Insurance Advocate November 26, 2012

VOLUME 123, NUMBER 20 / November 26, 2012

New York • New Jersey • Connecticut • Pennsylvania Washington D.C.

A CINN Group, Inc. Publication

Since 1889

thankyou As the end of 2012 approaches and we look back at the year, NYIA wishes to thank all of our insurance company members for their support of the association and all we have collectively been striving to achieve. Whether it is holding the line on all state insurance taxes, assessments and fees, responding to policyholders and regulators in the wake of Sandy or modernizing the laws on cooperative insurer governance, NYIA members came together to create change.

Our members share the association’s culture of hard work and epitomize the meaning of integrity—fundamentals that have served NYIA well for 130 years. The association is fortunate to have such dedicated members who truly represent the best aspects of the property and casualty insurance industry, an industry NYIA is proud to represent in New York.

Allegany Insurance Group Allstate Insurance Company American European Insurance Group American International Group, Inc. American Transit Insurance Company Associated Mutual Insurance Cooperative Broome Co-Operative Insurance Company Callicoon Co-Op Insurance Company Central Co-Operative Insurance Company Chautauqua Patrons Insurance Company Claverack Cooperative Insurance Company Community Mutual Insurance Company Country-Wide Insurance Company Countryway Insurance Company Dryden Mutual Insurance Company Electric Insurance Company Erie and Niagara Insurance Association Erie Insurance Group Eveready Insurance Company Farmers Group, Inc. Farmers Mutual Insurance Company Farmers Town Mutual Insurance Company Finger Lakes Fire and Casualty Company

Fire Districts of New York Mutual Insurance Co. Franklin Fire Insurance Company Fulmont Mutual Insurance Company Genesee Patrons Cooperative Insurance Company Greater New York Mutual Insurance Company GUARD Insurance Group Hartford Steam Boiler Inspection & Insurance Co. Hereford Insurance Company Interboro Insurance Company Kingstone Insurance Company Leatherstocking Cooperative Insurance Company Livingston Mutual Insurance Company Madison Mutual Insurance Company Magna Carta Companies MAPFRE Insurance Company of New York Maya Assurance Company Medical Liability Mutual Insurance Company Merchants Insurance Group Mercury Insurance Company Meredith Insurance Company Mid-Hudson Co-Operative Insurance Company Midrox Insurance Company Midstate Mutual Insurance Company

Narragansett Bay Insurance Company Nationwide Insurance Norfolk & Dedham Group North Country Insurance Company Ontario Insurance Company Oswego County Mutual Insurance Company Otsego County Patrons Co-Op Pittstown Co-Operative Fire Insurance Company Preferred Mutual Insurance Company Progressive Northern Insurance Company Sauquoit Valley Insurance Company Security Mutual Insurance Company State Farm Mutual Automobile Insurance Co. Sterling Insurance Company Tower Group, Inc. Union Mutual of Vermont Companies United Frontier Mutual Insurance Company Utica First Insurance Company Utica National Insurance Group Walton Cooperative Fire Insurance Company Washington County Co-Op Insurance Company Wayne Cooperative Insurance Company

KNOW BETTER NEW YORK CONNECTIONS www.nyia.org

November 26, 2012

CONTENTS

[ IN THE NEWS ]

Superstorm Sandy Puts Analytics to the Test

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nline applications for hurricane risk assessment were crucial in helping clients manage and mitigate risk in advance of Superstorm Sandy, as well as plan and mobilize their response, according to data provided by Willis Re. More than 60 insurers used intelligence gathered from the ‘Willis eVENT Hurricane’ app, and SpatialKey ‘Hurricane Forecasts’ app to quantify and manage risk throughout the lifecycle of Superstorm Sandy.

Commenting on the performance of Willis Re and SpatialKey with respect to Superstorm Sandy, Vivalde Couto, Vice President & Chief Underwriting Officer, of American European Insurance Group Inc. said: “The steps taken to mitigate our exposures and to ensure that our insured risks are geographically spread are having a visible impact in minimizing the losses after a storm such as Superstorm Sandy. In advance of the storm, SpatialKey assists us in managing our coastal exposures. Post-landfall, it provides us with an idea where we can expect the highest impact from an event. Lastly, Willis Re, along with SpatialKey, will help us in the decision making process going forward in how we prepare for and minimize the impact of future hurricanes/storms.”

Roy Cloutier, Senior Vice President, Catastrophe Management Services, said: “Given the extent of Sandy’s footprint, we needed detailed footprint data to assist clients in quantifying their risk potential and prioritizing where to focus their response efforts.

Willis Re offers seamless access to Kinetic Analysis Corporation’s detailed wind and surge footprint data in its proprietary eVENT Hurricane application, while SpatialKey’s Hurricane Forecasts application captures NOAA’s real-time forecasts and event details.

These two industry-leading solutions empower our clients with more focused risk intelligence when it matters most.”

“While these analytics are tailored to assessing the potential impact of Superstorm Sandy, our partnership with SpatialKey delivers extended business value to our clients looking to manage extremes across the globe before events occur. Event response is just one business-critical process our solution supports. We also offer comprehensive analytic solutions that empower our clients with actionable intelligence to proactively understand, manage, and mitigate portfolio risk,” Vaughn Jensen of Willis added.

To learn more about these Willis Re-SpatialKey solutions, please visit willisre.spatialkey.com [IA]

[ COVER STO RY ]

20

[DE PA RTMENTS] In the News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10 Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Insight, By Peter H. Bickford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 From Counsel, By Sari Gabay-Rafiy, Esq. . . . . . . . . . . . . . . . . . . . . . . . 8 Sandy Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 In the Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 28 Courtside, By Lawrence N. Rogak . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Classifieds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Looking Back. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Last Word, By Richard Amerling, M.D. . . . . . . . . . . . . . . . . . . . . . . . . 38

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www.insurance-advocate.com INSURANCE ADVOCATE / November 26, 2012 3

[ FORE WORD ]

Steve Acunto

Post Sandy Strategies

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hen Governor Cuomo announced appointments to three commissions – NYS 2100, NYS Respond, and NYS Ready – the groups charged with undertaking a review and making recommendations to “overhaul New York State’s emergency preparedness and response capabilities, as well as examining how to improve the strength and resilience of the state’s infrastructure to better withstand major weather incidents”, we were surprised that the insurance industry was not as well represented in the number – not the quality – of participants nominated. Perhaps as additional appointments are made we will see our critical factor in the formula represented. I believe that some of the policing and report card styled actions – see page 12 – might be considerably different in tone and scope, if, say, the insurance industry were able to weigh in heavily. Insurers have proved their mettle again and again, independently for the most part.

The NYS 2100 Commission has been charged to make recommendations on: • Strategies to protect existing transportation, energy, environmental, and other infrastructure systems to withstand natural disasters and other emergencies; • Priority projects to replace damaged infrastructure or to diversify or make more resilient our infrastructure; • Long-term options for the use of barriers and natural protective systems; • Opportunities to integrate infrastructure planning, protection and development into New York’s economic development strategies; and • Reforms in the area of insurance and risk management related to natural disasters and other emergencies.

Appointments • Judith Rodin, President, The Rockefeller Foundation (Co-Chair) • Felix Rohatyn, Senior Advisor to Chairman and CEO, Lazard (Co-Chair) • Richard T. Anderson, President, New York Building Congress • Dan Arvizu, Director and CEO, U.S. Department of Energy’s National Renewal Energy Laboratory • Walter Bell, Former Chair, Swiss Re America Holding Company • Jo-Ellen Darcy, Assistant Secretary of the Army (Advisory Member) • Isabel Dedring, Deputy Mayor for Transport, London, England • Lloyd Dixon, Senior Economist, RAND Corporation • Mortimer L. Downey, Vice Chair, Washington Metropolitan Area Transit Authority • Clark W. Gellings, Fellow, Electric Power Research Institute • Patricia Hoffman, Assistant Secretary for the Office of Electricity Delivery and Energy Reliability (Advisory Member) 4 November 26, 2012 / INSURANCE ADVOCATE

• J. Robert Hunter, Insurance Director, Consumer Federation of America • Sudhakar Kesavan, Chair and CEO, ICF International • Roy Kienitz, Former Under Secretary for Policy, U.S. Department of Transportation • Timothy Killeen, President, SUNY Research Foundation and SUNY Vice-Chancellor for Research • Fred Krupp, President, Environmental Defense Fund • Sylvia Lee, Water Manager, Skoll Global Threats • Joe Lhota, Chair and CEO of the Metropolitan Transit Authority • Miho Mazereeuw, Lecturer, Massachusetts Institute of Technology • Guy J.P. Nordenson, Partner, Guy Nordenson and Associates • John Porcari, Deputy Secretary, U.S. Department of Transportation (Advisory Member) • Robert Puentes, Senior Fellow Brookings Institute • Gil Quiniones, President and CEO, New York Power Authority • Jack Quinn, President, Erie Community College • Scott Rechler, Vice-Chair, Port Authority of New York and New Jersey • Jonathan F.P. Rose, President, Jonathan Rose Companies • Lisa Rosenblum, Executive Vice-President for Government and Public Affairs, Cablevision • John Shinn, USW District 4 Director, United Steelworkers • Mark Tercek, President and CEO, The Nature Conservancy • Robert D. Yaro, President, Regional Plan Association (also member of the NY Works Task Force)

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VOLUME 123, NUMBER 20 NOVEMBER 26, 2012

EDITOR & PUBLISHER Steve Acunto, 914-966-3180, x110 sa@cinn.com CONTRIBUTING EDITOR Peter Molinaro CONTRIBUTORS Peter H. Bickford Jamie Deapo Michael Loguercio Sari Gabay-Rafiy 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 President and CEO Steve Acunto

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[ INSIGHT ]

By Peter H. Bickford

Rethinking Insurance Guaranty Funds

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t’s probably a good thing that the NY Insurance Law prohibits advertising the existence or terms of a life guaranty fund in the sale or solicitation of life insurance products. The statutory caps for the NY life funds are fully committed to the $1.6 billion deficit of Executive Life Insurance Company of New York (ELNY),

million aggregate cap (recently increased to $558 million – more on that later), but which only covers NY residents of NY licensed companies. Like most insurance guaranty funds nationwide, the NY life funds are not pre-funded and are managed by separate entities with boards comprised of industry representatives (a glaring

In addition to shining a bright light on the causes of the insolvency under the Liquidation Bureau’s management, the ELNY failure has exposed the shortcomings of the life guaranty fund system, particularly as applied to the ELNY annuity book of business.

Peter H. Bickford

and without new legislation there is simply nothing available for the payment of claims in future insolvencies of life insurance companies. However, the current state of the funds might be a blessing in disguise – an opportunity for the NY Legislature, regulators and the industry to address the mishmash of confusing, inconsistent, inadequate and often misleading coverage by the State’s insurance guaranty/security funds.

New York has a plethora of insurance guaranty/security funds. There are three New York property/casualty funds – one for workers’ compensation, one for public auto and a larger catchall property/casualty fund. And there are two life funds: the “old” and the “new,” both of which technically continue to provide coverage.

Although the p/c funds provide their own issues, this column is focusing on the life funds because of the crisis caused by the ELNY debacle.

Basically, the “old” life guaranty fund provides “unlimited” coverage for any claimant, wherever located, under a policy issued by a NY licensed company before August 1985. This fund, which had only a $50 million aggregate capacity, has been totally used up by ELNY claims. The “new” fund covers policies issued after August 1985 up to $500,000 with a $500 6 November 26, 2012 / INSURANCE ADVOCATE

exception are the pre-assessment NY p/c funds that are financial accounts controlled by the receiver and not separate entities with industry representation – but that’s a topic for another day).

In addition to shining a bright light on the causes of the insolvency under the Liquidation Bureau’s management, the ELNY failure has exposed the shortcomings of the life guaranty fund system, particularly as applied to the ELNY annuity book of business. While roughly 84% of ELNY annuitants are purportedly being fully covered, the class of annuitants most in need of coverage – seriously injured or ill structured settlement annuitants – are having their benefits cut by 50% or more.

Of the almost 10,000 annuitants, about 1500 of them, almost all of them seriously ill or injured structured settlement payees, are absorbing the entire $900 million shortfall – even after the guaranty fund contributions – an average of $600,000 loss per annuitant.

Last summer, in anticipation of court approval of the ELNY restructuring plan, the NY Legislature increased the $500 million cap of the post-1985 life guaranty fund to $558 million, the amount needed to meet its commitment under the plan. As mentioned, the cap on the “old” fund was

also fully used up in the ELNY plan. This means, of course, that the cupboard is currently bare for any other life insolvency without further legislation. The sticking point for increasing the cap further is the current statutory tax credit for life company assessments: the industry wants to keep or expand the credit; the regulators want it eliminated or further limited. This dispute must be resolved between the industry and the regulators if there is going to be any meaningful improvement in the life guaranty fund system. But, as ELNY demonstrates, simply addressing “who pays?” will do little to make the system responsive to lifetime annuity claims.

It is impossible in this short space to outline all the issues presented by the life guaranty funds as currently constituted, or to discuss all the possible solutions – not just in NY but nationwide. However, here are a few of the items that the State Legislature, regulators and the industry might want to consider: • Eliminate the ridiculous restriction on the advertising of the terms and limitations of the guaranty funds. In fact, consideration should be given to requiring life and annuity contracts to state that guaranty fund coverage is limited and may vary depending on where you live now or may chose to live in the future.

• Coordinate with the regulators and guaranty funds nationally to provide unity of coverage in all states and to eliminate loss of coverage resulting from a claimant’s change in residence.

• If meaningful coverage cannot be assured for classes of claimants such as seriously injured or ill structures settlement recipients, then consider eliminating such classes of annuities from guaranty fund coverage altogether. Traditional guaranty funds, with per claim and aggregate caps, simply do not work for structured settlement annuities, particularly those intended to provide lifetime support for seriously injured or ill recipients.

It may be more honest to acknowlcontinued on page 8

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[ INSIGHT ] continued from page 6

edge this inadequacy rather than face future outrage like that caused by the ELNY plan.

• Eliminate the preferred creditor status of guaranty funds. Existing statutes grant guaranty funds subrogation and early access rights that provide them with the same or greater creditor status as the claimants they are intended to protect. This makes no sense other than as a back-door limitation of guaranty fund coverage. Certainly guaranty funds should be entitled to subrogation rights, but those rights should not be allowed to dilute claimant coverage, nor make the caps mathematically meaningless, which is currently the case. Nowhere does this preferential treatment of the guaranty funds exhibit more glaring conflict with the interest of claimants than in the ELNY fiasco.

• Finally, require the funds to be more open and communicative about their coverage limitations, current activity and financial status, including regular reports to the regulators that are made publically available.

Given the state of the life guaranty funds today, the NY Legislature, regulators and the industry have an excellent opportunity to take action to provide definition to the funds and their purpose, and to provide a leadership role in ensuring that the guaranty fund system nationwide provides real protection for those most in need of such protection.

Without meaningful changes, the adequacy, continuity and transparency of guaranty fund coverage nationwide may also become a critical element in the continuing debate on State v. Federal oversight of the insurance industry, particularly in monitoring insurance company solvency. [IA]

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com 8 November 26, 2012 / INSURANCE ADVOCATE

[ FROM COUNSEL ]

By Sari Gabay-Rafiy, Esq.

New York’s Highest Court Strengthens Policyholder’s Rights and May Place Insurance Brokers at Risk

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n November 19, 2012, the New the Court went a step further and held that York Court of Appeals – the high- “[w]hile it is certainly a better practice for est court of the State of New York, an insured to read its policy, an insured apparently strengthened the rights of poli- should have a right to ‘look to the expertcyholders as against their insurance brokers. ise of its broker with respect to insurance In American Building Supply Corp. v. matters.’” (Emphasis added) Petrocelli Group, The Court of Appeals recognized the plaintiff-insured was rethat “insurance agents have quired by its a common law duty to obtain lease to obtain requested coverage for their clients general liability insurance in the within a reasonable time or inform minimum the client of the inability to do so; amount of however, they have no continuing $5,000,000 for bodily injury duty to advise, guide or direct a client and property to obtain additional coverage.” Sari Gabay-Rafiy, Esq. damage. The policy procured, however, contained the following exclusion: In finding there were issues of fact pre“This insurance does not apply to any actual cluding dismissal, the court noted that the or alleged ‘bodily injury’ property damage, insured testified he specifically requested ‘personal injury’ or ‘advertising injury’ to … the coverage for employees, the broker visA present, former, future or prospective ited the premises and was aware that the partner, officer, director, stockholder or em- only people on the premises would be the ployee of any insured.” insured’s employees, and “[s]ince no one Neither the insured nor the insurance but employees ever entered the premises, broker read the policy upon its delivery. the coverage defendant obtained, which When an employee was injured, the insur- excluded coverage for injuries to employees, ance company disclaimed coverage based hardly made sense.” on the above quoted exclusion. As a result, In disagreeing with the majority’s ruling the insured sued its insurance broker for the dissent pointed out that the decision is negligence and breach of contract in con- likely to result in “he said-she said battles nection with the broker’s procurement of of what occurred during coverage discusinsufficient coverage. sions between the insured and broker.”

The Court of Appeals recognized that In light of this decision, brokers should “insurance agents have a common law duty be careful to obtain the type of coverage to obtain requested coverage for their clients specifically requested by a client, or advise within a reasonable time or inform the client of the inability to do so because the onus is of the inability to do so; however, they have not simply on the insured to read the policy no continuing duty to advise, guide or direct at the time of delivery. [IA] a client to obtain additional coverage.”

This article is for informational purposes The Court also recognized the longstanding principle that an insured is pre- only and is not intended to give legal advice. sumed to have read its policy, a presump- For more information or assistance with tion that has historically precluded certain insurance matters or regulatory issues please actions against brokers for failure to procure contact the author at gabay@gabaybowler. requested coverage. In Petrocelli, however, com or (212) 941-5025.

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[ IN THE NEWS ]

National Indemnity Company Acquires Guard

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n October 25th, GUARD Insurance Group, Inc., was acquired by National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. (BRK.A and BRK.B).

According to GUARD CEO and President Sy Foguel, “We are very proud that such a well-respected, world-class

10 November 26, 2012 / INSURANCE ADVOCATE

Group was interested in purchasing us.

With the operational and financial support of our new parent company, we believe that GUARD can become a national presence within the marketplace within a few years.”

GUARD is a long-time specialist in providing workers’ compensation insurance to small- to mid-sized businesses and current-

ly insures over 60,000 in 29 states. The organization is licensed to write policies in 46 jurisdictions. Over the past few years, GUARD also began offering additional complementary property and liability lines for that same targeted market niche.

Specifically, the Company provides Businessowner’s Policy (BOP), Commercial Umbrella/Excess, and Commercial Auto coverage in select states.

CEO Carl Witkowski noted, “GUARD was very successful and profitable during some difficult years in the recent past. Despite a long and deep recession, we managed to expand and produce good financial results.

With the economy slowly turning around and a strong parent company to assist us, we are very optimistic about our prospects for profitable expansion and growth.”

In 2012, GUARD was named a “Ward’s Top 50” performer – a prestigious distinction that places the Group among the top property and casualty companies nationally. GUARD’s A- (Excellent) A.M. Best Company rating was placed under review with positive implications when the sale to National Indemnity Company was announced in late August. At that time, A.M. Best Company stated, “Post completion of the acquisition, A.M. Best believes NICO [National Indemnity Company] will provide substantial operational and financial support to GUARD.” Headquartered in northeastern Pennsylvania, GUARD was founded in 1983 and operated as an independent carrier until being acquired by Clal Insurance Enterprises Holdings Ltd. in 2007. GUARD’s new parent, National Indemnity Co., was founded in 1940 and is a wholly owned subsidiary of Berkshire Hathaway, Inc. National Indemnity Co. is a worldwide provider of specialized insurance and reinsurance coverages. Berkshire Hathaway Inc. is a holding company owning a number of diverse business activities, including property and casualty insurance and reinsurance. Warren Buffett is Chairman and COO of Berkshire Hathaway, Inc. GUARD is projected to write $400 million in premiums in 2012 and is represented by over 700 independent agents. The Company currently employs over 300 people with approximately three quarters of them working out of the home office. [IA]

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[ SANDY CLAIMS ]

Cuomo Acts to Expedite Sandy-Related Claims, Launches Report Card on Carriers

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overnor. Cuomo has announced a series of measures to expedite the payment of claims for New Yorkers affected by Hurricane Sandy and launched a new online report card system, www.NYInsure.ny.gov, to hold insurance companies accountable, according to the Governor’s office.

The Department of Financial Services (DFS) issued a new regulation that will cut by more than half the amount of time insurers have to send adjusters to homes and businesses to inspect claims, thereby helping consumers receive their payments sooner. In addition, Governor Cuomo signed an executive order that will allow for expedited, temporary licenses to be issued to qualified out-of-state public insurance adjusters, increasing the number of adjusters available to New York consumers to help get their claim settlements faster. Finally, at the Governor’s direction, the DFS will publish report cards assessing insurance companies’ performance in responding to the disaster and paying claims. The report cards will be published on a new website, www.NYInsure.ny.gov, which the Governor launched today. The website will be updated regularly.

“In the wake of Hurricane Sandy, it is vital that New Yorkers receive their claim settlements as soon as possible, so that they can rebuild their homes, businesses and lives,” said Governor Cuomo. “There simply is no substitute for speed when it comes to insurance payouts after a storm.

We must do everything possible to make sure we hold insurance companies accountable to their customers. Today’s actions do just that.”

Benjamin M. Lawsky, Superintendent of Financial Services, said, “The perform-

ance of insurance companies after a storm like Sandy is incredibly important.

Homeowners and businesses have the right to know how their insurers are performing and how quickly the companies are handling claims.”

Governor Cuomo also announced today that, at his direction, DFS Superintendent Benjamin M. Lawsky will continue the moratorium barring insurance companies from cancelling or terminating homeowners’ and small business owners’ insurance policies in storm stricken areas for any reason, including nonpayment of premiums, for an additional 21 days through December 15. This executive order and moratorium applies to residents and business owners in Bronx, Kings, Nassau New York, Orange, Queens, Richmond, Rockland, Suffolk and Westchester counties. The Governor’s order also extends the time the Superintendent may deny applications by licensed mortgage bankers or registered mortgage brokers to open branch offices and temporarily suspends a requirement involving community development investments.

Launches Online Report Card System of Insurance Companies At the Governor’s direction, DFS Superintendent Lawsky launched an online report card system concerning insurance companies who are operating in the areas that were affected by Hurricane Sandy.

This action will hold insurance companies accountable to consumers and allow New Yorkers to see the performance of their insurance company compared to other companies. The report cards will be pub-

lished on the DFS website and will be frequently updated. They will be available today at www.NYInsure.ny.gov.

Among other criteria, insurance companies will be graded on: • Number of claims and dollar amount of claims • Average time for an adjuster to inspect • Number of claims closed with and without payment so far • Amount of claims paid so far • Total number of consumer complaints • Number of complaints as a percentage of number of claims DFS will be publishing report cards on the following companies: • Nationwide • Liberty Mutual • Hartford • FM Global • Allstate • Chartis/AIG • State Farm • USAA • Utica National • Zurich • Metropolitan • Narraganset Bay Insurance Company • QBE • Arch • New York Central Mutual • Amtrust Financial • Travelers • Tower • Adirondack Insurance Exchange • Chubb • GEICO

Marketing Reimbursement Program: Up to $500 Available. www.iiabny.org/TrustedChoice 12 November 26, 2012 / INSURANCE ADVOCATE

continued on page 14

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[ SANDY CLAIMS ] continued from page 12

• Andover • Assurant • NYPIUA

New Regulation to Speed Up Timeframe for Claim Investigation The new regulation issued by Governor Cuomo will shorten the timeframe in which insurers must send an adjuster to inspect a claim. This action will help insurance companies process the claims faster and pay out claims to consumers sooner. Starting today, the new regulation will require insurance companies to start investigating claims in six business days after the claim is made to the insurer, rather than 15 business days under current rules. The new rule applies to Storm Sandy.

In addition, the regulation makes clear that to protect health and safety, other than for policies issued under the national flood insurance program, claimants can commence immediate repairs to heating systems, hot water systems, and necessary electrical connections, as well as exterior windows, exterior doors, and, for minor permanent repairs, exterior walls, in order to enable properties to retain heat.

Executive Order To Expedite Claims The Governor’s executive order will authorize qualified, out-of-state public adjusters, whose job is to advocate on behalf of homeowners, to obtain temporary licenses to work in the state. Currently there are more than 16,800 out-of-state adjusters who have received temporary licenses to work on behalf of insurance companies, which more than doubles the amount of adjusters working for insurers in New York State. DFS has been allowing more insurance adjusters to operate in the state so that insurance companies will be able to assess and pay out claims in a more timely manner and help New Yorkers affected by Hurricane Sandy rebuild.

The new order will allow the licensing of temporary public adjusters, who work on behalf of a policyholder to negotiate a claims settlement on the consumer’s behalf.

To qualify, out-of-state public adjusters must: • Apply for a temporary license with DFS 14 November 26, 2012 / INSURANCE ADVOCATE

• Have a valid insurance license that has not been revoked in the last 10 years • Have not been convicted of or plead guilty to any crime in the U.S. in the last 10 years • Have not been accused of fraud or unethical conduct in the U.S. in the last 10 years Below is the complete Executive order:

No. 82 EXECUTIVE ORDER Temporary Suspension and Modification of Provisions of The Insurance Law WHEREAS, on October 26, 2012, I issued Executive Order Number 47, declaring a disaster emergency in all 62 counties in the State of New York; and WHEREAS, on October 30, 2012, the President issued a major disaster declaration for the counties of Bronx, Kings, Nassau, New York, Queens, Richmond and Suffolk, on November 2, 2012, extended such declaration to include the counties of Rockland and Westchester and thereafter extended such declaration to include Orange County; and WHEREAS, Hurricane Sandy brought damaging winds and torrential rainfall causing record flooding and severe storm surges throughout the State of New York that severely devastated the State; and WHEREAS, the storm caused widespread damage to property throughout the affected counties, creating a substantial need for insurance adjusters to view and assess such damage to ensure that consumers’ property/casualty insurance claims are timely processed; NOW, THEREFORE, I, ANDREW M. CUOMO, Governor of the State of New York, by virtue of the authority vested in me by Section 29-a of Article 2-B of the Executive Law to temporarily suspend or modify specific provisions of any statute, local law, ordinance, orders, rules or regulations, or parts thereof, of any agency during a State disaster emergency, if compliance with such provisions would prevent, hinder or delay action necessary to cope with the disaster, hereby temporarily suspend and modify, as the case may be, for the period from the date of this Executive Order until further notice, the following: Section 2108 of the Insurance Law, along with any associated regulations, to the

extent that they require permanent licensing of public adjusters by the Department of Financial Services (the “Department”) so that, for the purposes of this Executive Order only, the Department may issue temporary public adjuster licenses that authorize such temporary licensees to adjust property/casualty insurance claims in the counties of Bronx, Kings, Nassau, New York, Orange, Queens, Richmond, Rockland, Suffolk and Westchester that are commenced during the period for which this Executive Order is effective, as long as: (1) an application for a temporary license pursuant to this order is made on a form prescribed by the Superintendent of Financial Services; (2) such form is signed by a public adjuster who is licensed in this State pursuant to Section 2108 of the Insurance Law; whose license is in good standing; and who will be responsible for both the supervising of the temporary licensee either in an employer/employee relationship or other arrangement whereby the licensed public adjuster has control over the temporary licensee and the satisfactory completion of all adjustment undertaken by the temporary licensee; (3) the temporary licensee has not had an insurance license revoked, suspended or otherwise terminated for cause in any state in the United States in the last ten years; (4) the temporary licensee has not been charged with, been convicted of, or pleaded guilty to or nolo contendere with respect to a crime or misdemeanor in any state in the United States in the last ten years; (5) the temporary licensee has not been found liable for misrepresentation, fraud, or unethical conduct in any state in the United States in the last ten years; and (6) the temporary licensee is presently licensed in another state as a public or independent adjuster to adjust property/casualty insurance claims; or has 5 years prior experience within the last ten years as a public or independent adjuster adjusting property/casualty insurance claims in the United States; or has been licensed as a public or independent adjuster in New York State within the last 5 years.

G I V E N under my hand and the Privy Seal of the State in the City of Albany this twenty-ninth day of November in the year two thousand twelve.

BY THE GOVERNOR Secretary to the Governor [IA]

ADVERTORIAL

Keeping Warm After the Storm IN THE AFTERMATH OF STORMS like Katrina, Irene and Sandy, hundreds of thousands of people can be without power, some for extended periods of time. People turn to alternate means to light and heat their homes and businesses.

One of the most popular choices is the portable generator. Generators can help to minimize damage and subsequent insurance claims by keeping refrigerators, freezers and sump pumps operating. If people are able to stay in their homes, and businesses to remain in operation, additional living expense and business income losses are eliminated or reduced.

However, there are important safety issues that must be adbuilding’s outlets or dressed. Helping your power system. A genAs with any clients understand and erator can backfeed mechanical or safeguard against these power into the utility is a sign of the profeslines with enough electrical device, sional insurance agent. power to kill someone Health Hazards working on the lines it is essential to According to the Conmiles away, or neighread and follow sumer Products Safety bors who are on the Commission (CPSC), the manufacturer’s same transformer. If each year over 70 the system must be instructions for use connected to the deaths and 10,000 emergency room visits household/building of the generator. are a result of generator supply, it should be use. The most common done by a qualified hazard associated with electrician. An alternagenerators is Carbon Monoxide (CO) tive is to get a power transfer switch from poisoning. Carbon monoxide is odorless the utility company. An even better and colorless, and lethal concentrations choice would be the purchase of a percan build up in mere minutes. Opening manent stationary generator that can windows and doors will not prevent power the entire home or building. buildup of CO, so generators should As with any mechanical or electrical never be operated inside the home, busidevice, it is essential to read and follow ness, or attached garage or shed. the manufacturer’s instructions for use For anyone using a generator or other of the generator. For example, a naturalalternate heating or power source, it is gas powered generator requires oil levels important to have battery-powered (or to be checked regularly. Special oil is battery back up powered) CO detectors. used, so this should be purchased and This could save lives. During a power kept on hand. It is a good idea to keep outage, a hard wired detector may not the instructions close to the generator so be operational. CO and smoke detectors information is readily accessible when should be tested regularly. According to needed. Keep instructions in a Ziploc CPSC, 93% of generator-related CO bag or other container to protect them deaths are in homes where there is no from the elements. The generator must CO detector. also be protected from the elements.

Proper installation is essential. GenFire hazards – Fuel to power the generators should never be plugged into the erator, such as gasoline, kerosene or

propane, is highly flammable. It should not be stored indoors or within 50 feet of the operating generator, or any other fuel-burning appliance. In addition, generators should be allowed to cool down before refueling. Another point to consider is that, in a widespread power outage, gasoline may not be available if stations do not have power to pump it.

Load capacities of generators vary greatly. Portable generators are not usually designed to power an entire house, and an overloaded generator can fail or start a fire. Appliances should be plugged directly into the generator, or use a heavy duty outdoor rated three prong extension cord. The cord must not be frayed or damaged. The cord should be rated for at least the total wattage of the appliances that are being powered by the generator.

Generators can be a life and money saving tool, but they are also very dangerous. Understanding both the benefits and hazards of electric generators, and providing valuable information to your clients, is another value-added service of the true insurance professional.

139 Harristown Road Glen Rock, NJ 07452, Suite 100 (800) 935-6900 www.msonet.com INSURANCE ADVOCATE / November 26, 2012 15

[ IN THE ASSOCIATIONS ]

PIANY/NYIA Insurance Leadership Forum

D

uring the PIANY/NYIA Insurance Leadership Forum held in November, agent and company panelists discussed the need for strong partnerships; perpetuation plans; effective communication; and technology to develop solid and effective relationships that benefit agencies, companies and ultimately clients.

In addition, the conversation also found its way to Sandy and its lasting effects.

Two panel discussions, moderated by Sam Friedman, the insurance research leader for Deloitte Research and former editor-in-chief at National Underwriter for 29 years, discussed how agents and carriers develop relationships; what they look for when they need a new business partner; and the reasons the affiliations last.

The first panel included: Jeffrey W. Rice, CPCU, ARe, chair of the New York Insurance Association Inc., and president and CEO, Wayne Cooperative Insurance Co.; Cindy Van Hoesen, director of marketing and underwriting, Mercury Insurance; and Ann Zaprazny, senior vice president, East region officer, Erie Insurance Group.

The second panel included: Michael J. Skeele, CIC, CPIA, president of PIANY and president of Skeele Agency Inc.; Richard A. Savino, CIC, CPIA, immediate past president of PIANY and president and CEO of Warwick Resource Group; and Gino A. Orrino, CPIA, president of the New York Young Insurance Professionals and president and founder of Orrino Capital Services LLC.

‘Partnerships are not one-sided’ Responding to inquires about appointments, the carrier representatives said they are open to signing new agencies under the right circumstances and are committed to the time it takes to build partnerships with their agents. “Seventy percent of our agencies started as a scratch agency,” said Erie’s Zaprazny. “And, we provide support to help them in their journey [to help them become successful].” Erie Insurance Group also asks potential agencies to submit a business plan so the company has an idea of where the agency would like to be in the future.

Rice also discussed Wayne Cooperative Insurance Co.’s commitment to its agents, 16 November 26, 2012 / INSURANCE ADVOCATE

FROM LEFT TO RIGHT: GINO A. ORRINO, RICHARD A. SAVINO, SAM FRIEDMAN AND MICHAEL J. SKEELE AT THE PIANY/NYIA INSURANCE LEADERSHIP FORUM

noting that agencies that showed slow and steady growth over time are often the agencies that build the strongest relationships with the company and tend to have longevity.

Each carrier representative stated they the termination of an agency relationship is rare. However, Mercury’s Van Hoesen cautioned, “partnerships are not one-sided” and a company’s “relationship with the agency needs to be beyond the principal— it needs to be with the entire staff.”

On the agent side of the equation, Skeele rejoinered loyalty between an agent and his or her carrier is a two-way street, “where the agency gives good business to the carrier and the carrier provides consistent underwriting. And, when the agency needs it, it knows the carrier has its back.”

Perpetuation plans All the participants on both panels recognized that perpetuation is a huge problem across the insurance industry. While some companies, such as Erie Insurance Group, offer seminars and resources to help agents set up perpetuation plans and source for additional talent for agencies, most agencies are on their own to overcome the negative stereotype the prevails about professional, independent insurance agents.

Orrino talked about the importance of reaching out to the next generations of

insurance professionals. He encouraged those present to join the NY-YIP, but also to visit job fairs at local high schools, colleges and community colleges. “Agents and carrier representatives need to encourage new people to join the industry. This needs to be a priority. We need to promote the positives of the industry. I am not a used-car salesman, I’m an insurance professional.”

Effective communication Both agent and carrier representatives discussed the issue of communication overload and the importance of getting feedback from each other. Erie Insurance Group and Mercury Insurance Co. each have advisory councils where the encourage agents to share their thoughts. However, everyone recognized there is a delicate balance when it comes to keeping in touch. The companies in attendance said their primary contact method with agents was via email or via the Internet on an agency portal. They also encourage their marketing representatives to follow up with a phone call if the news is important. Savino suggested making communication simple, even if it is just a bullet point a day.

Technology Addressing how technology has affected continued on page 18

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INSURANCE ADVOCATE / November 26, 2012 17

[ IN T HE ASSOCIATIONS ] continued from page 16

the relationships between agents and their carriers, Savino noted that in the past carriers acted as true partners with their agents.

However, the use of technology made the relationships more about numbers, predictive models, etc. Now, with technology there’s a danger of communication becoming less personal, but the industry still is about human contact and agents and carriers need to be aware of this.

However, agents and carriers can’t shun technology because consumers continue to be influence by what they find online when making major purchasing decisions. While Internet marketing seems to be dominated by direct writers, independent agents and evolution in Internet search engines are finding ways to make headway into the digital market.

“Local-search (on the Internet) changed the world. The question is: ‘Are you findable?’” said Savino. “We cannot ignore technology and how people buy things. We need to be in the marketplace to compete with direct writers.”

L-R: CINDY VAN HOESEN, DIRECTOR OF MARKETING AND UNDERWRITING, MERCURY INSURANCE; JEFFREY W. RICE, CPCU, ARE, CHAIR OF THE NYIA., AND PRESIDENT AND CEO, WAYNE COOPERATIVE INSURANCE CO.; AND ANN ZAPRAZNY, SENIOR V.P., EAST REGION OFFICER, ERIE INSURANCE GROUP PARTICIPATE IN THE CARRIER PANEL

Implications of Sandy The effects of Sandy and how to provide the best service to clients were fresh on everyone’s mind at the event, and surfaced when a roundtable discussion that followed each panel questioned the agent’s role in the claims process. “Agents are the eyes and ears, and play a vital role in the claims process,” said Rice. “They triage the damage effectively and efficiently.”

The company panel also noted that agency and company contingency plans have improved in the last few years because recent real-life situations have stressed the importance of being prepared, and in some cases (e.g., Irene and Sandy) the plans of both agencies and companies have been put to the test.

MODERATOR SAM FRIEDMAN ASKS CARRIER PANELISTS (L-R) VAN HOESEN, RICE AND ZAPRAZNY ABOUT THEIR RELATIONSHIPS WITH THEIR AGENCIES DURING THE PIANY/NYIA INSURANCE LEADERSHIP FORUM

Final thoughts When all was said and done, each panel commented on the importance of building strong relationships with each other in order to build lasting partnerships. Everyone agreed that it was important to know what each side wanted out of the relationship. To be successful, each side has to have a forward-looking plan and the right resources to meet their maximum performance. [IA] 18 November 26, 2012 / INSURANCE ADVOCATE

L-R: GINO A. ORRINO, CPIA, PRESIDENT OF THE NEW YORK YOUNG INSURANCE PROFESSIONALS AND PRESIDENT AND FOUNDER OF ORRINO CAPITAL SERVICES LLC; RICHARD A. SAVINO, CIC, CPIA, IMMEDIATE PAST PRESIDENT OF PIANY AND PRESIDENT AND CEO OF WARWICK RESOURCE GROUP; AND MICHAEL J. SKEELE, CIC, CPIA, PRESIDENT OF PIANY AND PRESIDENT OF SKEELE AGENCY INC., PARTICIPATE IN AN AGENCY PANEL AT THE PIANY/NYIA INSURANCE LEADERSHIP FORUM

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[ COVER ]

20 November 26, 2012 / INSURANCE ADVOCATE

[ COVER ]

The Patton Boggs law firm is a national leader in public policy and related areas.

We present their thinking on what faces us as citizens and business leaders. S.A.

To put matters in perspective: Unless current law is amended, all of the Bush tax cuts will expire at the end of the year, as will PATTON BOGGS LLP PRESENTS THE ISSUE. various other temporary tax proviWith President Barack Obama having been reelected and the Senate and the sions (e.g., AMT House having stayed in Democratic and Republican hands, respectively, attention now will turn to the lame duck session.. Based on past experience, we expect to relief for middle hear sleigh bells before the 112th Congress leaves town. Since so much that will class Americans, happen next year will be driven by what happens in the next two months, we principally focus this introduction on the challenges facing the President and the extension of estate Congress in the lame duck session. tax relief, and a To put matters in perspective: Unless current law is amended, all of the Bush tax variety of tax credits cuts will expire at the end of the year, as will various other temporary tax provisions AMT relief for middle class Americans, extension of estate tax relief, and a that are enjoyed by (e.g., variety of tax credits that are enjoyed by individuals, as well as the R&D tax credit and a host of other tax credits relied upon by the business community, some of individuals, as well which need to be extended retroactively to the beginning of 2012). Congress as the R&D tax and the Administration also must decide how to protect physicians serving Medicare patients from sustaining steep cuts in reimbursement rates and whether credit and a host of to extend enhanced unemployment insurance for the long-term unemployed.

In addition, decisions need to be made whether to extend, replace, or allow to other tax credits lapse the two percentage point payroll tax cut for all working Americans. Finally, $109 billion in across-the-board spending cuts (“sequestration”) mandated by relied upon by the the Budget Control Act of 2011 will begin to kick in on January 2. Half of the business commuautomatic spending cuts will hit the Pentagon, while the other half will reduce by the rest of the government, with most agencies facing funding cuts nity, some of which spending of 8.2%. In popular parlance, the United States will fall off a fiscal cliff with potenneed to be extended tially no safety net in place unless the President and the Congress agree to amend current law. retroactively to the the dangers to the economy, the Administration reportedly is anabeginning of 2012). Recognizing lyzing the extent to which it could use existing authority to buy additional time

CRITICAL PROBLEMS FACE ALL SECTORS OF THE ECONOMY– INCLUDING FINANCIAL SERVICES

to reach an agreement with Congress early next year, such as by freezing the amount of money taken out of payroll checks by not updating tax withholding tables to reflect expiration of the Bush tax cuts on December 31. The continued on page 22 INSURANCE ADVOCATE / November 26, 2012 21

[ COVER ] continued from page 21

Administration also could seek to delay to later in the year automatic spending cuts that otherwise would begin on January 2. We do not expect the Administration to make its plans public any time soon, not least because identifying an escape hatch early could create the very outcome it hopes to avoid. And, in any event, it doesn’t have to come to this.

A great deal was accomplished in the lame duck session of 2010, in large part because Democrats and Republicans agreed to compromise. Both sides recognized that the economy needed a boost and that, by working together, they could resolve issues that until then had eluded resolution.

In that environment, the President agreed to extend all the Bush tax cuts, as well as to extend other expiring or expired tax provisions, such as AMT relief. He also succeeded in pushing a major arms control treaty through the Senate. We expect a comparable effort this time as well, though the details on the tax policy side will likely be subject to intense negotiations, particularly on whether to limit extension of the Bush tax cuts to a particular income threshold.

To date, Congress has been unable and unwilling to agree to do anything, in part because of intransigence by both parties over whether to impose an income limit on an extension of the Bush tax cuts and in part because the “cost” of extending current law has been well beyond what Congress has been willing to “pay.” As one example, a two-year extension of an AMT patch for middle-class families plus routine extension of expired and expiring tax provisions would cost $205 billion. In addition, delaying sequestration for an additional year would require $109 billion in new revenues or cuts to non-targeted programs (unless, of course, Congress punted by forcing nine years of cuts into eight, increasing the pain in future years).

Over the last year, there has been bipartisan agreement that the fiscal cliff must be avoided and that a comprehensive overhaul of our tax code is necessary. Nonetheless, the parties have fundamentally disagreed about how to approach these issues, with President Obama and Congressional Democrats arguing for significant tax increases as a means of deficit reduction and Governor Romney and Congressional Republicans rejecting the idea that any direct tax increases are necessary, preferring that any new revenue come from assumed economic growth once tax reform is enacted.

The result has been a continued legislative stalemate, with a heavy dose of political posturing by both sides. But even close elections can be clarifying. A narrowly divided electorate now having spoken, we expect discussions to begin anew with some urgency in the lame duck session. Given major philosophical differences on tax policy issues between the parties, it remains to be seen whether these discussions will lead to an agreement to avert the fiscal cliff while, at 22 November 26, 2012 / INSURANCE ADVOCATE

the same time, clearing the way for comprehensive tax reform. In our view, it is likely both will occur in the lame duck session (or shortly thereafter), beginning with agreement on a Bush tax cut extension coupled with a broad framework for a tax reform agreement, with the hard work of tax reform to span across 2013. Although there are a range of possible outcomes in the lame duck session and beyond, one thing is certain: in stark contrast to the last year, over the next few months we will finally see the parties undertake a serious discussion about tax policy.

In the lame duck session, for example, Congress might agree to legislation that would extend all (or most) expired and expiring tax breaks for six months to a year, tied to fundamental tax reform generating some agreed-upon amount in the hundreds of billions of dollars (or more) in overall deficit reduction over the next decade, with the threat of greater deficit reduction if the 113th Congress were to fail to act by then. Democrats will likely raise eliminating or modifying some tax measures, including those aimed at the oil and gas industry, to help offset the cost of forestalling the spending sequester or to make a “down payment” on future deficit reduction. Such an agreement also could mandate some further level of deficit reduction by seeking to compel the 113th Congress to reform entitlement programs such as Medicare and Medicaid next year.

Forcing hard decisions as a means of achieving deficit reduction of course is what the Budget Control Act of 2011 was supposed to accomplish by establishing the “Super Committee” and creating the threat of sequestration next year if Congress failed to agree to legislation reducing the deficit by at least $1.2 trillion over a decade. And it is precisely that failure that has the nation confronting the fiscal cliff. Many Senators and Representatives recognize the irony that the best way to prevent going over the fiscal cliff this year is to cut a deal that merely creates a bigger cliff that would arrive in another six or twelve months. But doing so would at least keep us at the precipice.

With the elections behind them, the President and the 112th Congress have an opportunity to succeed where they have failed before. Assuming Congress is willing to support legislation putting off the day of reckoning for an additional six months to a year, we expect the President to ask for an increase in the debt ceiling as part of the final negotiations. ( As a result of increased tax receipts, the Treasury Department now anticipates that the debt ceiling will not be reached until early in the first quarter, with action to address the problem probably necessary by late February or early March.) Whether the President can secure congressional support for an increase by the end of the year will be a matter to be negotiated and ultimately will depend on the magnitude of whatever deal is reached. The President will not want to ask Congress to increase the debt ceiling early next year in a situation in which House Republicans would be in a very strong position to extract additional concessions

[ COVER ] without having to give up something meaningful. For them, the trade off in the lame duck session might be a one-year extension of the Bush tax cuts, including for married couples making more than $250,000, tied to an agreement to pursue fundamental tax and entitlement reform next year. Even that might be a stretch. Given the election results, Congressional Republicans may have to accept an income limitation for any Bush tax cut extension, if not at $250,000 then at $500,000 or $1,000,000. What else beyond addressing the fiscal cliff can we expect Congress to accomplish during the lame duck session? Unfortunately, not much. Majority Leader Harry Reid (D-NV) agreed to bring a cybersecurity bill to the Senate floor, but action on it was blocked. The leadership of the Armed Services Committees will endeavor to move a defense authorization bill that would not be subject to contentious amendments on the floor. Beyond that, a backlog of noncontroversial bills has been building for a long time, but most if not all of them will have to move in the Senate by Unanimous Consent.

When it adjourned for the elections, the 112th Congress had approved only 196 bills that were enacted into law, well below the output of the 104th Congress, which produced legislation resulting in 333 public laws. Along with many others, we will be pressing to get things done in an environment we hope will be more hospitable to legislating than the first 22 months of the 112th Congress.

In our State of the Union Analysis this past January, we pointed out that “[t]he first session of the 112th Congress is likely to be remembered as one of the least productive in decades.”

When the President signed the National Defense Authorization Act for FY 2012 on New Year’s Eve, it became Public Law No. 112-81. Having fallen seven short of the 88 bills enacted in 1995, the first session of the 112th Congress produced the fewest number of public laws since Congress formally began keeping track in 1947. With a flurry of signatures on January 3, however, the President helped this Congress eke out of last place with a total of 90 bills signed into law in the first session. Having barely picked up the pace since then, the 112th Congress is now on track to be the least productive ever as measured by bills enacted into law. Congressional Republicans would argue that the slow pace of legislation is the natural and desired result of divided government. But the public’s record low approval rates for this Congress no doubt reflect the perception that partisan activity has prevented necessary legislation from becoming law.

What else can we expect in the next few months? With the President having won re-election, we anticipate that many major rules will soon be published in final form, which will likely trigger a political reaction on Capitol Hill as Republicans invoke the Congressional Review Act in an effort to block them from becoming law. The EPA, for example, has many major rules on track to become final later this year or early next year. In addition, dozens of rules required

under the Dodd-Frank Act are in the works. Finally, the President’s re-election puts his Administration in a commanding position to finalize numerous rules that solidify the regulatory framework for implementing the Affordable Care Act. Republican efforts to invoke the Congressional Review Act later this year and next year are unlikely to succeed in the Democratic-controlled Senate. Even if one or more do, a certain Presidential veto virtually ensures forthcoming rules will stand unless struck down by the courts.

In its next term, the Administration is likely to face high Cabinet turnover, beginning early in 2013, not least because so many senior officials have been in position so long.

(Turnover to date has been historically low for the postWorld War II era.) In addition to moving forward with his regulatory agenda, the President may be able to effectuate long-lasting policy changes through Supreme Court and lower-court appointments as well. Four Supreme Court Justices, for example, are in their mid to late 70s and could opt to retire prior to the end of the President’s second term.

On Capitol Hill, there will be a great deal of turnover, in particular among Republicans currently serving in committee leadership positions. This will provide the Administration with an opportunity to forge some new relationships in the 113th Congress. In the Senate, Republican caucus rules limit time served as a Ranking Member to six years (and time served as a Chairman to an additional six years). While most current Ranking Members have time left to serve as chairmen, many of them are completing their sixth year as the Ranking Member, which will lead to a significant reshuffling of the decks for the 113th Congress.

As a result of House Republican Caucus term limit rules, we expect to see as well a great deal of turnover among Republicans chairing House committees. In fact, of the Members who are completing six years of service, House Budget Committee Chairman Paul Ryan will be the only Member to secure a waiver to serve an additional two-year term.

Except for changes triggered by retirements, all Senate Democratic Chairmen will maintain their gavels in the new Congress since they are not subject to term limit rules. Only the Budget Committee, the Energy and Natural Resources Committee, the Homeland Security and Governmental Affairs Committee, and the Veterans’ Affairs Committee will likely have new leaders. Among House Democrats, there will be a similar level of continuity, with little turnover among Members serving as Ranking Members.

With the balance of this analysis, we offer our thoughts on major policy areas that will drive the agenda in Washington for the next two years and thus how potential developments might affect you. Given the still narrow margin enjoyed by continued on page 24

INSURANCE ADVOCATE / November 26, 2012 23

[ COVER ] continued from page 23

Senate Democrats (55-45), not much will get through the Senate unless each party commits to putting aside partisan differences to get something done on the deficit, fundamental tax reform, and a host of other pressing national issues. Under Republican control, the House leadership will be in a strong position to move whatever their membership supports. But bills written with only the interests of one party in mind stand virtually no chance of moving in the Senate, as House Republicans have seen over and over again in the 112th Congress.

Ironically, the voters have elected a 113th Congress that may be even more partisan than the 112th Congress, at least on paper. Both chambers will have a substantial number of new Members, in part because of redistricting and because so many Senators and House Members have thrown in the towel over their dismay that so little gets done anymore.

(The House, for example, had 62 Districts in which an incumbent was not on the ballot.) By casting their votes, we have a sense the public wants the 113th Congress to get something done, to address the big issues that confront the country, and to do so working together.

Now that the voters have spoken, will the 113th Congress keep in mind Thomas Jefferson’s advice and make more of an effort to cross ideological divides, compromise, and solve the major policy challenges that confront our nation? As Jefferson recognized, major policy changes demand broad support to be successful. Addressing the deficit, for example, is too important and too big an issue for one party to hope to dictate the outcome to the other. We thus remain optimistic that the President and the Congress will work together in the lame duck session and establish the framework by which they can continue to work together next year.

neither party can risk failing to address the issue before the next Presidential election. In an interview with the Des Moines Register last month, the President signaled that he wants to take up the issue once the deficit has been addressed. He made the case for reform on both substantive and political grounds, saying in part: “I am fairly confident that [Republicans] are going to have a deep interest in getting that done.” As part of this effort, we expect there to be a renewed focus on the DREAM Act, which removes certain barriers to access for undocumented children who wish to attend college. Senator Marco Rubio (R-FL), who has expressed great interest in crafting a compromise, may lead the Republican effort, possibly joined by two incoming Republican Senators from Southwest border states—Ted Cruz of Texas and Jeff Flake of Arizona. As in addressing the deficit and fundamental tax reform, both parties will need to compromise to get something meaningful done. A policy change of this magnitude simply cannot be forced on a slender majority.

As a firm with deep public policy roots, we are proud of our ability to help clients exercise the right enshrined in the U.S. Constitution of petitioning their government. We have been at it since 1965, when Jim Patton encouraged a young White House aide named Tom Boggs to help him build a different kind of law firm, one that understood that all three branches of government could provide solutions to challenging problems. They had a vision for helping clients achieve success by combining political know-how, legislative and regulatory experience, and substantive knowledge of the law. For our paying and pro bono clients alike, we look forward to helping them achieve their legislative objectives as President Obama engages with the 113th Congress.

FINANCIAL SERVICES In the pages that follow, we sketch out our sense of what is in store in the areas of agriculture policy, budget and sequestration, defense and national security, education, energy and environmental policy, financial services, food and drug policy, foreign investment in the United States, government contracts, health care, homeland security, Native American affairs, tax policy, technology and telecommunications policy, trade policy, and transportation and infrastructure policy.

Among the big issues likely to be addressed by the President and the 113th Congress is one we think worth mentioning here: immigration reform. There is broad support in the business community for Congress to finally address the issue.

Leaders of the high-tech community, for example, have been calling on Congress for years to adopt legislation that would help them attract skilled engineers and software programmers, especially those who have graduated with advanced degrees from American universities and then are forced to return to their home countries. Moreover, the demographics of the voting population is changing so dramatically that 24 November 26, 2012 / INSURANCE ADVOCATE

Major Issues Two years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), regulatory agencies such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) continue working steadily to implement financial services reform in the United States. Of the nearly 400 rules required under the Dodd-Frank Act, only about one-third have been finalized, with the rest not yet finalized or not yet proposed. With growing criticism over the international implications of the law, the delayed rulemaking process, and potentially burdensome regulations, the 113th Congress will face important questions regarding whether to make technical, or even substantial, amendments to the law.

During the 113th Congress, we expect financial services legislative activity to focus on continuing oversight of the regulatory process arising out of the Dodd-Frank Act to ensure

[ COVER ] that regulators stay within the “intent” of the Congress. In the regulatory space, a recently successful judicial challenge to a CFTC position limits rule may cause regulatory agencies to prolong implementation of the Dodd-Frank Act, as they seek to avoid promulgating rules that will not withstand judicial scrutiny.

Given the relatively narrow control of the House and the Senate, it is unlikely that the 113th Congress will modify substantially or repeal the Dodd-Frank Act. Instead, we believe that legislative changes will focus on technical corrections where there was a clear error or in areas where the new Congress believes regulators require a clearer statement of congressional intent. Nonetheless, House Republicans will continue pushing for substantive changes to the law and may attempt to use the CFTC reauthorization as a vehicle to make them. This will make for a contentious reauthorization process in an already divided Congress. Further, the Obama Administration can be expected to strongly resist substantive changes to the Dodd-Frank Act. In 2013, there will be continued criticism over the regulatory agencies’ funding and the importance of addressing housing finance reform. Indeed, both the Democratic Senate and the Republican House of Representatives can be expected to put forth proposals to address the reform of governmentsponsored enterprises (GSEs) and the privatization of the housing market. Of note, passage of comprehensive housing finance reform will require bipartisanship and compromise, which will not be an easy feat to achieve in the 113th Congress. This could empower the Federal Housing Finance Administration (FHFA), the conservator of Freddie Mac and Fannie Mae, to play an even more direct role in the reformulation of those GSEs while the legislative process sputters, as evidenced by the recent Securitization Platform White Paper released by FHFA. An important Presidential appointment to watch will be the Director of the FHFA. This position has been held on an Acting basis by the previous Deputy Director, Edward DeMarco. The Democratic margin in the Senate is not significant enough to make it easier to confirm a permanent head of FHFA, but there nonetheless will be pressure on the Administration to fill the position and take control of these issues for the President.

Regulatory agencies will remain focused on implementation of the Dodd-Frank Act in 2013 and newly created agencies such as the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) will play important roles in regulating the financial services industry.

The CFPB, the establishment of which was broadly opposed

by Republicans, will increase its role of protecting consumers as it begins to finalize key rules such as those governing mortgage servicing standards, the qualified mortgage definition, credit insurance financing, and the treatment of larger participants in certain consumer financial products markets.

The FSOC will make its initial designations of non-bank companies to be considered systemically important financial

institutions (SIFIs) subject to enhanced prudential standards.

Similarly, the CFTC and SEC will begin the implementation phase for various rules and will have to address difficult industry questions on issues such as the impact of the new regulatory regime for over-the-counter derivatives on end users, the registration of swap and security-based swap dealers and major swap and security-based swap participants, and various clearing, execution, recordkeeping and reporting requirements. Other agencies including the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency will continue interpreting numerous other Dodd-Frank Act provisions including those focused on enhanced prudential standards for SIFIs, orderly liquidation authority, and the U.S. implementation of international capital requirements for banks.

President Obama will likely have several SEC and CFTC Commissioner positions to fill, including potentially the two chair positions. SEC Chairman Mary Schapiro’s term expires in June 2014, although press reports indicate she will resign with President Obama’s re-election. Similarly, Commissioner Elisse Walter’s term expired in June 2012 and, according to press reports, she is likely to leave the Commission as well.

At the CFTC, Chairman Gary Gensler can continue serving until the end of 2013 despite his term having already expired.

It remains unclear whether Chairman Gensler will seek another term (requiring Senate confirmation) or vacate his position. Commissioners Bart Chilton, a Democrat, and Jill Sommers, a Republican, have positions expiring in 2013 and 2014, respectively. While new appointments in the SEC and the CFTC will not change the political balance on the Commissions as the President selects the fifth member to each Commission, new members typically change the culture, tone, and chemistry of these independent regulatory bodies.

Another major appointment that will surely influence financial markets and financial services regulation is that of the Secretary of the Treasury. Secretary Timothy Geithner is widely expected to step down, leaving that crucial position to be filled, with rumors of potential appointees including former Clinton White House Chief of Staff Erskine Bowles, Current White House Chief of Staff Jacob Lew, Evercore CEO and Former Deputy Treasury Secretary Roger Altman, or BlackRock CEO Larry Fink. The Administration may also move to approve other pending financial regulatory agency nominations, including that of Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg, whose nomination has been pending since June 2011.

Forecast for the 113th Congress Financial Regulatory Reform Agency Implementation. The CFTC began implementation of various Dodd-Frank rulemakings on October 12, prior to the elections. This implementation date came after dozens of open meetings, procontinued on page 26

INSURANCE ADVOCATE / November 26, 2012 25

[ COVER ] continued from page 25

posed rules, and industry comment letters, all of which are expected to continue in 2013. During the 113th Congress, we can expect the House Republican majority to continue promoting an implementation strategy for financial regulatory reform rulemaking that follows the principles of (1) individual choice over government supervision and (2) privatesector solutions over a “government only” approach. This can be expected to come into conflict with the perspective of the Obama Administration and the heads of the principal regulatory agencies involved in Dodd-Frank Act rulemaking.

In 2013, the CFTC will address the position limits rulemaking and will finalize rules related to the operation of swap execution facilities and the international application of the new swap regulatory regime. Further, the CFTC must continue its work in designating swaps subject to mandatory clearing and trade execution, registering and regulating swap dealers and major swap participants, and implementing the reporting requirements for swap transaction data. Moreover, following the collapse of MF Global and Peregrine, the CFTC will take on new rulemakings to bolster customer protection requirements. The CFTC will also increase its scrutiny over high frequency trading activity, including a forthcoming concept release on this matter.

Financial Regulatory Reform Technical Corrections. During the 113th Congress, we expect to see Republicans and Democrats in the House pursuing technical corrections to the law, as identified by the industry and relevant regulators.

In any lengthy piece of legislation such as the Dodd-Frank Act, technical errors, omissions or other mistakes are bound to occur, and thus need to be corrected with subsequent legislation. Such an effort could be a platform for discussions about total or partial “repeal” of the Dodd-Frank Act. However, there is some speculation that Republicans, including House Agriculture Committee Chairman Frank Lucas (ROK), will be reluctant to address technical corrections if Democrats, including Senate Agriculture Committee Chairman Debbie Stabenow (D-MI), are unwilling to consider actual substantive changes to the law.

market in general. The FHFA and the Department of Housing and Urban Development have also begun dedicating significant resources to the reform effort in 2013, as demonstrated by the FHFA’s recently released white paper on a new securitization platform and rumors regarding an Administration-supported “HARP 3.0” to increase access to refinancing for homeowners. Congress may consider a legislative proposal referred to as a legislative “HARP 3.0” authored by Senators Menendez and Barbara Boxer that would provide immediate refinancing relief to qualifying homeowners during the lame duck session.

Insurance Reform. Almost a year after missing the DoddFrank mandated deadline of January 2012, the Federal Insurance Office (FIO) has not released a report to Congress on how to modernize the regulation of the insurance industry. After this report is submitted, Congress will likely address insurance reform in proposed legislation. The FIO report is expected to consider systemic risk regulation, capital standards, and the relationship between capital allocations and liabilities. The report will also look at consumer protection and gaps between States, the degree of national uniformity of State insurance regulation, and the regulation of insurance companies and affiliates on a consolidated basis. Finally, the report will study the international coordination of insurance regulation and the impact of foreign insurance laws on potential federal regulation. Although the FIO Director, Michael McRaith, has engaged in dialogue with E.U. insurance regulators as recently as October 2012, there is still no estimated timeline for the release of the FIO report.

Consumer Financial Protection Bureau. This agency, created under the Dodd-Frank Act, was one of the most controversial developments during the legislative process.

Director Richard Cordray was a recess appointment by President Obama and is allowed to serve as a recess appointee until the end of 2013, unless his nomination is confirmed by the Senate for the full five-year term. During the 113th Congress, Republicans in the House and Senate will continue to be critical of the CFPB and Director Cordray.

In any event, any changes that come out of the split chambers of Congress will remain focused on slight modifications to the legislation, as opposed to repealing it. Even technical changes will be tough to achieve. The inability to legislate modifications to the Dodd-Frank Act and the expectation that regulators in a second Obama Administration could continue on a path of a more aggressive approach to DoddFrank implementation could lead to further legal challenges to the rulemaking process.

Financial Stability Oversight Council. The Dodd-Frank Act established the FSOC to identify and monitor excessive risks by financial institutions, including SIFIs and systemically important Financial Market Utilities (FMUs). The FSOC consists of ten voting members, including an independent insurance expert, and five non-voting members. Of the ten voting members, four are from agencies where a change in leadership is expected (Secretary of the Treasury, SEC Chairman, CFTC Chairman, and Director of the FHFA). Roy Woodall, the independent insurance expert with voting power, was confirmed in 2011 to serve a six-year term as an FSOC member.

Housing Finance Reform. Government-sponsored enterprises were not addressed in the Dodd-Frank Act. As noted above, the 113th Congress is expected to attempt to deal with issues related to GSEs reform and the housing finance

Anticipated Committee Developments House Financial Services Committee. The committee will face significant changes in the 113th Congress, with Chairman Spencer Bachus (R-AL) reaching his six-year term

26 November 26, 2012 / INSURANCE ADVOCATE

[ COVER ] limit and Ranking Member Barney Frank (D-MA) retiring.

Representative Jeb Hensarling (R-TX) is expected to become the next Chairman and Representative Maxine Waters (DCA) is expected to take Representative Frank’s role as Ranking Member and the new chief Democratic defender of the Dodd-Frank Act. With both leaders already invested in housing finance reform—Representative Hensarling introduced an ambitious GSE reform bill in 2012 and Representative Waters was the outspoken Ranking Member of the Subcommittee on Capital Markets and GSEs—the committee will hold numerous hearings on housing reform and will look at ways to address the need to decrease the role of GSEs in the housing market. The Committee is also expected to continue hearing from market participants about issues related to market structure and high frequency trading, setting the stage for potential future legislative action on the topic. The committee will see some changes in membership as Republican Committee Members Judy Biggert (R-IL) (current Chair of the Subcommittee on Insurance, Housing, and Community Opportunity), Francisco Canseco (R-TX), Robert Dold (R-IL), Frank Guinta (R-NH), and Nan Hayworth (RNY) were defeated and Ron Paul (R-TX) is retiring. Democrats also are leaving the committee. Representative Joe Baca (DCA) was defeated, Representative Joe Donnelly (D-IN) was elected to the Senate, and Representatives Gary Ackerman (D-NY) and Brad Miller (D-NC) are retiring.

Senate Banking, Housing, and Urban Affairs Committee.

Current Chairman Tim Johnson (D-SD) will continue his leadership of the committee. Ranking Member Richard Shelby (R-AL), who will step down as Ranking Member due to caucus term limits, is expected to be replaced by the committee’s second highest ranking Republican, Senator Mike Crapo (R-ID). With neither party having a sixty vote majority for a filibuster-proof Senate, we expect slow progress on all issues. However, Chairman Johnson and Ranking Member Crapo can be expected to attempt to explore where there is common ground, particularly on a Dodd-Frank Act technical corrections bill and housing finance reform. This potential collaboration could give the Senate leverage in negotiating deals regarding changes to the Dodd-Frank Act coming out of the Republican-controlled House of Representatives.

The committee will see at least two new Members on the Democratic side, with the retirements of Senator Herb Kohl (D-WI) and Senator Daniel Akaka (D-HI). Senator Chris Coons (D-DE) and Senator-elect Elizabeth Warren (D-MA), who defeated incumbent Republican Scott Brown, are most likely to be appointed to the Committee.

The Senate and House Agriculture Committees will continue playing a significant role in the implementation of the DoddFrank Act, as these committees oversee the CFTC and were central to the debate on regulating over-the-counter derivatives markets. For a further discussion of the Senate and House Agriculture Committees and the 113th Congress, please see the Agriculture Policy portion of our analysis.

Contact Information For additional insights about likely policy developments, please feel free to contact the authors of this section: Micah Green at 202-457-5258 or msgreen@pattonboggs.com; Carolyn Walsh at 202-457-6531 or cwalsh@pattonboggs.com; Michael Dunn at 202-457-6148 or mvdunn@pattonboggs.com; Vince Frillici at 202-4576021 or vfrillici@pattonboggs.com; Daris Meeks at 202-4575205 or dmeeks@pattonboggs.com; Matthew Kulkin at 202457-6056 or mkulkin@pattonboggs.com; Lindsey Weber at 202-457-5686 or lweber@pattonboggs.com; and Mara Giorgio at 202-457-6522 or mgiorgio@pattonboggs.com.[IA]

Almost a year after missing the Dodd-Frank mandated deadline of January 2012, the Federal Insurance Office (FIO) has not released a report to Congress on how to modernize the regulation of the insurance industry.

After this report is submitted, Congress will likely address insurance reform in proposed legislation. The FIO report is expected to consider systemic risk regulation, capital standards, and the relationship between capital allocations and liabilities.

INSURANCE ADVOCATE / November 26, 2012 27

[ IN THE ASSOCIATIONS ]

NYIA Annual Meeting Readies N.Y. Industry for 2013

T

he New York Insurance Association (NYIA) held its 2012 Annual Meeting November 15 in Latham, New York. The meeting was multifaceted, but with the focus on preparing the industry for next year.

The event began with NYIA’s Legislation and Regulation Committee meeting, where the association’s 2013 legislative and regulatory agenda was set.

Priority issues for NYIA next year include holding the line on all industry taxes, assessments and fees, substantial reform to curb fraud in the no-fault auto insurance system, changing the strict liability standard for scaffolding, encouraging stiff penalties for misrepresentation on personal lines applications and modifying the interest rate applied to judgments from 9 percent to the prevailing market rate.

The committee meeting was followed by two presentations. First, Chuck Chamness, president and CEO of the National Association of Mutual Insurance Companies gave a Federal Focus: What lies ahead for the P&C industry presentation.

Chuck highlighted the many issues occurring at the federal level including regulatory activities in Washington, Congress’s response to Sandy as well as the National Flood Insurance Program, building codes and the BuildStrong Coalition, and the Terrorism Risk Insurance Program.

Edmund J. McMahon, senior fellow at the Manhattan Institute for Policy Research and Empire Center for New York State, who is widely viewed as the foremost expert on New York’s economy, gave the keynote address. E.J. discussed the many fiscal challenges New York is facing: state revenues coming in below target for the year, the ever-soaring pension costs for local governments and school districts and uncertainty in how major future infrastructure projects including the rebuilding of the Tappan Zee Bridge will be funded. And now in the aftermath of Sandy, state and local governments have even greater pressures as they figure out how to pay for the storm, estimated to cost a hefty $50 billion.

NYIA’s 2013 officers and directors were elected by the membership at the conclusion of the Annual Meeting. The following 28 November 26, 2012 / INSURANCE ADVOCATE

NYIA CHAIR AND PRESIDENT AND CEO OF WAYNE COOPERATIVE INSURANCE COMPANY JEFF RICE AND NYIA PRESIDENT ELLEN MELCHIONNI WITH NAMIC PRESIDENT AND CEO CHUCK CHAMNESS AND NAMIC NORTHEAST STATE AFFAIRS MANAGER JOHN MURPHY

officers were elected for a one-year term ending Dec. 31, 2013: Chair: Jeffrey Rice, president and chief executive officer, Wayne Cooperative Insurance Company; First vice chair: Bernard Turi, senior vice president, Utica National Insurance Group; Second vice chair: Steven Coffey, president and chief executive officer, Broome Co-Operative Insurance Company; Treasurer: Marlene Benton-Sherwood, president, Fulmont Mutual Insurance Company.

The following directors were elected for a three-year term ending Dec. 31, 2015: • Elizabeth Heck, president and chief operating officer, Greater New York Mutual Insurance Company • Craig MacCormac, vice president, reinsurance assumed, Hartford Steam Boiler Inspection and Insurance Company • Patrick O’Malley, product manager, Progressive Northern Insurance Company • Jeffrey Rice, president and chief executive officer, Wayne Cooperative Insurance Company • Bernard Turi, senior vice president, Utica National Insurance Group

The following individuals were elected in previous years and will continue in their capacity as directors: • Steven Coffey, president and chief executive officer, Broome CoOperative Insurance Company • Waqas Durrani, regional counsel, Allstate Insurance Company • Mark Prechtl, executive vice president and chief executive officer, Chautauqua Patrons Insurance Company • Norman Orlowski, vice president and treasurer, Erie & Niagara Insurance Association • Nicholas Masi, government and industry affairs manager, Farmers Group, Inc. • Louis Masucci, vice president underwriting, Magna Carta Companies • Martin Doto, senior vice president, Preferred Mutual Insurance Company • Thomas Ruane, president, Security Mutual Insurance Company • Richard Zick, president and chief executive officer, Utica First Insurance Company These leaders enable NYIA to capably represent the property and casualty insurance industry. New York always presents new and unique challenges and opportunities in doing business, and NYIA stands ready to address whatever comes the industry’s way in 2013. [IA]

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[ COURTSI DE ]

By Lawrence N. Rogak

Court Orders In-Camera Review of Insurer's Claims File To Determine What Parts Must Be Disclosed McLaurin Fields v First Liberty Ins. Corp.

M

ildred Collins was the owner of the property located at 21 Tilney Avenue in Medford, New York and had a homeowners policy of insurance with the defendant until her death on July 28, 2008. The homeowners policy was renewed and issued to the Estate of Mildred Collins effective February 5, 2009 through February 5, 2010. On February 6, 2009, the insured premises sustained water and mold damage as a result of pipes freezing and rupturing. After a claim was filed, the defendant retained counsel in May 2009 regarding its rights under the homeowners insurance policy and to provide legal advice with respect to the issue of whether heat had been maintained in the premises.

Subsequent to an investigation, it was determined that the heat had not been maintained as required by the homeowner's

insurance policy, and coverage was denied by letter dated June 2, 2010 (the "Denial Letter"). Thereafter, the Executrix of the Estate, plaintiff, Yvonne McLaurin Fields, commenced the instant action for breach of contract. Issue has been joined and discovery is in progress.

Plaintiff served the defendant with omnibus discovery demands dated October 8, 2010, which called for the production of, among other items, a complete copy of the claims file with the claim notes, and a privilege log. On February 17, 2011, defendant served its response to the demands, however, plaintiff 's counsel asserts that a privilege log was not included and portions of the claim notes were redacted, without explanation.

On June 21, 2011, the defendant produced for deposition Lance Latten, the

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examiner assigned to the claim and who authored the Denial Letter. Upon questioning, Latten testified that in preparation for the deposition he reviewed the claims file and the unredacted version of the claim notes, and he revealed that entries had been made after June 2, 2010. Latten's testimony prompted plaintiff to serve a Second Notice for Discovery and Inspection dated October 12, 2011 (the "Second Notice"), demanding production of, among other items, memoranda, business and personal files, diaries and computerized notes, "in full, without abbreviation or expurgation."

The Second Notice also demanded estimates, invoices, bills, proposals and inventories prepared by certain identified companies hired in connection with the damages sustained to the insured premises and its contents (hereinafter referred to collectively as "Demands #1 through #6"), and a privilege log.

By letter dated October 18, 2011, defendant's counsel objected to Demands #1 through #6 as material prepared in anticipation of litigation or on the grounds of relevance. The letter did not address the demand for the unredacted claim notes, and did not include a privilege log. Plaintiff 's counsel, by letter dated November 10, 2011, advised defendant's counsel that the objections were improper and unresponsive, and demanded the production of the documents in five days; the documents were not produced and no response was received. The instant motion ensued.

Plaintiff 's counsel contends that the claim notes sought are discoverable as a matter of law as any privilege shielding them from disclosure was waived when employees of the defendant reviewed the unredacted version in preparation for deposition. Counsel also contends that Demands #1 through #6 are discoverable and necessary in order to adequately prepare for trial. In opposition, defendant's counsel contends that the redacted claim note entries contain confidential communications between employees of the defendant and attorneys at the law firm and

[ COURTS I DE ] therefore are absolutely immune from discovery under the attorney-client privilege.

The responsive documents to Demands #1 through #6, defendant's counsel contends, were prepared in anticipation of litigation or are irrelevant to the facts of this case.

The drastic remedy of striking the defendant's answer pursuant to CPLR 3126 is not warranted here, as plaintiff has not shown that the defendant's failure to produce documents responsive to the Second Notice was willful, contumacious or in bad faith (seeRini v Blanck, 74 AD3d 941, 902 NYS2d 185 [2d Dept 2010]; Kesar v Green Ridge Enters., 30 AD3d 471, 817 NYS2d 343 [2d Dept 2006]).

The branch of the motion to compel the production of the unredacted claims notes and the various other documents is decided as follows.

"CPLR 4503(a) states that a privilege exists for confidential communications made between attorney and client in the course of professional employment, and CPLR 3101(b) vests privileged matter with absolute immunity" (Spectrum Sys. Intl.

Corp. v Chemical Bank, 78 NY2d 371, 377, 575 NYS2d 809 [1991]). Nevertheless, as there is a strong public policy in favor of full disclosure, a party seeking to withhold discovery on the ground of privilege has the burden of proving each element of the privilege asserted (see id.; Matter of Priest v Hennessy, 51 NY2d 62, 431 NYS2d 511 [1980]; Koump v Smith, 25 NY2d 287, 303 NYS2d 858 [1968]). Thus, where a party alleges that documents sought for production and inspection are shielded from disclosure by the attorney-client privilege, the party seeking to withhold such documents has the burden of demonstrating that the information contained therein constitutes confidential communications between the attorney and the client for the purpose of securing legal services or advice (see Rossi v Blue Cross & Blue Shield of Greater New York, 73 NY2d 588, 542 NYS2d 508 [1991]; All Waste Sys. v Gulf Ins. Co., 295 AD2d 379, 743 NYS2d 535 [2d Dept 2002]; Bertalo's Rest. v Exchange Ins. Co., 240 AD2d 452, 658 NYS2d 656 [2d Dept 1997]). The attorney-client privilege is not lost because the documents also contain or refer to some nonlegal concerns (see Rossi v Blue Cross & Blue Shield of Greater New York, supra; All Waste Sys., Inc. v Gulf Ins. Co., supra). Materials prepared in antici-

pation of litigation are subject to a conditional privilege (CPLR 3101[d]). To demonstrate that this privilege is applicable, it must be shown that the material was prepared exclusively in anticipation of litigation (Bombard v Amica Mut. Ins. Co., 11 AD3d 647, 783 NYS2d 85 [2d Dept 2004]; Agovino v Taco Bell 5083, 225 AD2d 569, 639 NYS2d 111 [2d Dept 1996]). When such a showing is made, materials prepared in anticipation of litigation are immune from disclosure unless a party shows "sub-

stantial need" and the "inability to obtain the substantial equivalent elsewhere without undue hardship'" (CPLR 3101[d]; Valencia v Obayashi Corp., 84 AD3d 786, 787, 922 NYS2d 794 [2d Dept 2011]).

Whether a particular document is shielded from disclosure necessarily is a fact-specific determination that most often requires an in camera inspection (see Spectrum Sys. Intl. Corp. v Chemical Bank, supra). continued on page 34

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[ COURTSIDE ] continued from page 33

The argument by plaintiff 's counsel in support of production of the claim notes centers on the fact that two of the defendant's employees, Latten and his supervisor Kim Russo, admittedly reviewed the unredacted version of the claim notes in preparation for their respective deposition testimony, and thereby waived the attorneyclient privilege. This argument is unavailing.

A document protected by an unqualified privilege is not waived by a party merely by allowing its own employee to review the document in preparation for a deposition (see Fernekes v Catskill Regional Med. Ctr., 75 AD3d 959, 906 NYS2d 167 [3d Dept 2010]; Geffers v Canisteo Cent. School Dist.

No. 463201, 105 AD2d 1062, 482 NYS2d 635 [4th Dept 1984]; see also US v Kovel, 296 F2d 918 [2d Cir 1981]; People v Osorio, 75 NY2d 80, 550 NYS2d 612 [1989]; Hudson Ins. Co. v Oppenheim, 72 AD3d 489, 899 NYS2d 29 [1st Dept 2010]). There is no dispute that Latten and Russo are employed by the defendant. Thus, if the redacted information contains confidential

34 November 26, 2012 / INSURANCE ADVOCATE

A document protected by an unqualified privilege is not waived by a party merely by allowing its own employee to review the document in preparation for a deposition. communication protected by the attorneyclient privilege, the privilege was not waived.

However, the court cannot determine from the papers submitted whether the redacted information in the claim notes concerns communication primarily of a legal character or "for the purpose of facilitating the rendition of legal advice or services" (Rossi v Blue Cross & Blue Shield of Greater New York, supra at 593). Therefore, an in camera review of the unredacted claims notes is necessary.

In reply, plaintiff 's counsel asserts for the first time that the redacted information is discoverable because it was prepared prior to the defendant's decision to deny coverage. An argument cannot be raised for the first time in a reply (see Bailey v Brookdale

Univ. Hosp. 27 AD3d 677 [2d Dept 2006]).

In any event, unlike material conditionally immune from discovery, the attorney-client privilege which has absolute immunity, is not tied to such a decision or to the contemplation of litigation (see Spectrum Sys. Intl. Corp. v Chemical Bank, supra; Bombard v Amica Mut. Ins. Co., supra).

Turning to the items in the Second Notice, to which the defendant's counsel objected on relevance grounds, the Court finds that at this juncture, plaintiff has not established its entitlement to such documents. Plaintiff is clearly entitled to "full disclosure of all matter material and necessary in the prosecution...of [this] action" (CPLR 3101[a]). However, "[i]t is incumbent on the party seeking disclosure to demonstrate that the method of discovery sought will result in the disclosure of relevant evidence or is reasonably calculated to lead to the discovery of information bearing on the claims" (Vyas v Campbell, 4 AD3d 417, 418, 771 NYS2d 375 [2d Dept 2004]; Crazytown Furniture v Brooklyn Union Gas Co., 150 AD2d 420, 421, 541 NYS2d 30 [2d Dept 1989]). Plaintiff 's counsel has

[ COURTS I D E ] not demonstrated how the invoices or bills of the companies hired by the defendant are relevant to the issues herein. Therefore, the branch of the motion seeking documents responsive to demands 2, 4 and 6 in the Second Notice, is denied at this time.

The court will now address the demands in the Second Notice to which the defendant's counsel objected on the basis that the documents were prepared after the date of the Denial Letter. "[T]he payment or rejection of claims is a part of the regular business of an insurance company.

Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business" (Landmark Ins. Co. v Beau Rivage Rest., 121 AD2d 98, 101, 509 NYS2d 819 [2d Dept 1986] [internal quotation marks omitted]). Reports prepared by insurance investigators and adjusters before the decision is made to pay or deny a claim are thus not privileged and are discoverable (see id.; see also Bertalo's Rest. v Exchange Ins. Co., supra). However, once an insurance company "has rejected the claim...reports made to it to aid in the resistence of the claim are made for the purpose of litigation and are protected by CPLR 3101 (subds. [c], [d])" (Landmark Ins. Co. v Beau Rivage Rest., supra at 101). The relevant date in determining whether an expert's report was prepared exclusively for anticipated litigation or trial, is the date of the insurance company's decision to deny coverage (id.).

The Second Notice seeks: 1. All estimates and/or proposals prepared by Certified Restoration Services Inc. with respect to damages sustained to the [subject] premises by virtue of the Loss. *** 3. All personal property estimates and/or inventories prepared by Insurers World and/or SOS (Service on Site) with respect to damages sustained to the contents located at [the subject premises] by virtue of the Loss." *** 5. All estimates, proposals, restoration proposals and/or inventories prepared by PCI Restoration with respect to damages sustained to the contents located at [the subject premises] by virtue of the Loss.

Defendant's counsel states, and it is not disputed that the building damages estimate prepared by Certified Restoration dated

January 20, 2010 was previously provided to plaintiff 's counsel, as was the damage inventory of personal property prepared by Insurers World/SOS dated February 18, 2009. Defendant objects to the extent that the Second Notice seeks disclosure of material prepared after June 2, 2010, the date of the defendant's decision to deny the claim.

It contends that documents prepared after June 2, 2010 are privileged as material prepared for litigation, and thus are not discoverable. Defendant's counsel posits that a second estimate dated June 14, 2011 prepared by Certified Restoration, and a second inventory received from SOS dated October 17, 2011, fall into this category.

Similarly, defendant's counsel posits that PCI Services was retained by the defendant on July 8, 2011 to prepare an estimate of the cost to clean the personal property in the subject premises. The estimate provided

by PCI Services dated November 2, 2011, defendant's counsel maintains, is thus also protected from disclosure as material prepared for litigation.

The court finds that the Certified Restoration estimate dated June 14, 2011, the SOS inventory dated October 17, 2011, and the PCI Services estimate dated November 2, 2011 were prepared after the defendant issued the Denial Letter. Thus these documents fall within the parameters of CPLR 3101(d), material prepared for litigation, and are immune from disclosure unless the plaintiff 's counsel can demonstrate a substantial need and the inability to duplicate the reports, which plaintiff has failed to do. Rather, plaintiff 's counsel makes the conclusory assertion that plaintiff would be at a decided disadvantage should she not have time to review the damages evaluations. However, this assertion is undermined by the fact that the defendant's counsel has produced the estimates and inventory reports prepared prior to the date of the Denial Letter.

Accordingly, held in abeyance is a decision on that portion of the motion which seeks disclosure of the claim notes, in full, pending the court's in camera inspection thereof. Plaintiff 's motion is otherwise denied. [IA] 2012 NY Slip Op 22324 Decided on November 1, 2012 Supreme Court, Suffolk County Pastoressa, J.

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[ LAST WORD ]

By G. Keith Smith, M.D.

Central Planners’ Miscalculations Have Consequences

A

fter the election, the victors are exulting that ObamaCare is here to stay, and that the “best is yet to come” as their glorious plans to “fundamentally transform America” can proceed.

In their intellectual arrogance, the power-seekers have left a key variable out of their calculations: human behavior. Their

Physicians in this country will always be physicians.

However, they might not be practicing medicine. predictions, for example, of increased revenue from increased taxation, are based on “static analysis.” They assume that people will not change their behavior, as when they think they are being robbed.

They assume that doctors will keep working, just as they always have, even though they may complain. But people need to see how this assumption has worked out before.

One of the finest surgeons I’ve ever worked with was an Argentinian hand surgeon. Before coming to the United States, he was waiting tables. The government of Argentina’s version of Obamacare made waiting tables more attractive to him than practicing medicine. The government miscalculated, never considering that a talented surgeon would make what Austrian economists call a comparison of doing surgery to “the next best alternative use” of resources. This surgeon was better able to feed himself and his family by waiting tables. He simply resorted to the next best use of his time and labor.

The consideration of the next best alternative use of an individual’s time and resources is innate, something that each and every one of us does without even thinking.

The belief that American physicians won’t do this is naive and arrogant. It may represent one of the greatest miscalculations in the bloody history of central planning. And

G. Keith Smith, M.D.

38 November 26, 2012 / INSURANCE ADVOCATE

what will “medicine” look like if the “providers” work begrudgingly, under terms that they see as detrimental to their own interests and their patients?

Physicians in this country will always be physicians. However, they might not be practicing medicine. The tyrants who would point a gun at a doctor to extract some “right” to health care assume that the doctors will show up for this work camp the next day, again and again, instead of seeking work conditions that are more advantageous. The current shortage of physicians will look like a surplus in a short time, if price controls and bureaucratic risk outweigh the benefit of medical practice.

As the nation drifts toward socialist redistribution and totalitarianism, economic miscalculations will proliferate as government economists assume that, this time, the laws of economics can somehow be suspended.

Already there are many examples.

A few years ago, Walmart opened its first stores in Canada. Not long afterward, they met the iron fist of the unions and their demands. The workers belonging to these unions miscalculated. Walmart simply shut down these stores, eliminating these folks’ jobs. I suppose it never occurred to them that Walmart would react in this way.

More recently, Hostess workers miscalculated, never imagining that the company would simply close. Hostess was exercising one of our few remaining rights, that of refusing to operate a company on terms that are not mutually beneficial.

New Yorkers elected a mayor they thought cared about them even more than they cared about themselves, as evidenced by his recent push to ban large sodas. Their health and well-being was his primary concern, right? Their miscalculation was apparent recently when he refused the help of non-union power workers in the aftermath of hurricane Sandy, revealing his true priorities.

When Medicare began, the price paid for physician and hospital services was whatever the physician or hospital wanted to charge. Predictably, more service was provided. In the early 1990s, the central planners tried to correct their earlier error

with the Resource-Based Relative Value Scale, cutting physician fees drastically.

They miscalculated again. First, they thought that they were able to come up with a rational price from their abstract formulas, and second, they set it too low, below the market-clearing price, so that physicians are increasingly reluctant to see Medicare patients.

With ObamaCare, there is little evidence that the government officials and bureaucrats who created the current disaster have learned anything. They still hold the fatal conceit that they can dictate human behavior from on high without causing misery, mayhem, and death. [IA] Dr. G. Keith Smith is a board certified anesthesiologist in private practice since 1990. In 1997, he co-founded The Surgery Center of Oklahoma, an outpatient surgery center in Oklahoma City, Oklahoma, owned by 40 of the top physicians and surgeons in central Oklahoma. Dr. Smith serves as the medical director, CEO and managing partner while maintaining an active anesthesia practice.

In 2009, Dr. Smith launched a website displaying all-inclusive pricing for various surgical procedures, a move that has gained him and the facility, national and even international attention. Many Canadians and uninsured Americans have been treated at his facility, taking advantage of the low and transparent pricing available.

Operation of this free market medical practice, arguably the only one of its kind in the U.S., has gained the endorsement of policymakers and legislators nationally. More and more selffunded insurance plans are taking advantage of Dr. Smith’s pricing model, resulting in significant savings to their employee health plans. His hope is for as many facilities as possible to adopt a transparent pricing model, a move he believes will lower costs for all and improve quality of care.

Dr. Smith resides in Oklahoma City, Oklahoma. Contact: KSmith@surgery centerok.com, 405-627-0274

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