 will help create a career path for the next generation of insurance professionals through financial literacy, insurance education and scholarships,” says Bob Rusbuldt, Big “I” president & CEO. “Companies, educators, volunteers, agents and industry leaders, like the dedicated professionals at Applied Systems, are key to the success of the InVEST program. We applaud and thank them for their commitment to this critical program.” Reid French, CEO, Applied Systems, announced the donation during a keynote presentation at the recent TENCon 2013, the flagship conference for Applied Systems software users, which was attended by more than 2,200 insurance industry professionals. The contribution to InVEST coincides with Applied Systems’ 30th anniversary this year and reflects the company’s continued commitment to investing in the future of the insurance industry. “The business of insurance is changing, and the need to continually attract highlyskilled talent to careers in the insurance industry is vitally important to our industry,” said Reid French. “InVEST is helping to shape the future of our industry through school-based insurance literacy and career resource programs designed to attract new talent to the insurance industry. We are very proud to continue our support and partnership with this outstanding organization.” InVEST is solely funded by contributions from insurance agencies, carriers, vendors, organizations and individuals. A longtime InVEST advocate, Applied Systems also donates software for use in insurance education courses and has supported InVEST with awareness-building media campaigns. Applied Systems is a leading provider of software that powers the business of insurance. The company is recognized as a pioneer in agency and brokerage management systems

and data exchange between agencies, brokers, carriers and their clients. By automating the insurance lifecycle, Applied Systems software enables millions of people around the world to safeguard and protect what matters most. To learn more, please visit www.appliedsystems.com. As a 501(c)(3) educational trust, InVEST benefits from the support of numerous insurance organizations, hundreds of agencies, brokers and volunteers. The program provides the insurance industry with motivated, talented and intelligent professionals through a support structure of state associations, board members, national staff, teachers and the many industry professionals who work in the field as classroom liaisons. Founded in 1970 and based in Alexandria, Va., InVEST promotes insurance education in order to attract individuals to pursue a career in the insurance industry. Each year, the program prepares thousands of students for insurance-related careers with a handson curriculum taught in high schools, adult education centers and colleges. The high school curriculum is a business-education program that utilizes a hands-on approach which simulates an insurance agency and company operations to prepare students for various business careers and create more knowledgeable insurance consumers. At the college level, InVEST is an information-intensive curriculum of risk management and financial services. These courses provide students with a working knowledge of the basics needed to pursue careers in the insurance industry. For more information, go to www.investprogram.org. Founded in 1896, the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) is the nation’s oldest and largest national association of independent insurance agents and brokers, representing a network of approximately a quarter of a million agents, brokers and their employees nationally. Its members are businesses that offer customers a choice of policies from a variety of insurance companies. Independent agents and brokers offer all lines of insurance—property, casualty, life, health, employee benefit plans and retirement products. Web address: www.independentagent.com.[IA]

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