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VOLUME 125, NUMBER 20 / December 2014 / End of Year
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Contents [FEATURES] 4
Foreword: Sad news. Steve Acunto, Publisher
6
Insight: A View From the Far Side Peter H. Bickford
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Exposures and Coverages: Business Income—Purchase Adequate Limits Whether or not Coinsurance Applies; Telephone Toll Fraud Jerome Trupin, CPCU On the Level: Holiday Wishes N. Stephen Ruchman, CPIA
16
In the Associations: David J. Walsh Named Chairman of LICONY
18
The Social Notebook: Improving Customer Experience with Digital Marketing Chris Paradiso
22
From Counsel: The Consequences of Misclassifying Employees as Independent Contractors in New Jersey
34
On the Level: Meeting the New Challenges Jamie Deapo
40
On My Radar: Polluter Must Pay Barry Zalma
42
Looking Back: November 11, 1989
December 22, 2014 | volume 125 number 20 44
Courtside: Noncumulation Clause Means One Policy Limit Applies To All Lead Paint Claims From All Plaintiffs Even After Policy Renewal Lawrence Rogak
45
Classifieds
[ AD FEATURES] 19
ATIC: Season’s Greetings
27
MSO: Childproofing Tips
31
LICONY: People Are What Matter Most in Life
Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / December 22, 2014 3
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[ FORE WORD ]
Steve Acunto
Sad news.
S
Insurance Advocate has received two sad notices, as we go to press. The first was this note and obituary from Diana Sands, daughter of Linda Lamel. “Dear Steve: My mother passed away on Friday, December 5th at her Manhattan home at the age of 71. At her request and with the encouragement of her former colleagues and friends, I would like to submit a draft of a possible obituary for my Mom to Insurance Advocate. She was an avid reader of your paper and was quite sure you would have past material about her work as well as interest enough to write about her. We're hoping a notice/obituary/article about her in Insurance Advocate will spread the LINDA LAMEL news and inform readers about her passing and about her extraordinary life of service and accomplishment. Thank you, Diana Sands.” Of course we report this sad news of an untimely death of a great industry colleague to so many: Linda H. Lamel passed away peacefully in her daughter’s arms on December 5th after a valiant, three-year struggle against a rare form of thymic cancer. Born and raised in both Brooklyn and Queens, she became a proud Phi Beta Kappa graduate of Queens College, NYU, and Brooklyn Law School. Early on as a high school Social Studies teacher in Farmingdale, Long Island in the 1960s, she was elected Shop Steward for the local teacher’s union and fought for maternity leave protections among many other rights. Later on she became a pioneer of the modern women’s movement and a leader in the insurance industry, specializing in regulation, solvency, life and health insurance, corporate governance, compliance, claims adjudication, and executive compensation. She was New York State’s first female Deputy Superintendent of Insurance and a founder and first President of the National Organization for Women (NOW) on Long Island. A former President and CEO of The College of Insurance, she inspired and helped launch the insurance industry careers of a number of protégés. She was the Campaign Manager for Lt. Governor Mary Anne Krupsak’s successful 1974 election campaign and was her Chief of Staff (where she hired and mentored current Manhattan Borough President Gale Brewer). After government service, she worked in the insurance industry as a Vice President of TIAA-CREF, Executive Director of the Risk and Insurance Management Society, CEO of Claims on Line, Inc., a Director of Universal American Corp. and SCOR Reinsurance Company (US), and a consultant, trainer, and arbitrator specializing in insurance dispute resolution and regulation. Ms. Lamel held a number of leadership roles in industry and bar organizations as chair of the ABA Torts and Insurance Practice Section, Executive Committee Member of the NYSBA Insurance Section, Association of Professional Insurance Women’s Woman of the Year, a member of the Insurance and Risk Management Council of the American Management Association, chair of the Medical Malpractice Committee of the Association of the Bar of the City of New York, Founding Director of the American Society of Workers Compensation Professionals, a member of the Reinsurance Advisory Committee to Senator Biden of the U.S. Senate Committee on the Judiciary, a member of the Presidential Council of AIDA-US, and Corporate Director and Adjunct Professor of Insurance Law at Brooklyn Law School. Ms. Lamel also served in leadership roles for many non-profit women’s and community organizations, including but not limited to, Phi Beta Kappa, the League of Women Voters, Hour Children (Astoria), the Association of Professional Insurance Women, and as the President of the Alumni Association for Brooklyn Law School. She is survived by her daughter, Diana Sands, her sisters Donna Weintraub and Eileen Hill, her brother Jerry Treppel, and her mother, Sylvia Treppel, as well as a great number of friends and colleagues who will miss her bright mind and warm heart. Contributions may be made to Hour Children in her honor. ... At about the same time we learned that Gordon Curran Stewart, former president of the Insurance Information continued on page 38
4 December 22, 2014 / INSURANCE ADVOCATE
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VOLUME 125, NUMBER 20 DECEMBER 22, 2014
EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Rafi Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com PROOF READER Maria Vano SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x117 circulation@cinn.com PUBLISHED BY CINN Group P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto
CINN G R O U P, I N C .
INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 21 times a year, and once a month in July, August and December by CINN ESR, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing offices. POSTMASTER Send address changes to Insurance Advocate®, P.O. Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN ESR, Inc. and is copyrighted 2014. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Office.
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[ INSIGHT ]
By Peter H. Bickford
A View From The Far Side Regulators are people too! I spend a lot of focus in this column on problems with excessive, pointless, redundant and counter-productive insurance laws and regulations. In the process, however, many of those individuals responsible for interpreting and enforcing the rules are often unintentionally caught
their dealings with regulators are mostly grumbled in water cooler conversation out of earshot of the regulators. These complaints center mostly on frustrations dealing with a rigid, inflexible, plodding “bureaucratic” mindset largely unresponsive to the needs of the industry. But what about the view from the other side of the
As regulatory policymakers and pundits battle over the shape and scope of their world, the day-to-day supervision, analysis and enforcement of the existing world continues at street level between the staff professionals in the state insurance departments and their counterparts for the companies, agencies and consumers. Peter H. Bickford
in the crossfire. So I want to take a moment to take a look at the regulatory scene from the perspective of the many hard working, conscientious and productive regulators I have worked with and against over the past four decades. First a distinction: just like in the private corporate world, there are the ivory tower set and the professional staff in the regulatory world. This column is about the latter – the civil servants who actually carry out the day-to-day work of ensuring compliance with the laws and regulations of their jurisdiction, and protecting the interests of policyholders, claimants, companies and agencies. It is not about the appointed or elected top of the regulatory heap who often arrive on the scene with little knowledge about the industry and have an eye down the road to their next appointment or position. As regulatory policymakers and pundits battle over the shape and scope of their world, the day-to-day supervision, analysis and enforcement of the existing world continues at street level between the staff professionals in the state insurance departments and their counterparts for the companies, agencies and consumers. Complaints by industry people about
mountain? What are the complaints by regulators of the industry representatives across the table? It may come as a surprise to many of these industry representatives that the regulators’ complaints are quite similar to their own complaints. Many of the same practices and perceptions that we have about them they have about us. So let’s look at some of the “rules” that regulators would most like to scold industry representatives about for failing to follow. File on time and make sure your filing is complete! One of the most frequent industry complaints in dealings with regulators is their failure to respond to filing needs and approval requests in a timely manner, and their insensitivity to business deadlines. Regulators, on the other hand, counter that often these perceived delays or lack of responsiveness are a direct result of a filer’s own action or inaction. Too often filings are made at the last minute with unreasonable expectations about review and approval. Or the filings are incomplete and regulators’ requests for additional materials are inadequately or untimely addressed. These failures to properly address requests for complete information or clarification of submissions make it difficult if not impossible to pro-
vide the necessary response in a timely manner. In sum: don’t accuse regulators of dragging their feet when your filing is incomplete or untimely or both! Please don’t insult our intelligence with gamesmanship! Closely related to the issue of timely and complete filings, and often overlapping, is the regulators’ perception of gamesmanship by industry representatives. Submitting requests or filings that the filer knows is missing some key element, attempting to hide relevant or even required information or filing at the last minute in the hope that deficiencies will not be noticed, is not only insulting to the reviewers, but also needlessly slows the process and ultimately jeopardizes the desired result. If there is a problem, talk to us! Despite the perception of many in the industry, most staff regulators take their jobs seriously and professionally, and if you have a problem with or a question about a particular matter, most regulators are quite willing to discuss the issue with you and see if there is a reasonable answer or solution. The worst course of action, however, is to try and avoid the issue through deception, incomplete information, delay - or unctuous charm. Understand our role! Frustration with regulators can lead many industry representatives to lose sight of the fact that staff regulators do not make the rules. (I know, I know! I hear the murmurs about “desk drawer” requirements not found in the laws or regulations that are imposed by regulators, but that is a different topic for another day. This column is about the regulators’ view.) Furthermore, like many of us on the industry side, most staff regulators may have limited areas of expertise, and are knowledgeable only about the laws and regulations regarding their particular area. The regulators’ job is to carry out the requirements of the laws and regulations of their jurisdiction and to ensure compliance by regulated companies, agents and others. They are not required to be apologists for rules and regulations that they did not make but are charged to comply continued on page 8
6 December 22, 2014 / INSURANCE ADVOCATE
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[ INSIGHT ] that you follow the rules and understand their role in enforcement or compliance. Respect the process! It is more than cliché that respect is earned. In my four decades of dealing with insurance regulators at all levels of the bureaucracy, there are those regulators that I respect and admire for their intelligence, knowledge of the business, fairness and communication skills. Even if there is disagreement on interpretation or compliance issues, at least you know that your position has received
continued from page 6
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That does not mean that the time-honored practice of grousing about incompetent or arrogant regulators will suddenly end. But it should be kept in mind that on the far side there is an equally timehonored grousing about incompetent and arrogant industry representatives. a full and fair hearing. On the other hand, I have also met a number of insurance department bureaucrats who lend themselves to the stereotypical rendition of an inflexible, robotic and exasperating civil servant lacking in common sense. Difficult as it may be at times – and we have all encountered those moments – it is essential to understand and respect the process. Not surprisingly, many regulators I have talked to over the decades have the same view of us. They respect those who treat them professionally, are knowledgeable about and follow the legal and regulatory requirements, work with rather than against them, and do not try to game the process. That does not mean that the time-honored practice of grousing about incompetent or arrogant regulators will suddenly end. But it should be kept in mind that on the far side there is an equally time-honored grousing about incompetent and arrogant industry representatives.[IA]
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[ EXPOSURES AND COVERAGES ]
By Jerome Trupin, CPCU
Business Income—Purchase Adequate Limits Whether or not Coinsurance Applies; Telephone Toll Fraud
T
he most frequent question producers ask me concerns how to set the amount of insurance for business income coverage. Here’s one from a NYC producer: “We are insuring a condo association of 50 units… If total annual maintenance fees amount to $250,000 for all units combined, would you suggest that we write the [Business Income] policy with a limit of $250,000 (assuming 100% co-ins) for the condo association?” The Good News: Setting business income insurance amounts is easier for habitational property owners than for most other businesses. Fewer expenses discontinue in the event of a loss and there’s little seasonal variation in income. Furthermore, an increase in income is much easier to predict than for most other businesses. The Bad News: It still requires some work. One hundred percent coinsurance is the common choice for multi-family dwellings—it’s often what mortgagees require. It’s not a bad choice, but it may not be the best. You should encourage the insured to consider its exposures and look at the alternatives.1 There may be a solution that will avoid problems when the loss occurs. To start, have the insured estimate how long it would take to restore the building after the worst possible loss. One of our clients recently had serious fire damage in one of its buildings. The fire damaged 31 of the 80 apartments. It took 10 months to complete the repairs and move the tenants back in. He felt that the reconstruction had gone very smoothly; that won’t always happen. And as extensive as the damage was, it was far from a total loss to the building. Total losses are rare, but they do hap-
pen. Other than small residential or commercial properties, I’ve had only two total losses in my career, but I’ve had a good number that were worse than 31 out of 80 apartments. The classic underestimate of fire damage potential was a fire a number of years ago in a high-rise Center City Philadelphia office building that resulted in a total loss to the building. That’s not supposed to happen. Because it was a fire-resistive building, the insurer’s guidelines called for reinsurance based on the cost to restore six floors, not the entire building. The underwriter purchased facultative reinsurance accordingly.2 Big mistake; the loss was many times the amount of reinsurance. (Surprising insurance connection: The fire originated in the offices of a reinsurance firm that was having its floors refinished.) As hard as it is to estimate the maximum possible damage for property insurance, it’s harder to estimate the time needed to restore facilities for business income insurance. Encourage clients to ask an architect or contractor for an estimate of how long it would take to rebuild after a catastrophic loss. Don’t overlook potential problems such as planning, zoning, building permits, special-order items, etc. And remember that ordinance or law coverage is just as necessary to business income as for direct damage. Add the time needed to bring the building up to current codes. Coverage tip: If building ordinances require the insured to install a substantial upgrade in order to obtain a building permit for the repairs, continued on page 12
1 Some of the ideas incorporated in this article were set out in more detail in Jerome Trupin & Arthur Flitner, "Magnum BI: Calculating Maximum Business Interruption Loss Exposure" American Agent & Broker January 1, 2010 2 Facultative reinsurance is reinsurance that’s purchased specifically for an individual risk as opposed to treaty reinsurance that kicks in automatically.
10 December 22, 2014 / INSURANCE ADVOCATE
Jerome Trupin
Jerome “Jerry” Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, nonprofit and governmental entities. He is, in effect, an outsourced risk manager. Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses. Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Society publication, the Insurance Advocate, and others. He can be reached at jtrupin@aol.com. Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.
Encourage clients to ask an architect or contractor for an estimate of how long it would take to rebuild after a catastrophic loss. Don’t overlook potential problems such as planning, zoning, building permits, special-order items, etc.
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[ EXPOSURES AND COVERAGES ] continued from page 10
the period of restoration will increase, but the policy coverage for the business income restoration period remains the same unless the policy is endorsed. (ISO has an endorsement for that purpose: CP 15 31 10 12 Ordinance or Law – Increased Period of Restoration.) Once the insured has estimated the maximum period of restoration (MPR), the time needed in the worst case situation, to restore the building and move the tenants back in, then the total possible income loss can be estimated. Since coverage for a loss that occurs during the policy period doesn’t end with policy expiration, if rents are expected to increase, assume that the loss occurs on the last day of the policy period. Calculate the gross loss of income accordingly for the MPR. From that total, deduct any expenses that will definitely discontinue during the period of restoration and add anticipated extra expense to expedite restoration. 3 That should be a workable estimate of the insured’s maximum possible loss; it’s the minimum amount of insurance needed.4 While BOP policies with 12 months of unlimited business income coverage seem to avoid this problem, the 12-month time limit can be bad new for some insureds. It’s not unusual for restoration of a severely damaged building to drag on for 18 months or more. The questioner is asking about a policy that is subject to coinsurance, so there’s another calculation required. The insured has to select a coinsurance percentage and an amount of insurance adequate to comply with coinsurance. ISO offers a range of coinsurance percentages from 50% to 125%. Here’s my suggestion for a way to select the coinsurance percentage and the amount of insurance. 1. Calculate the coinsurance basis. That’s the amount to which the coinsurance percentage will be applied. It’s not the same as the maximum possible loss since not all expenses that may discontinue are
Endorsements are available to eliminate or modify coverage for ordinary payroll and power, heat and refrigeration expenses. For some insureds, incorporating these endorsements can lower their coinsurance basis and premium without sacrificing meaningful coverage.
excluded from the coinsurance basis and it covers the entire twelvemonth period starting with policy inception, not the estimated restoration period. 2. For condos and rental properties, the total annual rent roll can be used as the coinsurance basis. The items that the policy permits to be deducted in computing the coinsurance basis, including the one that’s the largest for many insureds, cost of goods sold, don’t apply to condos and rental properties. 3. Divide the maximum anticipated business income exposure by the coinsurance basis. 4. Select the next higher coinsurance percentage. For example, if the result in step 2 is .37, select 50% coinsurance. If it’s .53, select 60% coinsurance and so forth. If the result is equal to or more than 1.25, select 125% as that’s the highest coinsurance ISO provides. The amount of insurance should equal the coinsurance percentage times the coinsurance basis or the estimated maximum possible loss, whichever is greater. If the insured won’t go through the process, point out the possibility of a severe loss and quote the cost for an amount of
insurance equal to the annual rent roll using 100 percent coinsurance rate, and 1.25 times the annual rent roll using 125 percent coinsurance rate. Let the insured choose the limit it feels will be adequate. In all cases, you want the agreed amount option (coinsurance waiver) to be part of the policy. It’s easier to obtain for business income insurance for condos and other rental property since the insurance company will probably just want to know the annual rent roll to determine if the amount is adequate. Much more information is needed for other businesses.
Selecting a Business Income Amount of Insurance is Much More Difficult for Other Businesses As complex as setting an amount of insurance for a condo may sound, it really isn’t that hard after you’ve done it once or twice. It’s more difficult for other businesses, particularly those that have seasonal variation or costs of goods sold calculations. For firms with seasonal variations in operations, such as retailers who frequently do as much as 70% of their business in the final quarter of the year, monthly calculations are vital. If there’s any meaningful variation month-to-month, here’s my recommendation: 1. Have the insured estimate operating revenues for the MPR on a monthby-month basis. As pointed out for condos, if revenues are expected to grow, increase the estimate accordingly. 2. Have the insured estimate expenses that won’t continue in the event of an interruption (again adjusting for any expected changes if the MPR starts at the end of the policy period). Because well-run midsize or larger businesses do monthly projections for at least one year into the future—most do it for a longer period—steps 1 and 2 should not be an onerous task for the CFO or controller. But even if the insured just uses the current year’s figures and projects them into the future on a simple percentage basis to
3 An item frequently overlooked is the income that may be lost during the time it takes to rebuild income to its prior level after reconstruction is complete. Tenants who have permanently moved elsewhere must be replaced; which can’t always be done before repairs are complete. That can be a problem for a rental property, but not a condo. Condo unit owners remain responsible for the maintenance fees. The unit owners are indemnified from having to pay maintenance for space they can’t use by the tenant’s policy that you sold them, right? It’s an argument for adequate rental value limits. 4 The amount of insurance can’t be less than that required by the mortgagee, but that amount shouldn’t be regarded as a maximum.
12 December 22, 2014 / INSURANCE ADVOCATE
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[ EXPOSURES AND COVERAGES ] account for expected changes, the result will be more accurate simply using the current figures. 3. Subtract expenses that would not continue during a suspension of operations from estimated operating revenues on a month-by-month basis. This will give estimated business income exposure by the month. 4. Because many businesses have seasonal variations, select the period containing the number of months equal to the MPR that produces the highest total business income exposure no matter when it starts during the policy term. 5. Add the insured’s estimate of extra expenses that would be incurred during the selected period. 6. Add the insured’s estimate of anticipated business income loss during the period needed to rebuild business after the property is restored. (ISO business income forms include 30 days of this extended coverage. This can be extended to two years in ISO forms. Some independent forms provide longer coverage or even no time limit on this extension.) The total of lines 5, 6 and 7 is the amount of insurance the insured should carry. There are many uncertainties involved in calculating business income exposure— how long will it take to restore operations, what will continuing expenses amount to, how much extra expense will be incurred, etc. The insured might want to carry a higher amount of insurance to provide a margin of safety. Because the business income coinsurance excludable items rarely, if ever, factor into business income calculations for condos and rental properties, I disregarded them in answering the question about a condo. Other businesses are not so lucky. Here are the items that can be deducted in determining the coinsurance basis that they’ll need to calculate: • For retail and wholesale operations, Cost of Goods Sold, • Cost of services purchased from outsiders (not the insured’s employees)
There are many uncertainties involved in calculating business income exposure—how long will it take to restore operations, what will continuing expenses amount to, how much extra expense will be incurred, etc. The insured might want to carry a higher amount of insurance to provide a margin of safety.
to resell, that do not continue under contract, • Outgoing Prepaid Freight, • Returns & Allowances, • Discounts, • Bad Debts, and • Collection Expenses. Endorsements are available to eliminate or modify coverage for ordinary payroll and power, heat and refrigeration expenses. For some insureds, incorporating these endorsements can lower their coinsurance basis and premium without sacrificing meaningful coverage. Many expenses that may discontinue are not excluded in calculating the coinsurance basis. That’s why some firms’ maximum possible loss is far less than their coinsurance basis. (That’s seldom true for condos and rental properties.) For more details, see the ISO form CP 15 15 10 12 Business Income Report/Worksheet. Don’t attempt to do the cost of goods sold calculations called for by the worksheet. The insured’s CFO or accountant should complete the worksheet. You should point out a possible snag for a firm with manufacturing operations. ISO uses the term “cost of goods sold” differently than accountants in one respect. In accounting practice cost of goods sold includes factory labor. ISO excludes factory labor costs in its calculation of cost of goods sold. You’ll
want to alert the CFO or accountant to that trap. It’s a way to help your insured even though you’re not an accountant.
Telephone Toll Fraud A client calls saying that she’s received a $500,000 bill from the phone company for unauthorized charges and the phone company refuses to waive the charges. She wants to know what coverage her firm has. That’s apparently what happened to the producer for a school district. The producer submitted the claim to the district’s property, crime, and cyber liability insurers. Coverage for the loss was declined by all three.5 What can a producer do? Is there any coverage available for such a loss? Yes. ISO has an endorsement for its crime form to provide some coverage for losses of this type, CR 04 16 08 13 Telephone Toll Fraud. It will pay for loss from long distance telephone toll call charges incurred by the insured resulting directly from fraudulent use of an account code or system password to gain access to the insured’s voice computer system. The insured’s system must have: • A call disconnect feature to terminate a caller’s access after three unsuccessful attempts to enter an account code, and • System passwords that the insured changes regularly as required by the insurer. You should tell your clients about this exposure and the available coverage—the losses can be substantial. The requirements in the ISO form worry me. If you offer ISO-type coverage, be sure the insured understands the requirements. There are insurers that do not limit the coverage in that way. What’s more, two of our clients have been offered the better coverage at no additional premium. You always look good when you can get something for free for your clients. [IA]
Since 1889
5 Bill Wilson “Telephone Toll Fraud Coverage” IIABA Virtual University VUpoint Newsletter 11/14/2014 https://webmail1.mail.aol.com/38848-916/aol-6/enus/mail/DisplayMessage.aspx?ws_popup=true (accessed 11/17/14)
INSURANCE ADVOCATE / December 22, 2014 13
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[ ON TH E LEVEL ]
By N. Stephen Ruchman, CPIA
Holiday Wishes
I
t’s the time for holiday greetings. I received a holiday email from PIA this week featuring the staff at Glenmont headquarters, and it gave me the idea for this article. I was president of PIANY and I am a director on the board of PIA Management Services, which manages the PIA state affiliates of Conn., N.H., N.J., and N.Y. While I have worked with this organization for decades and I understand their staff strength in the abstract, I've never seen the entire PIA team together at one time. So, it was striking to see the size of the staff employed at PIA. I, as well as every member of the N. Stephen Ruchman board of directors, are proud of what our association accomplishes day to day and how hard they work for the membership. I’ve been told I bleed PIA red. Indeed, I do. A major reason for this is the PIA staff. These people are an extension of every member agency’s office and they work hard for individual agents as well as for the entire industry. So I’d like to dedicate this article to the PIA staff, pictured in that greeting card. On behalf of all professional, independent agents and their employees, I'd like to say, thank you for a job well done. To the Industry Resource Center, which answers thousands of member questions a year; to
the attorneys and technical experts whom we reach through them: Thank you for your help! To the graphics and Creative Services department, which develops newsletters and consumer content for marketing; to the editors, writers and designers who work on PIAs magazine, Reporters, and informative emails: Thank you for keeping us informed. To the education department, I LOVE those webinars! (I need a single life CE credit before February—thanks for finding it for me!) Young Insurance Professionals: You represent our hope. What better time of year to thank you for that? To the membership department, for identifying and administering new benefits and for reminding us of our benefits and for keeping our ranks strong: Thank you. To the E&O group: Thank you for shopping our policies and making sure that we, as agents, have options and proper coverage. To the numerous unsung heroes in accounting and IT: Thanks for guarding our fiscal strength and helping to keep us modern and secure. I can’t forget the printing and facilities staff. Maintaining a building the size of PIA’s in Glenmont is no small job, but your work goes beyond that, with printing machinery and fulfillment responsibilities that accommodate every member. Of course, anyone who calls PIA is greeted by that friendly voice on the phone: We all love the PIA receptionist, but that tone is carried throughout the building. There’s a spirit in the PIA offices—it’s the most upbeat staff I’ve ever seen. I understand why PIA has been named by the two
PHOTO OF THE PIA MANAGEMENT SERVICES STAFF IN GLENMONT 14 December 22, 2014 / INSURANCE ADVOCATE
local papers as a "best place to work" in the Capital Region. The entire work atmosphere there would not be possible if not for the leadership of its executives; CEO Mark LaLonde, COO Kathy McNessor and Executive Director Kelly Norris set the tone. They are responsible for a culture and atmosphere that fosters unrivaled support of its members. But importantly, staff is happy. According to a Time magazine article, the top reason people stay in their jobs is that they “enjoy the work they do.” That outranked pay, benefits and even the lack of other available positions. We agents are often recipients of awards, greetings and recognition from our associations. But, this is my opportunity to recognize the staff that makes my association great. As an agency owner, the PIA staff was an extension of my agency staff, and I used PIA to the fullest extent I could—I’ve always gotten more than my dues worth. So, I share with you, dear readers: If you aren't taking advantage of all you have with your PIA membership, you are missing a big benefit. If you are a PIA member who has never been to your PIA headquarters—I invite you to stop in and see the facility. It’s hard to miss. It’s a landmark on the New York State Thruway, the first major building you see as you head north into the Capital Region, just before exit 23. For nonmembers, stop in and see all PIA can do for you as well as for our entire industry. I know you'll be impressed. PIA is not just a name, continued on page 16
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[ IN THE ASSOCIATIONS ]
David J. Walsh Named Chairman of LICONY
A
t its Annual Meeting, the Life Insurance Council of New York, Inc. (“LICONY”), elected David J. Walsh to serve as Chairman of the Board of Directors for 2015. Mr. Walsh is President & Chief Executive Officer for Amalgamated Life Insurance Company. “Dave is a strategic thinker with deep experience on legislative and regulatory matters affecting the life insurance industry,” said Thomas E. Workman, President of LICONY. “I look forward to working with him on the issues and challenges that will face our industry in 2015.” LICONY is the domestic trade association representing the life insurance industry in New York. Its member companies provide the vast majority of life, disability income, long-term care insurance and annuity benefits for New Yorkers. In 2015, LICONY’s membership will include 72 life insurance companies and 24 allied professional firms. Mr. Walsh is also CEO of Alico Services Corporation and also oversees operations for the entire Amalgamated Family of Companies. Under his leadership, a major reorganization was implemented which included development of an enhanced leadership team and strategic plan, and the relocation of the company’s offices from Manhattan to White Plains, New York. His leadership team is credited with improving the organization’s infrastructure and expanding its offerings and national footprint.
Prior to joining the organization, Mr. Walsh served in senior executive positions at AIG and Swiss Re. He also served as Director of Insurance and Director of International Trade for the State of Alaska. His professional career also includes hav-
ing served as a member of the United States delegation to the Organization for Economic Cooperation and Development (OECD), as a prosecutor during the construction of the Trans-Alaska Pipeline and, for ten years, on the Anchorage, Alaska Assembly (City Council). Currently, Mr. Walsh serves on the boards of numerous professional and charitable organizations, including: ChairmanElect of the Life Insurance Council of New York, Insurance Federation of New York, Sidney Hillman Foundation, and the college of Mount Saint Vincent. Additionally, he is President of the Westchester Putnam Boy Scout Council. His previous affiliations include that as President of the National Association of Insurance Commissioners, Co-Founder and First Chairman of the International Association of Insurance Commissioners, member of the Board of Regents of Loras College in Dubuque, Iowa, and Adjunct Professor of Law at Pace University Law School from 1998 to 2004. He is a frequent public speaker. Mr. Walsh earned a Master’s degree in Professional Studies, Industrial and Labor Relations from Cornell University, a Juris Doctor degree from the University of Wisconsin, a Master’s degree in Business Administration from Alaska Pacific University, and a Bachelor’s degree in Psychology from Loras College. He is currently working toward a Ph.D. from the University College Dublin.[IA]
cates bill passed—it now once again awaits the governor’s signature. History shows bills at the end of the year have a diminishing chance of being passed. I know many agents have written letters to the governor asking him to sign the bill. Please, Governor Cuomo, sign this bill into law. I don't want to report in a future column that an accident occurred and the injured were left without recompense because someone misrepresented coverage for a job in a certificate of insurance. The countdown is ticking.[IA]
N. Stephen Ruchman, CPIA, is a retired partner of B&B Coverage LLC, and founder of Ruchman Associates Inc., the agency he started in 1961. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and has sat on, or chaired, nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. He can be reached via email at nsruchman@gmail.com.
DAVID J. WALSH, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF AMALGAMATED LIFE INSURANCE COMPANY HAS BEEN ELECTED TO SERVE AS THE 2015 CHAIRMAN OF THE BOARD OF DIRECTORS OF THE LIFE INSURANCE COUNCIL OF NEW YORK, INC. (“LICONY”). THE DOMESTIC TRADE ASSOCIATION’S 72 MEMBER COMPANIES PROVIDE THE VAST MAJORITY OF LIFE, DISABILITY INCOME, LONG-TERM CARE INSURANCE AND ANNUITY BENEFITS TO NEW YORKERS. THE MEMBERSHIP ALSO INCLUDES 24 ALLIED PROFESSIONAL FIRMS.
[ ON THE LEVEL ] continued from page 14
it’s an organization of people. And, after all, we’re in a people business. A few last thoughts as closing notes for 2014: I'd also like to thank the many readers for the kind input I’ve received about my articles this past year. It makes my articles easier to write. Finally, as I write this, I have one final wish just a few weeks from the New Year: PIA, along with other associations, worked hard with the legislature to get the certifi16 December 22, 2014 / INSURANCE ADVOCATE
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www. s h e l t e r p o i n t . c om
sheltering you
sales@shelterpoint.com | 800.365.4999 (516.829.8100) facebook.com/shelterpointgroup
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[ THE SOCI AL NOTEBOOK ]
By Chris Paradiso
Improving Customer Experience with Digital Marketing
A
gencies that have relied on traditional channels to build and grow personal relationships face a future in which conversations and in-person meetings have become the equivalent of landline phones and cursive writing. If you never meet the customer, how do you get to know them? Just as you trained staff to ask the right questions and read body language, you need to learn to decipher the digital footprints that your customers leave behind. By applying advanced analytics, you can predict customer behavior and deliver a highly personalized communication or offer at the moment when the cusChris Paradiso tomer is most receptive to receiving it.
Analyst firm CEB TowerGroup estimates that 75 percent of US banking transactions in 2012 came from digital channels. By 2016, that percent is expected to rise to 84 percent. Today, online transaction volumes are more than double that of branch activity. Bank employees have fewer opportunities to say “Is there anything more we can do for you?” But let’s look at this and say what’s next for the independent insurance agency? Are we allowing our clients to be digital and if not are we going to end up like bank tellers? These are very important questions to ask ourselves.
Big Data vs. Small Data Finding a way to personalize offers involves making sound decisions on which 18 December 22, 2014 / INSURANCE ADVOCATE
data is meaningful, and in what context. Customer analytics tends to get conflated with the phrase “big data,” but success is just as dependent on “small data.” What’s the difference? Small data is knowing something specific about your customer/client, such as he just purchased a motorcycle. Big data crunches information to compare a customer’s transactions or purchases and demographics against similar customers to segment that customer for marketing offers. Both involve analytics, but not in the same way and both are very important in how we attain the information and what we are going to do with it.
Let’s Find a Starting Point Being able to segment customers is a critical starting point, the first stop in ending the “one size fits all” approach to customer communication. Your analysis needs to review customer behavior data to develop insight into how they will respond going forward. No two institutions will have the same segments, and savvy institutions are constantly honing and reworking segments as new information becomes available. Offer-response rates can be looped back into model building. Increasingly, understanding online behavior (how a customer moves through a website or app) is critical to successful segmentation. This is exactly what Facebook and other social avenues are gathering and then selling that data to understand prospects’ buying habits. Along with this I would recommend doing surveys with your clients; how we do this is with a digital marketing on-boarding system with each and every new client. We want to gather data on why they may have purchased insurance from our agency. Another survey goes out 90 days prior to the renewal because after we gather the data from the first survey, we want to find out the experience they have had with our agency over the past nine months. Why, you may ask? Because if we didn’t live up to their expectations, we have to reach out to them and figure out how we can improve, along with saying “Sorry.” That 90 days will be focused on getting them back on our side
to renew their policy. We need to listen to our clients!
Laying in Optimization – Real-Time Strategies Let’s think about the customer who made an expensive car purchase such as a Telsa. You want to get the right offer in front of him with the right coverage because if we don’t handle that properly he may be calling our competitor. Let’s remember many of our clients leave and/or shop after an auto is added for several reasons: they didn’t care for the service or they received a price they didn’t care for. If your analytic efforts reveal that information about the large purchase a month or a week later, it might be too late. The agency should have a congratulation card out to that client the same day he added that car onto his policy, and maybe along with it a Dunkin Donuts gift card (if allowed by your state’s insurance regulations). This is where it becomes critical to optimize the process and use realtime monitoring. Optimization does more than create the right offer and the right means to get it in front of the customer. It calculates the opportunity cost of not making the offer. Yes, every BIG purchase should trigger a communication. The real-time component makes sure that if an offer is necessary, it happens as quickly as possible and while the customer is still in-session. The offer should be tailored to what he/she’s done or liked in the past. If one customer responds to a direct email, social media or text message, that might be the approach to take. For another customer who tends to engage one way doesn’t mean all engage that way. We need to have the ability to communicate the way in which they want to be communicated.
Customers Like Feeling That You and Your Agency Are Out to ‘Get Them.’ Some agencies are concerned that customers will find this kind of marketing or information gathering intrusive. The reality is quite different. Despite privacy concerns, customers expect that you will know continued on page 20
s
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Warmest wishes for a wonderful holiday season and Happy New Year.
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[ THE SOCIA L NOTEBOOK ] continued from page 18
them: 60 percent said so in a 2013 SAS survey of 1,260 US respondents. They want recommendations for products and services based on their lifestyle, previous purchases and search history. Years of shopping on sites like Amazon, Google and Zappos that offer personalized recommendations based on search patterns condition customers to expect this. This level of personalization is becoming a factor in how customers view service quality. Online retailers get high ratings, where industries that typically shy away from customized offers fare worse, like insurance.
Conceptualization to Reality Being able to optimize and place offers in real time involves a few easily overcome technology hurdles. Insurance agencies have not invested in segmentation and personalization to the degree online retailers have. The first step is to recognize that if your customer analytics don’t monitor digital paths and can’t be done with optimization or real-time options, it won’t be effective. Many other industries use analytics providers that offer a report on overall website activity, not the kind of personalized data that can be read as it streams in to the site. Website tags that allow agencies and other industries to track how a cus-
tomer interacts with a digital channel haven’t been readily available in the past. Additionally, all of this data is useless if you can’t merge the online and offline data to build the profile that allows you to know that prospect or client. Luckily, insurance agencies don’t need to create this from scratch. Customer experience personalization solutions exist that can help by: 1. Capturing the complete online behavior of the customer and accurately associating it with data from other sources (including transactions with the use of your agency management system). 2. Matching this behavior to a library of your marketing efforts, reworking what is stocked on the library “shelves” as you see what clients respond to. 3. Striving to constantly deliver the best service, not just saying it. These types of solutions offer solid payoffs for an agency. Among the successes: 1. Our agency has increased target audience members by 200 percent at the same time it cut traditional marketing costs of 10 percent. 2. More targeted campaigns digitally and improved customer service through our Agency App and surveys along with our much improved
4441 Sepulveda Blvd., Culver City, CA 90230-4847 www.zalma.com | zalma@zalma.com 310-390-4455 | fax: 310-391-5614 http://zalma.com/blog Zalma Insurance Consultants provides expert advice to counsel for insurers and counsel for policyholders. Advice from Zalma Insurance Consultants is indispensable to the resolution of insurance disputes. Consultation from Zalma Insurance Consultants can save you, your counsel or client hundreds of hours of investigative and legal work. 20 December 22, 2014 / INSURANCE ADVOCATE
digital presence has helped our agency bottom line grow in double digits. But with that aid is an everchanging buyer so we must continue to evolve and continue to change and adapt with how our clients/prospects want to communicate with us. Driving marketing costs lower, increasing customer engagement, enhancing customer loyalty. Isn’t that the trifecta all insurance agencies are looking for? Yet, customer service is critical — whether customers are in front of you or at their computers. A 2012 Forrester Research report, The Business Impact of Customer Service, calculates that a bank with 40 million customers would gain $485 million in incremental revenue by improving its customer experience rating from below average to above average. Well, here I go again comparing an insurance agency to a bank and the reason why I’m doing this is because of how direct writers are turning auto insurance into a commodity. The two go handin-hand; bank tellers are disappearing to online banking and the use of an App, and we in the insurance industry are slow to adopt those same technologies that clients of banks are. We in the insurance industry need to adopt what our prospects and clients want – NOT what we think they want. We need to listen and see what’s happening and then implement. It’s time for us agents to really pay attention to what’s going on in the banking world because we too are affected just as they are. [IA] Christopher Paradiso, CPIA, is President of Paradiso Financial & Insurance Service. He has been acknowledged by several insurance publications as a leader in the industry for his use of digital marketing and social media to help brand his agency and promote other small businesses within his community. Chris has also been recognized for his charity work with The Connecticut Children’s Medical Center. In 2011, Chris introduced “Paradiso Presents LLC,” a social media program aimed at teaching small agencies to not only survive, but compete in today’s complex online marketing world. Chris resides in Stafford Springs, CT with his wife and two children, Mia and Gianni.
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[ FROM COUNSEL ]
By Frank Agostino, Esq. & Eugene Kirman, Agostino & Associates, P.C.
Editor’s note: The following in-depth article is of great importance to New Jersey businesses and the agents who work with them. SA
The Consequences of Misclassifying Employees as Independent Contractors in New Jersey I. Overview The U.S. Department of Labor recently awarded a total of $10.2 million to 19 states for the purpose of improving worker classification compliance. New Jersey received the third-largest total award of $838,621. This sum included the second-largest bonus, $496,399, for its performance in identifying instances of worker misclassification.1 In spite of such accolades, New Jersey remains the state with the third-highest rate of improper unemployment insurance payments in the nation.2 If your business uses independent contractors, be prepared for new, heightened scrutiny by the New Jersey Department of Labor (“DOL”). The consequences of misclassifying employees as independent contractors include penalties, interest, and criminal liability—in addition to paying back the required contributions. The New Jersey and federal statutes involved cover unemployment, workers’ compensation insurance, employment taxes, the Affordable Care Act, employment discrimination, Federal antidiscrimination statutes,3 and other issues.4 The purpose of this article is to discuss worker misclassification audits for businesses and unemployment benefit claims processes for workers in the State of New Jersey.
II. Independent Contractor versus Employee A. Responsibility for Unemployment and Disability Benefits For unemployment insurance purposes, an employer is a legal entity that is required by law to furnish unemployment insurance coverage to one or more individuals. An employer can be a sole-proprietor, a partnership, a limited liability company (LLC or LLP), a corporation, or any other entity for which a worker performs services. Every New Jersey employer must file Form NJ927, Employer’s Quarterly Report and Form WR-30, Report of Wages Paid, by the 30th day after the end of each quarter. The employer must also pay amounts due on Form NJ-927, which, among other items, include employment insurance and disability insurance. The employer must also fill out—and provide to the departing employee—Form BC-10, Instructions for Claiming Unemployment Benefits. If the employer rehires any employee, the employer must fill out Form BC-6, Notice of Failure to Apply For, or to Accept, Suitable Work.5 In New Jersey, an employee is defined as someone who performs a “service . . . for remuneration under any contract of hire, written or oral, express or implied.”6 Thus, according to the New Jersey legislature, every service provider is presumed an
1 News Release, U.S. Department of Labor, $10.2M Awarded to Fund Worker Misclassification Detection, Enforcement Activities in 19 State Unemployment Insurance Programs (Sept. 15, 2014), http://www.dol.gov/opa/media/press/eta/ETA20141708.htm. Some states received bonuses for high performance and others for improved performance. 2 U.S. Department of Labor, Unemployment Insurance (UI) Improper Payments by State, http://www.dol.gov/dol/maps/map-ipia.htm (last visited Sept. 17, 2014). 3 Title VII of the Civil Rights Act of 1964, Pub. L. No. 88-352; the Age Discrimination in Employment Act of 1967, Pub. L. No. 90-202; the Americans with Disabilities Act of 1990, Pub. L. No. 101–336; the Equal Pay Act of 1963, Pub. L. No. 88-38. 4 The National Labor Relations Act of 1935, Pub. L. No. 74–198; the Fair Labor Standards Act of 1938, Pub. L. No. 75–718; the Worker Adjustment and Retraining Notification Act, Pub. L. No. 100–379; the Employee Retirement
22 December 22, 2014 / INSURANCE ADVOCATE
employee unless there is a statutory exception or it is proven otherwise.7 The exceptions include church ministers, elected officials, members of the judiciary, and National Guard servicemen.8 Other people not considered employees—provided they are exempt by FUTA—include employees of the state and federal governments and their instrumentalities, certain individuals paid on commission-only basis such as mutual fund brokers, home-to-home salespersons, and individuals performing services for spouses, parents (if the child performing the services is under 18), and children.9 The presumption may be rebutted upon satisfaction of the “ABC test,” which sets forth the following: Services performed by an individual for remuneration shall be deemed to be employment subject to this chapter unless and until it is shown to the satisfaction of the division that: (A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and (B) Such service is either outside the usual course of the business for which such service is per-
Income Security Act of 1974, Pub. L. No. 93–406; the Immigration Reform and Control Act of 1986, Pub. L. No. 99-603. 5 The form must be sent to the address on the Notice BC-3E, Notice to Employer of Monetary Determination and Request for Separation Information. 6 See Carpet Remnant Warehouse, Inc. v. New Jersey Dept. of Labor, 125 N.J. 567, 581 (1991) (quoting N.J.S.A. § 43:21-19(i)(1)(A)). While this section focuses on unemployment benefits, the employee portion of the “covered individual” test for state disability benefits is the same. See N.J.S.A. § 43:2127(b). 7 N.J.S.A. § 43:21-19(i)(6). The employer bears the burden of proving that a worker is not an employee. See Philadelphia Newspapers, Inc. v. Board of Review, 397 N.J. Super. 309, 319 (App. Div. 2007). 8 N.J.S.A. § 43:21-19(i)(1)(D). 9 N.J.S.A. § 43:21-19(i)(7).
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[ FROM COUNSEL ] formed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and (C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.10 The statute is constructed liberally by both the DOL and the Courts, “permitting a statutory employer-employee relationship to be found even though that relationship may not satisfy common-law principles.”11 In contrast to an employee, an independent contractor is one who has control over how the work is performed, who provides services outside the usual course of business, and who operates an independent business. Courts have held that the independent business prong sets a high benchmark. It “calls for an enterprise that exists and can continue to exist independently of and apart from the particular service relationship. The enterprise must be one that is stable and lasting—one that will survive the termination of the relationship.”12 For the independent business prong, the DOL and Courts take into consideration the following additional factors: (1) strength and duration of business; (2) volume of business and number of customers; (3) resources, such as equipment, and compensation, received from the company in question compared to others; (4) corporate or trade name; (5) reporting on Schedule C for federal tax purposes; (6) insurance for the business; (7) business cards and stationery; and (8) payment method.13 Thus, if the employer can show that the independent contractor is a business separate and apart from the employer, with income from other clients, business expenses, and a separate business identity, the individual in question will not be considered an employee. For example, a paper-deliverer was designated as an “independent service contractor” in his contract with a newspaper company and was paid based on the number of
newspapers delivered, rather than a fixed salary.14 He was required to deliver newspapers on time in good condition. He was free to use sub-contractors and had to use his own vehicles.15 The parties agreed that the service was performed outside all the places or usual course of business (prong B was satisfied). The Court determined that the individual was free from control (prong A was satisfied), but did not maintain an independent business (prong C) and therefore was an employee.16 He did not have a history of newspaper delivery prior to that job and became unemployed upon getting fired from that job, so his business was not “established independently of the employer.”17 B. Workers’ Compensation New Jersey’s no-fault workers’ compensation insurance pays for medical bills, replaces wages, and compensates for permanent disability. Employees suffering jobrelated injuries or illnesses are covered under the insurance. New Jersey law requires that all New Jersey employers not covered by federal programs have workers’ compensation coverage or be approved for self-insurance. Out-of-state employers doing work in New Jersey or entering employment contracts in New Jersey may also need workers’ compensation coverage. The insurers and self-insured employers must submit quarterly reports. 18 The Division of Workers’ Compensation administers the New Jersey Workers’ Compensation Act. New Jersey Workers’ Compensation Act, N.J.S.A. § 34:15-36, defines “employees” as: [A]ll natural persons, including officers of corporations, who perform service for an employer for financial consideration, exclusive of . . . casual employments, which shall be defined, if in connection with the employer’s business, as employment the occasion of which arises by chance or is purely accidental; or if not in connection with any business of the
10 N.J.S.A. § 43:21-19(i)(6). 11 Carpet Remnant Warehouse, Inc., 125 N.J. at 581. 12 Id. at 585 (quoting Gilchrist v. Division of Employment Sec., Dept. of Labor and Industry, 48 N.J. Super. 147, 158 (App. Div. 1957)). 13 Anthill Construction, Inc. v. New Jersey Department of Labor, 95 N.J.A.R.2d 36 (1995). 14 Philadelphia Newspapers, 397 N.J. Super. at 312-14. 15 Id. at 313.
employer, as employment not regular, periodic or recurring[.] New Jersey courts have developed two tests to determine if an individual is an “employee” within the meaning of N.J.S.A. 34:15-36 or an independent contractor: the “control test” and the Frank Agostino, Esq. “relative nature of the work test.” Both tests focus on whether the alleged independent contractor is a separate enterprise as opposed to an integral part of the employer’s regular business. Specifically, the “control test” focuses on the control exercised by the employer over the Eugene Kirman means of completing the work. By contrast, the relative nature of the work test focuses on whether the allegedly misclassified worker is economically dependent on the employer (i.e., if there is a functional integration of the parties’ respective businesses). The courts look at the totality of the circumstances.19 In a recent unpublished case, a hairdresser cut hair once a week at Brandywine Senior Care Center, provided similar services once a week at a different nursing home, and also washed hair once a week at another unrelated business.20 The hairdresser used her own scissors, hair dye, permanent waves, and sanitizers, but she used Brandywine’s facilities, hairdryers, chairs, supply cabinet, and chairs.21 Brandywine also set the fees, paid the hairdresser after taking a 15% cut of her earnings, and reserved the right to terminate her. 22 continued on page 24
16 Id. at 323-24. 17 Id. 18 N.J.A.C. § 12:235–12.6. 19 Kertesz v. Korsh 296 N.J. Super. 146 (App. Div. 1996). 20 See Johantgen v. Brandywine Senior Care Center, No. A-4883-09T1, 2011 WL 5119052 (App. Div. 2011). 21 Id at *1. 22 Id. at *2, *5.
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Brandywine scheduled the appointments, and the hairdresser worked from 9:30 until the last scheduled customer.23 The court determined that control factors were present: the hairdresser did not set her own hours or schedule the appointments, was paid by Brandywine and not customers, and Brandywine could terminate her. 2 4 Substantial dependence was also present, as the hairdresser depended on Brandywine for customers and essential hardware, did not set her own hours, and could be terminated at will.25 The hairdresser was deemed Brandywine’s employee.26
III. How Cases Are Selected for Audit Because employers do not remit employment taxes, unemployment insurance, or workers’ compensation for independent contractors, the business will likely be audited when an independent contractor files a claim for unemployment benefits, disability, or workers’ compensation. The DOL also selects businesses for audit at random, by targeting particular industries and by following up on prior violators. New Jersey also encourages individuals and organizations to report: (a) allegations of failure on the part of any employer operating in the State of New Jersey to provide for the protection of its workers by maintaining workers’ compensation insurance or obtaining authorization to self-insure and (b) employers who don’t withhold payroll taxes.27 The DOL may also get a lead from other taxing authorities including the Internal Revenue Service (“IRS”).28 The Statute requires the DOL to cooperate with the U.S. Department of Labor and encourages it to work with other U.S. agencies.29 Furthermore, the DOL and the IRS have a Memorandum of Understanding (“MOU”), where they have agreed to
exchange information and collaborate to reduce incidents of employee misclassification.30 The purpose of the MOU is to facilitate proper employee classification, reduce fraudulent filings, and uncover avoidance schemes.31 However, in our experience, when the New Jersey liability is satisfied, there is no referral to the IRS.
IV. Department of Labor Audits—Unemployment and Disability A. Recordkeeping Requirement At the beginning of the audit, the auditor will request books and records from the employer, including payroll records, cash disbursement records, the petty cash book, the general ledger, NJ Quarterly Contribution Reports, NJ Employer Report of Wages Paid, Federal Income Tax returns, Federal Employment Tax Returns, Federal Forms W-3 Transmittal with Forms W-2, Federal Forms 1096 Transmittal with Forms 1099, and workers’ compensation insurance. Employers must keep the records for the current year and four preceding years.32 In addition, the auditor will request additional information concerning the independent contractor, such as invoices, advertisements, business telephone listings, contracts, business licenses, business cards and stationery, agreements, and business addresses. To prove to the auditor that the independent contractor is an independent business, the business should consider providing the auditor with a declaration by the independent contractor explaining how he established and operates his business, as well as a copy of the independent contractor’s Schedule C or corporate income tax returns. These documents will demonstrate to the auditor that the independent contractor is an established independent business and has income sources for the year other than the audited company. Because the auditor will request the
23 Id. at *1. 24 See id. at *5. 25 See id. at *6. 26 See id. 27 See e.g., State of New Jersey Department of Labor and Workforce Development, Form SCF-528 Report of Non-Compliance, http://lwd.dol.state.nj.us/labor/forms_pdfs/wc/pdf/interactive_pdf/NonCo mpliance_i.pdf; State of New Jersey Department of Treasury Division of Taxation, CATCH Program, https://wwwnet1.state.nj.us/Treasury/Taxation /CATCH_Web/CatchEntry.aspx. 28 New Jersey Association of Public Accountants, New Jersey Department of Labor and Workforce Development Audits and Field Services, available at http://www.nj-
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books and records of a business, it is best to be prepared: collect and organize the books and records for the auditor as soon as possible. If the business does not provide the required documentation, the DOL can subpoena the documents. Moreover, an employer is liable for up to $200 and is subject to an imprisonment of up to sixty days for each day of failing “to attend and testify or to answer any lawful inquiry or to produce books, papers, correspondence, memoranda, and other records, if it is in his power so to do.”33 Claiming protection against self-incrimination is not an excuse from attending or producing records, but evidence so obtained may not be used against the person.34 During the audit, the auditor will also request to see a copy of the workers’ compensation insurance. As explained above, all New Jersey employers are responsible for making sure that they have adequate and lawful workers’ compensation coverage for all employees. If the worker is found to be an employee, the business will be required to pay insurance on behalf of the worker. B. Administrative Appeals At the conclusion of the audit, the auditor will issue a “Summary Audit Schedule Report” (FS-325). If the employer disagrees with the report with respect to the coverage, status, liability for contributions, reporting, refunds, or rates of contribution, the employer should complete and file the “Request for Hearing” within 30 days of the date on the report.35 All completed requests are returned to the Chief Auditor within the required 30 days.36 All “Request for Hearing” forms will be reviewed in the Chief Auditor’s Office to determine if the reason for the dispute could be resolved at a conference with a representative of the Chief Auditor.37 If the review of the form indicates that an informal concontinued on page 26
apa.org/uploads/events/NJDOL%20Audit%20&%20Field%20Service.pdf 29 See N.J.S.A. § 43:21-11(k). 30 See Internal Revenue Service, IRS and States to Share Employment Tax Examination Results (Nov. 6, 2007), http://www.irs.gov/uac/IRS-and-Statesto-Share-Employment-Tax-Examination-Results. 31 See id. 32 N.J.A.C. § 12:16–2.4(a). 33 N.J.S.A. § 43:21-11(i). 34 N.J.S.A. § 43:21-11( j). 35 See N.J.A.C. 12:16-22.2 36 Id. 37 See N.J.A.C. 12:16-22.3
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ference is necessary, then a representative of the Chief Auditor will be assigned to contact the employer to schedule the informal conference.38 If a review of the form indicates that an informal conference will not be productive, then the employer will be notified that the case will be transmitted to the Office of Administrative Law.39 Many practitioners assert that interest and penalties are negotiable at the hearing. Likewise, if the informal conference proves unsuccessful, the case will be forwarded to the Office of Administrative Law.40 Within 45 days (or, when good cause is shown, 90 days) of the administrative judge’s recommended report, the Commissioner “shall adopt, reject or modify” it, and if he does nothing, the report “shall be deemed adopted.”41 C. Appeal to the Courts The employer may appeal the final decision within 45 days to the Appellate Division of the New Jersey Superior Court.42 On appeal, the court looks at the administrative agency’s decision. While the court is not bound by the administrative law judge’s decision, it is free to use it to evaluate the soundness of the DOL’s findings. The Appellate Division will not overturn the DOL’s decision, unless it is “arbitrary, capricious or unreasonable,” “lack[s] fair support in the evidence,” or “violate[s] legislative policies expressed or implicit in the [act governing DOL].”43
V. Audits of Workers’ Compensation A. Responsibility for Workers’ Compensation The New Jersey Division of Workers’ Compensation is responsible for the admin-
istration of the New Jersey Workers’ Compensation Act. The Compensation Rating and Inspection Bureau of the Department of Banking and Insurance establishes regulations and sets rates for insurance policies. Proof of workers’ compensation insurance must be included in the employer company’s annual report44 and must be presented to the Commissioner of Banking and Insurance on demand.45 The employer must also conspicuously post notices of insurance in the place of business.46 To reduce their workers’ compensation compliance costs following an injury, employers are encouraged to establish return-to-work programs with lighter loads, communicate before the injury, and get actively involved after the injury— including communicating, ensuring the employee promptly seeks medical attention, and exercising the right to select the employee’s health provider.47 B. Insurer Audits The insurer may inspect ledgers, registers, journals, vouchers, tax reports, contracts, programs for storing and retrieving data payroll, and disbursement records. An audit normally takes place at the end of a policy term. After the inspection, the insurer may attempt to assess additional premiums—if, for example, the insurer decides that certain employees were improperly classified as independent contractors. The insurer may not, however, assess such additional premiums if the independent contractor classification was proper, even if the workers in question were not qualified to obtain workers’ compensation independently.48 An employer disagreeing with the assessment should first attempt to resolve the dispute with the insurer. If there is still a dispute, to avoid insurance cancellation the employer disagreeing with the assess-
38 See N.J.A.C. 12:16-22.3(b) 39 See N.J.A.C. 12:16-22.3(c) 40 See N.J.A.C. 12:16-22.3(b) 41 N.J.S.A. § 52:14B-10(c). “The agency head may not reject or modify any findings of fact as to issues of credibility of lay witness testimony unless it is first determined from a review of the record that the findings are arbitrary, capricious or unreasonable or are not supported by sufficient, competent, and credible evidence in the record.” Id. “In rejecting or modifying any findings of fact, the agency head shall state with particularity the reasons for rejecting the findings and shall make new or modified findings supported by sufficient, competent, and credible evidence in the record.” Id. 42 See N.J.A.C. 12:16-22.6(b); N.J.R. 2:4-1. 43 See Campbell v. Dep’t of Civil Service, 39 N.J. 556, 562 (1963). 44 N.J.S.A. § 34:15-79.1.
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ment may pay under protest and later seek reimbursement. C. Administrative Appeals If an employer disagrees with the insurer on an issue specifically covered by the New Jersey Workers’ Compensation and Employers’ Liability Insurance Manual, such as the amount of payroll or the classification of the business as a furniture store instead of a restaurant, the employer may appeal to the New Jersey Compensation Rating and Inspection Bureau. According to the Bureau’s representative, such disputes are always resolved within the Bureau and there is never a need to take them further. The insurer may not change a classification without an approval from the Bureau, but may change the total payroll amount on its own. In order to appeal the determination of insurance premiums to the Bureau, the employer must present the appeal prior to the effective cancellation of coverage date or commencement of collection or other legal proceedings by the insurer and must have paid all the undisputed premiums.49 The dispute must be submitted in writing to the Director of the Division that made the original determination, and must identify the employer, producer, insurer, policy term and number. It need also contain “sufficient detail,” including premium calculations.50 After that, an informal conference involving both parties and the Division’s representative may be scheduled, and a written summary of the conclusions and agreements provided to the participants.51 Further appeals may be made first to the Rating Bureau’s Executive Director and then to the Governing Committee.52 D. Appeals to the Courts The New Jersey Compensation Rating continued on page 28
45 N.J.S.A. § 34:15-73. 46 N.J.S.A. § 34:15-80. 47 See State of New Jersey Department of Labor and Workforce Development, Employer’s Guide to Workers’ Compensation in New Jersey (2011), http://lwd.dol.state.nj.us/labor/forms_pdfs/wc/pdf/WC-373.pdf. 48 See Aetna Insurance Co. v. Trans American Trucking Service, Inc., 261 N.J. Super. 316 (App. Div. 1993). The insurance company relied on Workers’ Compensation Manual as support for its position that truck owneroperators, even though independent contractors, had to be insured. 49 New Jersey Compensation Rating and Inspection Bureau, New Jersey Workers’ Compensation and Employers’ Liability Insurance Manual Part 3, Section 1, Page 2 (2014), http://www.njcrib.com/manual/manual.pdf. 50 Id. at 3. 51 Id. 52 Id.
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ADVERTORIAL
Childproofing Tips NOTHING IS MORE PRECIOUS to us than our children and keeping them safe is of primary importance. The home should be a haven . Unfortunately, 2,000 children under the age of 19 die from household accidents each year. 70% of children who die from unintentional household accidents are four years old or less (www.kidshealth.org). Helping clients protect themselves against injuries to their own or another person’s children is another value-added service of the professional insurance agent. Children under one are most likely to die of suffocation, or airway obstruction. Those between one and four are most likely to drown, with home swimming pools being the most common location (www.stanfordchildrens.org). During the summer of 2013, more than 200 children between the ages of 1 and 14 – including 143 under the age of five – drowned in swimming pools and spas in the United States (www.cpsc.org). When family and friends visit, it is especially important to ensure that the house is properly childproofed. Even the most vigilant parent cannot watch their children 100% of the time. If small children will be present in a home, try crawling around to see what might be within arm’s reach. Toddlers love to pull themselves up using anything nearby – be it furniture, curtains, tablecloths or the cord to the iron on the ironing board. Cord keepers on electrical cords, curtains and drapes keep them where tiny hands can’t reach. This will help to prevent hazards of electrical shock, strangulation or having an appliance fall over. Secure furniture, including televisions and stereo equipment, so that they cannot be pulled over on top of a child. Covers or locks on doorknobs prevent a child from going outside or into a room that might pose a danger. Cabinets in every room should be equipped with safety latches, and toilet covers with locks. It goes without saying that smoke and carbon monoxide detectors
During the summer of 2013, more than 200 children between the ages of 1 and 14, including 143 under the age of 5, drowned in swimming pools and spas in the United States.
save lives. Fire espace plans should be practiced. 4,000 children go to the emergency room each year due to falls from windows. Install window guards (www.parents.com). However, it is important to keep one window in each room accessible for use as an emergency exit, with fire ladders available for upper floors. The most common type of burns for children under age four is scalding (www.burnfoundation.org). Scalding is skin contact with wet heat – from faucets, steam from microwaves, or food. More
than 2000 children are treated for scalds each hear (www.plumbingsupply.com). Never leave food unattended while cooking. Install scald protection on faucets, showerheads and tubs. Test the water before exposing a child to it. Children burn more easily than adults because their skin is thinner. Falls are another common cause of household injury, particularly for children. Stairs and lofts are especially hazardous. Install guards if the openings are large enough for a child to get through. Accidents can happen in an instant, even in the most vigilant households. Many of them can be easily prevented. Offering tips to clients to help them prevent injuries to children is another sign of a true insurance professional.
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and Inspection Bureau does not decide issues such as independent contractor versus employee classification. On such claims, the employer may file a claim in the Superior Court, Law Division and later appeal that decision to the Appellate Division, according to the standard procedures. The insurer may also file a claim for issues such as unpaid premiums. E. Cross-Matching by the Office of Special Compensation Funds The Office of Special Compensation Funds regularly compares its data with the Department of Banking and Insurance’s Compensation Rating and Inspection Bureau to identify uninsured employers. A suspect employer is sent a letter and a crossmatch response form. If the employer’s response is unsatisfactory, penalties may be assessed against the employer.
VI. Consequences of a New Jersey Determination of Misclassification A. Employers May Be Liable for Penalties Unemployment and disability insurance rates depend on the employer’s experience. For the first three years, “new employer” rates apply.53 Depending on a number of factors, these premiums then may go up or down. If premiums are paid late, a 1.25% per month interest is added to the total.54 On top of additional principal and interest, penalties may apply. For failing to timely file NJ-927, an employer is liable for the lesser of $10 per day or 25% of contributions due. For a late or incomplete WR-30 the penalties range from $5 to $25 per form. An employer or employer’s officer or agent who knowingly makes a false statement, or fails to disclose a material fact, to reduce the payment of unemployment
benefits or to reduce the contribution amount, “or who willfully fails or refuses to furnish any reports required . . . or to produce or permit the inspection or copying of records” is liable for the greater of a $100 fine or 25% of the amount fraudulently withheld, per day.55 An employer or responsible person filing a fraudulent report is liable for a fine up to $1,000 and may be imprisoned up to ninety days.56 A fine of up to $1,000 per violation may be imposed for a knowinglymade false statement, failure to disclose a material fact, attempt to defraud, or a willful violation of a provision of the act, rule, or regulation promulgated under it.57 The Construction Industry Independent Contractor Act makes it a second degree crime to knowingly fail to properly classify construction workers if the contract amount exceeds $75,000.58 Employers may be additionally penalized for violating the provisions of the Workers’ Compensation Act.59 The insurance premiums, which must be paid to stay current on the insurance, depend on payroll size, type of work, experience of the employer, and other factors. For example, a machine shop may be charged premiums of over 4% of the payroll, while a clerical department may be charged less than 0.3%.60 B. Potential for IRS Audit Under the MOU between the IRS and New Jersey mentioned above, the IRS refers worker misclassification cases to New Jersey. Similarly, New Jersey refers worker misclassifications to the IRS. Note, however, that mere referral to the IRS does not guarantee that the IRS will adopt the DOL’s employee classification. The IRS has a separate test from New Jersey’s ABC test for determining whether a worker is an employee. Common law principles are applied to specific facts and circumstances to determine whether a worker is an employee or independent contractor.61 Relevant factors
53 For 2015, the taxable base is $32,000. New employer rates are: 3.2825% (Unemployment Insurance), 0.5% (Disability Insurance). Employee rates are: 0.3825% (Unemployment Insurance), 0.38% (Disability Insurance), 0.1% (FLI), and 0.0425% (W.F./S.W.F.). State of New Jersey Department of Labor and Workforce Development, Division of Employer Accounts 2015 Rates, http://lwd.dol.state.nj.us/labor/ea/rates/ea2015.html. 54 State of New Jersey Department of Labor and Workforce Development, Employer Handbook, http://lwd.dol.state.nj.us/labor/handbook/chap1/chap1sec4ContributionR eports.html.
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include: (1) the degree of control exercised by the principal; (2) which party invests in the work facilities used by the worker; (3) the opportunity of the individual for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; (7) whether the worker is paid by the job or by time; (8) the relationship the parties believed they were creating, and; (9) the provision of employee benefits.62 An upcoming edition of this newsletter will address worker misclassification issues under Federal law and the private rights of action available to misclassified workers under 26 U.S.C. § 7434.
VII. Strategies for Minimizing Exposure A. Hire Incorporated Independent Contractors or Partnerships Our experience suggests that the single most effective tactic an employer can use to minimize exposure is to only hire independent contractors who have incorporated their own businesses. Stated simply, the employing entity should enter into an independent contractor agreement with C Corporations or partnerships, but not sole proprietors or single-member LLCs. Accordingly, the contracting entity will pay the corporation, which in turn will pay its employees. If possible, the contract should require that the service corporation pay state and federal payroll taxes, provide any employment benefits required by New Jersey law (i.e., paid vacation), and purchase workers’ compensation insurance. Because the IRS audit manual states that an incorporated worker will usually be treated as an employee of the worker’s corporation and not of the hiring firm— unless the corporation is a sham—New continued on page 30
55 N.J.S.A. § 43:21-16(b)(1). 56 N.J.S.A. § 43:21-16(e)(1). 57 N.J.S.A. § 43:21-7f; see also, N.J.S.A. § 43:21-55. 58 See N.J.S.A. § 34:20-5(a)(2). 59 See N.J.S.A. §§ 34:15-79, 34:15-57.4, 34:15-120.1(c). 60 See New Jersey Compensation Rating and Inspection Bureau, Exploring the Cost of a Workers’ Compensation Insurance Policy 10 (2007), available at https://www.njcrib.com/Exploring/expCost2.pdf. 61 Nationwide Mutual Insurance v. Darden, 503 U.S. 318, 323-25 (1992). 62 See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001).
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LIC
[ FROM COUNSEL ] continued from page 28
Jersey auditors respect the separate existence of the corporation. B. Execute an Appropriate Contractor Agreement The agreement with an independent contractor should: 1. Require the contractor to submit invoices. The payment due date must be the same as for your other outside vendors. 2. Require the contractor to pay travel or other business expenses directly. 3. Require the contractor to treat the relationship with the company as an independent contractor relationship for all purposes of the Internal Revenue Code and applicable state tax laws. 4. Require the contractor to report on his federal and state income tax returns all income received by him pursuant to the contract as income received from a trade or business subject to self-employment tax. 5. Require the contractor to pay all federal self-employment taxes shown on his federal income tax return that are attributable to the contract. 6. Require the contractor, upon request of the company, to complete and sign IRS Form 4669, Statement of Payments Received. 7. Require the contactor to indemnify and hold harmless the company for all federal and state withholding and employment taxes that the company pays with respect to the agreement.
VIII. Claiming Benefits A. Qualifying for Benefits in New Jersey 1. Unemployment Benefits For an employee to be eligible for benefits, the employee must have been working for at least 20 weeks or earned 1,000 times
the state minimum wage rounded up (i.e., $8,300 in 2014).63 The employee must file a claim, comply with reporting requirements, be able to work and be available for work, actively search for work, and participate in reemployment services if requested to do so.64 The employee must also wait for a week.65 In addition, the employee must not be subject to any of the disqualification or ineligibility conditions.66 What if someone works just a little to make ends meet? Is this type of worker still “available for work”? The analysis is caseby-case, and the factors include: (1) the income received from the new business measured against both the prior salary received and the salary sought in the search for work; (2) the accoutrements of a permanent business established by the claimant; (3) the hours dedicated to the new business versus the efforts expended to seek outside employment; and (4) the continued amenability of the claimant to a broad spectrum of appropriate employment.67 For example, an attorney who does a few real estate closings, or writes a couple of wills, or represents defendants in the evening but spends the day looking for work, may qualify.68 The details are important. In another example, an attorney who incorporated his own law office around the time he was laid off, leased commercial office space a month later, made regular calls between 8:30 AM and 5 PM, opened 150 cases and grossed $32,855 in about six months, did not qualify for unemployment benefits.69 2. State Disability Benefits Temporary disability benefits are for individuals who suffer non-work-related injuries or whose work-related claim is denied. To qualify for New Jersey disability benefits, the claimant must satisfy work requirements similar to unemployment benefits.70 Likewise, a one-week waiting
63 N.J.S.A. § 43:21-4(e). Note that only weeks where the claimant has earned at least 20 times the minimum wage ($165 in 2014) count. N.J.S.A. § 43:2119(t)(3). The period during which the requirements must be fulfilled is 52 weeks ending on October 1 of the previous year. 64 N.J.S.A. § 43:21-4(a), (b). 65 N.J.S.A. § 43:21-4(d). 66 See N.J.S.A. § 43:21-5(a)-(c). 67 Ford v. Board of Review, 287 N.J. Super. 281, 286 (1996). 68 Id. at 287. 69 Id. at 284, 286. 70 See N.J.S.A. § 43:21-41(a).
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period applies, except for a family leave immediately following a personal leave.71 Personal disability benefits may not extend for more than 26 weeks per disability.72 In addition, the individual must be under care of one of a listed professional,73 the injury may not be self-inflicted, and the individual may not work for compensation or be discharged for gross misconduct in connection with a crime.74 Family disability benefits may not extend for more than six weeks per disability or in any 12-month period.75 There are two qualifying categories of cases: an ill family member and a recently born or adopted child. To qualify under the first category, the family member for whom the covered individual cares must suffer from a serious health condition.76 The following certification must be obtained from a health care provider: (1) The date, if known, on which the serious health condition commenced; (2) The probable duration of the condition; (3) The medical facts within the knowledge of the provider of the certification regarding the condition; (4) A statement that the serious health condition warrants the participation of the covered individual in providing health care, as provided in the “Family Leave Act,” P.L.1989, c. 261 (C.34:11B-1 et seq.) and regulations adopted pursuant to that act; (5) An estimate of the amount of time that the covered individual is needed for participation in the care of the family member; (6) If the leave is intermittent, a statement of the medical necessity for the intermittent leave and the expected duration of the intermittent leave; continued on page 32
71 N.J.S.A. § 43:21-39(a). 72 N.J.S.A. § 43:21-39(b). 73 “[A] legally licensed physician, dentist, optometrist, podiatrist, practicing psychologist, advanced practice nurse, certified nurse midwife, or chiropractor.” N.J.S.A. § 43:21-39(d). 74 N.J.S.A. § 43:21-39(f), (g). 75 N.J.S.A. § 43:21-39(b). 76 “[A]n illness, injury, impairment or physical or mental condition which requires: inpatient care in a hospital, hospice, or residential medical care facility; or continuing medical treatment or continuing supervision by a health care provider.” N.J.S.A. § 43:21-27(s).
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LICONY
ADVERTOR IAL
LICONY
People Are What Matter Most in Life “The nature of the life insurance business is to help families move on financially after the loss of a loved one, or a small business after the loss of a key person.”
F
or many people, this is the time of year that we give the most to our families, friends and particularly those in need. It is a time when we think of others, celebrate the holidays with those we care about, cheer with them and hope for a happy new year. This is also the time of year when we think about the people who have had the greatest impact on our lives, people we have lost and those who have entered our lives. That is what the life insurance industry is really about: people. The nature of the life insurance business is to help families move on financially after the loss of a loved one, or a small business after the loss of a key person. We also help secure income for retirement years. We provide long-term care options to care for an elderly family member. And we lessen the financial stress that comes from disability.
Helping Families and Businesses Move On When life insurance is in place, life insurers provide the funds to cover the mortgages and car loans, continue paying for education, continue making the business payroll, continue to operate the family business, and provide financial assistance for other needs. The life insurance industry pays billions to New Yorkers annually—$27 billion in 20121 ($104 million every business day). Funding Retirement Income for New Yorkers The life insurance industry provides both the financial advice needed to help people create a personal retirement plan as well
as long-term income products – such as lifetime annuities – designed to provide income that retirees never outlive. New Yorkers were paid $7 billion in annuity benefits in 20122. Providing Options for Long-Term Care When long-term care insurance is in place, financial assistance is there to help a person stay at home through home health care, receive adult day care or reside in an assisted living facility. According to the most recent data, 357,000 residents of New York (or approximately two percent of the state’s adult population) owned long-term care insurance as of 20113. Supplementing Income During a Disability There are many suitable disability income insurance options for New Yorkers to supplement their income. Such policies help protect a family’s savings, pay their bills, and possibly live without government assistance. When these critical protections are in place, the life insurance industry can make a significant, positive difference as just described. But still, often it is not. Take life insurance for example: $950 billion is the estimated unmet life insurance need in New York State for 4.4 million households4. It would be a great start to the New Year for those 4 million plus households if they purchased life insurance coverage. Without protection, the unmet need represents a significant void that would unnecessarily burden a family, their friends, their community and even the federal, state, and local governments.
New York’s public policy goals for the insurance sector should be to implement policies that create an environment that encourages households to secure vital life insurance, annuities, long-term care insurance, and disability income insurance – obviating the need for costly government support for families in time of loss, disability, or retirement. The industry continues to have the capacity and the range of products available to meet these insurance needs of New Yorkers.[IA] Thomas E. Workman is the President and Chief Executive Officer of the Life Insurance Council of New York, Inc. LICONY is the principal voice of the life insurance industry in New York. LICONY works to create and maintain a legislative, regulatory, and judicial environment that encourages its members to conduct and grow their life insurance businesses here in New York State. For stories about New Yorkers who have benefitted greatly from purchasing the products of life insurers, go to www.licony.org, click on “Published Articles” in the NEWSROOM box on the homepage.
1 Source: ACLI 2014 New York Facts, www.acli.com. Includes death benefits, matured endowments, dividends, surrender values and other payments. 2 Source: ACLI 2014 New York Facts, www.acli.com 3 Source: LIMRA, Supplements to the Individual and Group Long-Term Care Insurance Sales and In-Force Survey 4 Source: LIMRA estimates for New York based on Closing the Life Insurance Gap: One Household at a Time, 2012
O: (212) 986-6181 F: (212) 986-6549 551 Fifth Ave., 29th Floor, New York, NY 10176 website: www.licony.org INSURANCE INSURANCE ADVOCATE ADVOCATE // December December 22, 22, 2014 2014 31 31
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[ FROM COUNSEL ] continued from page 30
and (7) If the leave is intermittent and for planned medical treatment, the dates of the treatment.77 In addition, the claimant must be ready to submit the affected family member to an examination by a state-designated health care provider.78 To qualify under the second family disability category, the leave must commence within a year after a child’s birth or adoption.79 In addition, the claimant must notify the employer (or the State, in the case of an individual receiving unemployment benefits) of the leave within 30 days of the leave.80 Failing to do so will result in a loss of two weeks’ worth of family disability benefits, unless the leave is unforeseeable.81 3. Workers’ Compensation For an injured employee to qualify for workers’ compensation, the injury must be accidental, occur during the course of employment, and be negligently caused by the employer.82 The employee must not have been willfully negligent. Note that the employee’s willful negligence is a jury question.83 The employee’s assumption of risk and fellow employees’ negligence are irrelevant, and the liability may not be waived by contract.84 B. Appealing Benefit Eligibility 1. Unemployment and Disability Benefits After an individual files a claim for unemployment benefits (which must be submitted within a year), the DOL issues a Notice of Determination to both the individual and the employer which states whether the individual is entitled to receive
benefits.85 If a worker has been classified as an independent contractor as opposed to an employee, his or her claim for unemployment benefits will initially be denied. If the individual is denied unemployment benefits, the individual can appeal the Notice of Determination to the Appeal Tribunal (the “Tribunal”). Both the individual and the employer may file an appeal from the determination of entitlement within ten days of the mailing of the Notice of Determination or seven days from its delivery.86 A worker who is initially improperly denied benefits may have to wait for several months to get them after appeals. The hearing is conducted by an appeals examiner. The Tribunal takes testimony under oath or affirmation. Witnesses may be presented by the employer, the employee, or the government, and subpoenas may be issued. Hearings may be postponed for good and substantial reasons if an appropriate request is received at least three days in advance. The Tribunal, on its own initiative or at the request of one of the parties, may substitute a phone conference for an in-person meeting. If a party is represented by an attorney, the attorney must submit Form BR-20 to the Board of Review for fee approval. The Tribunal’s decision may be appealed to the Board of Review in writing87 or in the local unemployment claims office within twenty days of the mailing or notification date of the decision. Most cases are decided on the record without an additional hearing. Within forty-five days of the mailing of the decision of the Board of Review, a party may further appeal it to the Superior Court,
77 N.J.S.A. § 43:21-39.2(b). 78 N.J.S.A. § 43:21-39.2(c). 79 N.J.S.A. § 43:21-39.3(c). 80 N.J.S.A. § 43:21-39.3(b). 81 Id. 82 N.J.S.A. § 34:15-1. 83 Id. The employer bears the burden of proof with respect to willful negligence. N.J.S.A. § 34:15-5. 84 N.J.S.A. §§ 34:15-2, -3, -39. 85 While this section focuses on unemployment benefits, the process is similar for state disability benefits. Individuals may file appeals of disability cases online at http://lwd.dol.state.nj.us/labor/tdi/worker/state/sp_clt_app_ form.html. 86 New Jersey Department of Labor and Workforce Development, Appeal Tribunal, http://lwd.dol.state.nj.us/labor/at/content/atindex.html. Address: New Jersey Department of Labor and Workforce Development Appeal Tribunal, PO Box 907, Trenton, NJ 08625-0907. Fax: (609) 292-2438. 87 Address: Department of Labor and Workforce Development, Board of
32 December 22, 2014 / INSURANCE ADVOCATE
Appellate Division.88 The Board of Review may remand a case back to the Tribunal for additional fact-finding. The Appellate Division may, likewise, remand a case back to the Board of Review. Individuals falsely claiming benefits may be assessed a fine equal to 25% of the amount fraudulently obtained with respect to both state and federal unemployment programs.89 2. Workers’ Compensation If the employer (or carrier) and the employee fail to reach an agreement regarding the employee’s entitlement to workers’ compensation within 21 days of the injury taking place, the Division of Workers’ Compensation (the “Division”) will attempt to facilitate a settlement.90 When an injured employee fails to file a claim, the Division may open an inquiry on its own motion and, with the employee’s consent, file a claim on the employee’s behalf.91 There are two types of proceedings: formal claims92 and informal hearings.93 An informal hearing gives the parties an opportunity to settle. It is speedier than a formal hearing.94 The deadline to file is the same as for the formal claim.95 The informal hearing does not stop the running of the statute of limitations to file a formal claim,96 and the resolution is non-binding. Any party of interest, such as the employer, employee, or insurance carrier, may file the claim.97 Form WC-66 is available for informal filings, but a different form may be used.98 WC-66 does not ask for any substantive information, except for injury type and date. The formal claim, in contrast, must be filed on Form WC-365 and signed under continued on page 34
Review, P.O. Box 937, Trenton, New Jersey 08625-0937. 88 Address: Clerk of the Appellate Division, Superior Court of New Jersey, Hughes Justice Complex, P.O. Box 006, Trenton, New Jersey 08625-006. 89 See N.J.S.A. § 43:21-16(a). 90 N.J.S.A. § 34:15-50. Note that an employee may not directly go to court and bring a civil action against an insured employer for damages, such as pain and suffering, except in case of intentional acts. 91 Id. 92 For details, see N.J.A.C. § 12:235–3.1 et seq. 93 For details, see N.J.A.C. § 12:235–4.1 et seq. 94 See New Jersey Department of Labor and Workforce Development, Filing a Claim, http://lwd.dol.state.nj.us/labor/wc/workers/claim/filing_index.html (last accessed Nov. 4, 2014). 95 N.J.A.C. § 12:235–4.2(c). 96 N.J.A.C. § 12:235–4.1(c). 97 N.J.A.C. § 12:235–4.2(b). 98 See N.J.A.C. §§ 12:235–4.2(a), -4.3.
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As we enter 2015 and look back at 2014, the N New ew Y York or o k IInsurance nsurance Association Association (NYIA) would like to thank all of our memb members ers for o supporting the association. Member companies partnering to improve the business climate in New Yo ork has made de a diff ffe erence. Whether it was holding the line on insurance taxes, assessments and fees e , providing companies with greater financial latitude when undergoing technological upgrades, or diversifying and simplifying board of director req quirements, NYIA N YIA members members came came together together to to create cr eate change change..
thank you Allegany Insurance Group Allstate Insurance Company American European Insurance Group American International Groupp, 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, a Union Mutual Affiliate Country-Wide Insurance Company Countryway Insurance Company Dryden Mutual Insurance Company Erie and Niagara Insurance Association Erie Insurance Group Eveready Insurance Company Farmers Group, Inc. Farmers Mutual Insurance Company Finger Lakes Fire and Casualty Company Fire Districts of NY Mutual Insurance Compan p y, Inc.
Franklin Fire Insurance Company Fulmont Mutual Insurance Company Genesee Patrons Cooperative Insurance Company Greater New York Mutual Insurance Company GUARD Insurance Group Hartffor o d Steam Boiler Inspection & Insurance Co. Hereffor o d 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 Yoork Maya Assurance Company Medical Liability Mutual Insurance Company Merchants Insurance Group Mercury Insurance Company Meredith Insurance Company Michigan Millers Mutual Insurance Company Mid-Hudson Co-Operative Insurance Company Midrox Insurance Company Midstate Mutual Insurance Compan p y
KNOW KNO W BE BETTER T TER NEW NE W YORK YORK CONNECTIONS CONNEC TIONS www.nyia.org w w w.nyia.org
Our members share a culture of hard work and they epitomize the meaning of integrity—fundamentals that have served NYIA well for o more than 130 years. The association is fo ortunate to have such dedicated members who represent the best aspects of the property and casualty insurance industry. N NYIA YIA is proud proud to to rrepresent epresent each of y you. ou.
Millville Insurance Company of New Yoork Nationwide Insurance Norfoolk & 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 Prefferr e ed Mutual Insurance Company Progressive Northern Insurance Company Sauquoit Valley Insurance Company Security Mutual Insurance Company State Farm Mutual Automobile Insurance Company 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
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[ FROM COUNSEL ] continued from page 32
oath.99 Form WC-365 requires more information than WC-66, including a more detailed description of the injury, the amount of wages, date reported, and dates when work stopped and resumed. The deadline to file a formal claim petition is two years after the injury.100 Within five days of the petition being filed, a copy is forwarded to the employer. The employer must answer within 30 days.101 Within 20 days of the answer being filed, or at the expiration of time for filing an answer, the Division will select a time and location102 for hearing the petition.103 In most cases, the selection will take four to six weeks from the filing of the petition.104 The parties must be given ten days’ or more notice of the hearing.105 The hearing “shall not be bound by the rules of evidence.”106 There are no filing fees.107 A winning party may be awarded attorneys’ and witness costs up to 20% of the judgment.108 The Division’s decision in a formal hearing may be appealed to the Appellate Division of the Superior Court.109 When an employer fails to comply with the decision of the Appellate Division, the employee may seek remedy in the Law Division of the Superior Court. 110 When the Supreme Court reverses the Appellate Division’s denial of compensation in a proceeding involving worker’s compensation, the fees for services in both the Supreme Court and the Appellate Division are determined by the Supreme Court.111 The Uninsured Employer’s Fund handles cases involving uninsured employers. The Fund may pay reasonable medical
Whether or not they have been classified as independent contractors, unemployed and injured workers are aggressively pursuing the wages, benefits, and legal rights available to “employees” working in New Jersey. expenses and temporary disability compensation, but not death benefits, or any benefits not in the order of the Compensation Judge. 1 1 2 The Compensation Judge’s judgment or the Director’s order is filed with the Clerk of the Superior Court and may later be modified.113 The employee may sue the employer for the shortfall after deducting any payments received from the Uninsured Employer’s Fund.114
Whether or not they have been classified as independent contractors, unemployed and injured workers are aggressively pursuing the wages, benefits, and legal rights available to “employees” working in New Jersey. As a result, New Jersey employers should expect increased scrutiny of worker classification decisions. Readers with questions about the prosecution or defense of misclassificationbased claims should feel free to contact the attorneys at Agostino & Associates.[IA] Frank Agostino, Esq. is a graduate of New York Law School, has a Masters of Law from New York University School of Law, and is the founder of Agostino & Associates, a tax controversy law firm. Eugene Kirman is a tax controversy associate at Agostino & Associates, P.C. He holds a J.D. from Rutgers University School of LawNewark and a B.A. in Economics from Columbia University.
IX. New Jersey Worker Misclassification Cases in the News Recent cases demonstrate that no violator is safe. A mother and daughter involved in a Newark-based $2 million fraud scheme were recently each sentenced to 15 years in prison.115 A Livingston-based accountant pleaded guilty to falsely claiming $700,000 in unemployment benefits, in the names of his clients and others.116 Even DOL employees are not immune, as one of them was recently charged with redirecting unemployment benefits into her own account.117
99 Available at http://lwd.dol.state.nj.us/labor/forms_pdfs/wc/pdf/wc365%28r-7-05%29.pdf. See N.J.A.C. § 12:235-3.1. The claim may be filed on paper or electronically. 100 N.J.S.A. § 34:15-41. Both employers and employees may access litigation forms and relevant publications at http://lwd.dol.state.nj.us/labor/wc/forms/forms_index.html. 101 N.J.S.A. § 34:15-52. 102 The location is “the county in which the injury occurred or in which the petitioner or respondent resides, or in which the respondent’s place of business is located, or in which the respondent may be served with process.” N.J.S.A. § 34:15-53. 103 N.J.S.A. § 34:15-53. The selection may be made by the director, a deputy director or a referee. 104 Id. 105 Id. 106 N.J.S.A. § 34:15-56. 107 N.J.S.A. § 34:15-63. 108 N.J.S.A. § 34:15-64. Additional fees of several hundred to several thousand
34 December 22, 2014 / INSURANCE ADVOCATE
X. Conclusion
Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889.
dollars per witness may be awarded to physicians who testify. 109 N.J.S.A. § 34:15-66. 110 N.J.S.A. § 34:15-66.1. 111 N.J.R. 2:11-4(b). 112 See N.J.S.A. 34:15-120.1. 113 N.J.S.A. § 34:15-120.3. 114 N.J.S.A. § 34:15-120.9. 115 New Jersey Department of Labor and Workforce Development, Targeting Unemployment Insurance Fraud; The Check May Not Be In The Mail ( Jun. 23, 2014), http://lwd.dol.state.nj.us/labor/lwdhome/press/2014/20140623_uifraud.h tml. 116 Id. 117 Jessica Beym, N.J. Labor Department Employee Indicted for Allegedly Stealing Unemployment Funds, NJ.com (Apr. 15, 2014), http://www.nj.com/south/index.ssf/2014/04/nj_labor_dept_employee_ind icted_for_allegedly_stealing_unemployment_funds.html.
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[ ON TH E LEVEL ]
By Jamie Deapo
Meeting the New Challenges
M
arketing insurance protection has changed considerably since I started my independent agent career many years ago. As I sat behind my desk on that first day with my telephone, criss+cross directory and my x-date cards there was no internet. Prior to coming
we would advise them we didn’t do immediate quotes over the phone as it was our agency’s procedure to review their existing policy making sure there were no obvious coverage gaps or concerns. We would ask them to drop off or fax a copy of their policy so we could do a quick review and then give
It’s unlikely many of your prospects are developed by x-date cold calling. It’s more likely your prospect calls in and starts their conversation with wanting to know whether you can save them money on their insurance.
onboard as an agent I had spent many nights on the phone gathering 500 x-dates which was required in order to start as an Aetna Prime agent. Another advantage I had as an independent agent was my background as an underwriter and marketing rep for several companies along with a one-year career as a Prudential debit agent. Direct response companies like Geico and Progressive were no real threat and our primary competition came from captive agents and large brokerage houses. We operated a sales center which was an automated depository for prospects’ x-dates to be retained and used in marketing campaigns focused 90-120 days prior to their expiration. Most prospects switched their coverage on renewal and my job was to get an appointment with them to review their existing coverage, gather some additional pertinent information and provide them with my proposal. Most prospects were not so time sensitive that they needed a quote immediately and the time between gathering the information and presenting the proposal allowed me to develop coverage areas of concern to discuss with the prospect. Calls from prospects looking for a price quote were treated with suspicion and many times depending on the information we would decline to quote. If the caller appeared to be a potentially good prospect
Jamie Deapo
36 December 22, 2014 / INSURANCE ADVOCATE
them a proposal. Not everyone agreed, however we felt that those who didn’t were most likely price shoppers and our experience was that retention was poor and they took up an inordinate amount of the service staff ’s time. I believe this way of doing business is how many of the principals and owners now in their late fifties and early sixties operated. Producers back then were encouraged to gather as many x-dates as possible by cold calling and then it was just a numbers game. Out of 100 suspects you developed a certain percentage of prospects with x-dates that turned into a smaller percentage of opportunities to review their coverage and offer a proposal that ultimately became a smaller percentage of sales. It involved a significant amount of one-on-one phone calls and a tenacious attitude. Not every suspect/prospect appreciated the phone calls. Let’s fast forward to the insurance prospect of today. It’s unlikely many of your prospects are developed by x-date cold calling. It’s more likely your prospect calls in and starts their conversation with wanting to know whether you can save them money on their insurance. That’s the result of an enormous amount of heavily funded advertising that convinced them that the only differential in insurance is the premium. If you step back and analyze who is calling in many instances they are the same price shoppers I dealt with many years ago. There
are more because it is so easy to get price quotes on the internet and because they have been ingrained with the idea that they should shop their insurance and they should focus primarily on cost. Rather than spending significant amounts of time on prospects that call in and are only interested in a price quote, I believe today’s agency needs to go after those prospects that appreciate the value of having professional guidance on their coverage and an agency that advocates for them on a claim. Is price an issue for them? Certainly, however they are looking for a competitive premium and not a rock bottom, lowest price at all cost. I can only think of two ways that can happen in today’s world. One is to systematically and regularly develop referrals from existing clients and centers of influence. The other is to effectively use social media. In today’s world outbound marketing for business is very hard and isn’t very cost effective. It tends to attract prospects looking for “cheap” insurance who don’t appreciate the risk management service an agency provides. It’s more effective to do inbound marketing using social media to create prospects that value your agency’s knowledge and expertise and are encouraged by the positive feedback of your existing clients. This requires regular social media marketing either through a designated staff person or by outsourcing the process. It also requires agency procedures that mandate, support and monitor referrals. Developing clients through social media takes time. You need to get a prospect’s attention, have them recognize you for your expertise and knowledge and then create a relationship that encourages them to call and seek out your services. Remember you are looking to find and work with prospects that appreciate having an agency that offers the coverage necessary to properly protect them combined with hassle-free service. They also don’t want to be ignored or forgotten once they become a client. Many times these prospects are not actively looking to move their coverage. continued on page 38
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[ ON THE LEVEL ]
[ FORE WORD ]
continued from page 36
continued from page 4
They are moved by all that they see about you and your agency or something happens in their existing situation that causes them to look for someone new to protect them. That’s when you want them thinking of you and all you offer. It may be a chance encounter with one of your staff that leads to a conversation about your agency based on what they have seen in social media and heard about you. If an agency is going to go through the time and hard work to bring on new engaged clients you also want your existing clients getting enough of the right touches over time to show them they made the right choice. Your clients want to be reminded and assured that you are constantly concerned with them being properly informed and adequately protected. Your day-to-day customer service must operate with the utmost effectiveness. You need to gather as much pertinent information about your client as possible and use it effectively. You also need to be constantly checking your clientele’s satisfaction with your agency and the service you provide. This internal customer service commitment and management develops the foundation for new clients created through referrals and inbound marketing. Marketing through social media takes time but has many rewards. Prospects that come to you usually have a good idea of who you are and what you offer and that is what drew them to you. They are protection conscious and usually looking for a competitive premium, not the lowest price. They want to receive regular, pertinent information that is informative and helps them to make informed decisions. They also expect agency services that eliminate the day-today hassles of doing business. If your staff is frustrated and your hit ratio is low it’s probably because you’re not marketing effectively in today’s world. Quoting to be the lowest and taking orders is ineffective in today’s marketplace. The customers you do write will leave as quickly as they came. They also will blame you if they aren’t properly protected for a loss even though they didn’t want to discuss coverage. It’s a no-win situation. Why not spend the additional time and effort to locate and write a customer that appreciates what you do and will remain a client for a long time. [IA]
Institute (I.I.I.), died in Garrison, New York. Gordon, who joined the Institute in 1989 as Executive Vice President and in 1991 became its president until his retirement in 2006, was credited with turning the Institute from a small public relations organization into an important insurance reference point for journalists, academics and policymakers. “Much of what the I.I.I. is today is based upon the foundation Gordon built during his time here,” said Dr. Robert Hartwig, president of the I.I.I. Hartwig, who succeeded Stewart as president of the I.I.I. added “Gordon’s accomplishments throughout the course of his life were truly extraordinary. He was not only successful in the business world and at the highest levels of government, but also in the field of performing arts.” Gordon Stewart was born on July 22, 1939, on the south side of Chicago. He received his Bachelor of Arts degree from the Oberlin College of Arts and Sciences (as a full four-year George F. Baker Scholar, having been accepted at the age of 16), where he focused on history and music. He returned to the University of Chicago to work on a Ph.D. in European history. He studied music and drama at the University of Vienna in Austria, and then received an MFA in directing from Yale School of Drama before becoming a doctoral candidate in comparative literature at Yale Graduate School, which led to his first position as an instructor of English and theatre at Amherst College. He left teaching at Amherst to begin a career in drama and politics in New York. While directing plays, he also worked as Director of Communications for Business Communications for the Arts (BCA). There he wrote his first article for a noted public figure, former U.S. Treasury Secretary C. Douglas Dillon, followed by speeches for Katharine Graham of The Washington Post, William S. Paley of CBS and Arnold Gingrich, the founder of Esquire magazine. Gingrich introduced Stewart to New York Mayor John Lindsay, which led to a position as Chief Speechwriter and Executive Assistant to the Mayor from 1971-1973. Following his time in City Hall, Stewart was Director of Policy for Howard J. Samuels’s run for the Governorship of New York in 1974, and also wrote speeches for other Democratic Party campaigns, including
38 December 22, 2014 / INSURANCE ADVOCATE
Jimmy Carter’s successful run for the Presidency in 1976 — he was then appointed President Carter’s Deputy Chief Speechwriter. From 1982 to 1989, Stewart was Vice President of the American Stock Exchange. In addition, he helped to manage the taskforce created by New York Governor Mario Cuomo and New York Mayor David Dinkins that resolved the multi-year impasse over what to do with the $7 billion of federal highway money left over when the Westway Project was halted. After retiring from the Insurance Information Institute in 2006, Stewart continued his involvement in insurance industry affairs, serving as Vice Chairman and Chairman of the Nominating Committee of the International Insurance Society, the world’s largest insurance industry organization, with almost 900 members representing global insurance leaders, international regulatory authorities and worldwide insurance scholars from over 90 countries. In 1995, Stewart was invited by the industry-CEO membership of the Switzerland-based think tank The Geneva Association for the Study of Insurance Economics to chair the Geneva Association’s first Communications Council, and to later become the North American Liaison in charge of managing the Association’s presence in the U.S. Stewart also served as Chairman of the Named Fiduciaries of the Pension Plan for Insurance Organizations, one of the largest multiple employer pension plans in the country. In 2006, Stewart started his own company, Mind Inc., which focused on creating connections between broader insights into society, politics and the arts. In 2010, Stewart created an online newspaper, Philipstown.info, a working model for community supported journalism similar to listener supported radio that can be replicated in municipalities all across the country. In 2013, Stewart was named one of the “Century’s Game Changers” by the Council of Insurance Agents and Brokers, an association for commercial insurance intermediaries, for his work with the Institute. Stewart leaves behind his wife, Zanne, and his daughter, Katy. His family asks that in lieu of flowers, donations in Gordon’s name be made to the nonprofit community newspaper he founded, Philipstown.info. Donations can be made online at philipstown.info/support or by check to: Philipstown.info, Inc., 69 Main St., Cold Spring, NY 10516. [IA]
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[ ON M Y RADAR ]
By Barry Zalma
Polluter Must Pay Pollution Exclusion Applies
I
t is axiomatic that insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy. People who are sued have a problem with the concept when
the operation of these facilities, including the spillage and/or disposal of toxic oil field wastes, caused pollution damages on or adjacent to their property. In particular, plaintiffs allege that from 1978 to 1990, Oracle’s facilities were sources
People who are sued have a problem with the concept when the policy wording does not apply to the allegations of the suit.
the policy wording does not apply to the allegations of the suit. In Lodwick, L.L.C. v. Chevron U.S.A., Inc., 48, 312-CA (La.App. Cir.2 10/02/2013) four different defendants, Admiral Insurance Company (hereinafter referred to as “Admiral”), Steadfast Insurance Company (hereinafter referred to as “Steadfast”), ACE American Insurance (hereinafter referred to as “ACE”), and Oracle Oil, L.L.C. (hereinafter referred to as “Oracle”), appeal a single judgment granting Oracle’s motion for partial summary judgment against Admiral and ACE, denying Oracle’s motion for partial summary judgment against Steadfast, and granting Steadfast’s motion for summary judgment against Oracle. All of the motions addressed the same issue–the duty to defend.
Barry Zalma
of pollution which have migrated and caused damage to the soils and groundwaters underlying plaintiffs’ property. Four different insurers provided insurance to Oracle between 2000 and 2011. Upon receiving notice of the lawsuit, Oracle wrote its insurers seeking defense and indemnification. In time, Admiral, Steadfast, and ACE each responded, denying coverage based on certain exclusions, conditions, or endorsements in their policies. The trial court eventually granted Oracle’s motion as to Admiral and ACE, finding a duty to defend existed. However, the trial court denied Oracle’s motion for partial summary judgment as to Steadfast and granted Steadfast’s cross-motion for summary judgment based solely on the “Other Insurance” provision in the Steadfast policy.
Facts
Interpretation of Insurance Contracts
This case involves a “legacy lawsuit” by a group of land owners against a group of oil and gas operators who have worked in and around the Bellevue Field in Bossier Parish since the 1930s. The plaintiffs filed suit against various defendants, including Oracle, seeking damages related to defendants’ oil and gas production and exploration activities. These activities include the construction and operation of pits, wells, sumps, pipelines, flow lines, tank batteries, well heads, measuring facilities, separators, and injection facilities. Plaintiffs allege that
An insurance policy is a contract between the parties, and should be construed using the general rules of interpretation of contracts. The parties’ intent, as reflected by the words of the policy, determines the extent of the coverage. If the policy wording at issue is clear and expresses the intent of the parties, the agreement must be enforced as written. The purpose of liability insurance is to afford the insured protection from damage claims. Policies therefore should be construed to effect, and not to deny, coverage. Thus, if a provision which seeks to nar-
40 December 22, 2014 / INSURANCE ADVOCATE
row the language of the exclusion is subject to two or more reasonable interpretations, that which favors coverage must be applied. Of course, it is equally well settled that insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy.
Discussion Here, there is one issue on appeal– whether Admiral, Steadfast, and ACE owe Oracle a duty to defend. In Louisiana, the duty to defend is determined by the allegations of the injured plaintiff ’s petition, with the insurer being obligated to furnish a defense unless the petition unambiguously excludes coverage. This is known as the “eight corners rule,” whereby an insurer must look to the “four corners” of the plaintiff ’s petition and the “four corners” of its policy to determine whether it has a duty to defend. In this analysis, the allegations of the petition are liberally interpreted in determining an insurer’s duty to defend arises whenever the pleadings against the insured disclose even a possibility of liability under the policy. If, assuming all the allegations of the petition to be true, there would be both coverage under the policy and liability of the insured to the plaintiff, the insurer must defend the insured regardless of the outcome of the suit.
Plaintiffs’ Petition Similar to most legacy lawsuits, plaintiffs raise a plethora of allegations and theories of recovery against numerous oil and gas operators for pollution damage to their property. The crux of Oracle’s argument is that plaintiffs’ petition raises separate causes of action that may be totally unrelated to pollution, such as breach of contract and trespass. It is Oracle’s position that if plaintiffs’ allegations go beyond pollution damages, then the possibility of coverage and thus the duty to defend remains. Plaintiffs make no demands for damages concerning defendants’ operations other than those related to the seepage or migration of pollutants. In fact, plaintiffs
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[ ON M Y RADAR ] specifically describe the alleged trespass at issue as the “continued presence of oilfield wastes on plaintiffs’ lands,” and the civil fruits that are alleged to be due are described as the unauthorized “storage of toxic pollution and wastes in the groundwaters and soils.” Therefore, the appellate court concluded that all of the different theories of recovery and allegations are a direct result of defendants’ alleged contamination and pollution damages. Admiral, Steadfast, and ACE all argue that each of their respective policies issued to Oracle contain applicable provisions which in some way exclude coverage for long-term, environmental pollution damages. The court of appeal agreed and specifically found that all of the allegations set forth above fit squarely within the clear language of each insurer’s pollution exclusion contained within each policy issued to Oracle. If the policy wording at issue is clear and expresses the intent of the parties, the agreement must be enforced as written. When compared against plaintiffs’ petition for damages, the court of appeal found that coverage is unambiguously excluded under the clear terms of the policies. There is no question that this legacy lawsuit would not have arisen but for the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” The materials alleged in the lawsuit are, at the very least, contaminants, chemicals, or wastes. Therefore, coverage is unambiguously excluded based on the clear terms of the pollution exclusion, and accordingly the insurers owe no duty to defend Oracle in the instant matter. As a final matter, we reject Oracle’s contention that according to Doerr v. Mobil Oil Corp., 2000-0947 (La. 12/19/00), 774 So.2d 119, the pollution exclusions found within the policies are inapplicable to the facts of this case. In Doerr, the seminal case addressing pollution exclusions, the Louisiana Supreme Court detoured from its previous stance that total pollution exclusions were intended to be read strictly to exclude coverage for all interactions with irritants or contaminants. Rather, the Supreme Court narrowed its application of the exclusions and clarified that the purpose of the pollution exclusion was to exclude coverage for environmental pollution. It was also meant to strengthen
Insurers in the 1970s were inundated with hundreds of pollution lawsuits on policies the insurers thought had excluded such risks of loss.
environmental protection standards by imposing the full risk of loss due to personal injury or property damage from pollution upon the polluter by eliminating the option of spreading that risk through insurance coverage. In its reasoning, the court explained that pollution exclusions were born out of the environmental movement of the 1970s and were shaped in response to legislation designed to prompt the cleanup of hazardous waste sites and impose cleanup costs on responsible parties. Notably, Doerr did not involve the type of claims for which the exclusion was designed; it was a personal injury case, not an environmental pollution case as alleged here. Thus, guided by the principles set forth in Doerr, the court of appeal found that when long term pollution damages are alleged, such as the case with legacy lawsuits, pollution exclusions are applicable to exclude coverage.
Conclusion For the foregoing reasons, the court concluded that the pollution exclusions within the Admiral, Steadfast, and ACE policies unambiguously exclude coverage, and thus the trial court erred in granting Oracle’s motions for summary judgment on the issue of the insurers’ duty to defend. Accordingly, the judgment of the trial court granting Oracle’s motions for summary judgment is reversed, and summary judgment is hereby granted in favor of Admiral, Steadfast and ACE. All costs of this appeal are assessed to Oracle.
Zalma Opinion Insurers in the 1970s were inundated with hundreds of pollution lawsuits on policies the insurers thought had excluded such risks of loss. When the courts forced the insurers to pay they rewrote their policies with exclusions like those involved in
this case, including exclusions called the “total pollution exclusion.” With wording that is so clear and in an eight corners rule state like Louisiana, if the original suit only claims pollution damages the exclusions will apply and the polluters will be required to pay for the damage caused rather than pass it on to an insurer. [IA] Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter. com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide. The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http:// shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available. Mr. Zalma’s e-book, “Zalma on California Claims Regulations – 2013 explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,” “Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Mr. Zalma reports on World Risk and Insurance News’ web based television programing, http://wrin.tv or at the bottom of the home page of his website at http://www.zalma.com. INSURANCE ADVOCATE / December 22, 2014 41
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[ COURTSI DE ]
By Lawrence Rogak
Noncumulation Clause Means One Policy Limit Applies To All Lead Paint Claims From All Plaintiffs Even After Policy Renewal Nesmith v Allstate Ins. Co. SMITH, J.: In Hiraldo v Allstate Ins. Co (5 NY3d 508 [2005]), we interpreted a so-called "noncumulation clause" contained in a series of successivelyissued liability insurance policies. We held that a person suing for exposure to lead paint during the terms of all the policies could recover no more than one policy limit. Here we interpret a nearly identical clause in a case where members of different families were successively exposed to lead paint in the same apartment. We hold that, here as in Hiraldo, the insurer's maximum total
44 December 22, 2014 / INSURANCE ADVOCATE
‌the injury to Young's children and Nesmith's grandchildren resulted "from continuous or repeated exposure to the same general conditions‌
liability is only one policy limit. I In September 1991, Allstate Insurance Company issued a policy of liability insurance to the landlord of a two-family house in Rochester. The policy was renewed annually for the years beginning September 1992 and September 1993. It stated on the declarations page a $500,000 limit for "each occurrence," and contained the following noncumulation clause: "Regardless of the number of insured persons, injured persons, claims, claimants or poli-
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[ COURTS I D E ] cies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss." Felicia Young and her children lived in one of the two apartments in the house from November 1992 until September 1993. In July 1993, the Department of Health notified the landlord that one of the children had been found to have an elevated blood lead level and that several areas in the apartment were in violation of State regulations governing lead paint. The Department listed the violations and directed the landlord to correct them. The landlord made some repairs, and the Department advised him in August 1993 that the violations "have been corrected." After the Young family moved out of the apartment in September 1993, Lorenzo Patterson, Sr. and Qyashitee Davis moved in with their two children. Again a child was found to have an elevated blood lead level, and the Department of Health sent another letter saying that violations had been found and instructing the landlord to correct them. (This letter was sent in December 1994, but the parties seem to assume that the elevated readings resulted at least in part from events on or before September 29, 1994, the last day of Allstate's coverage.) In 2004, Young, on behalf of her children, and Jannie Nesmith, on behalf of the Patterson children (her grandchildren), brought two separate actions against the landlord for personal injuries allegedly caused by lead paint exposure. Young's action was settled in 2006 for $350,000, which Allstate paid. In 2008, Nesmith settled her claim pursuant to a stipulation that reserved the issue of the applicable policy limit for future litigation. Allstate paid the $150,000 that it claimed was the remaining coverage. Nesmith then brought the present action against Allstate for a declaratory judgment, asserting that a separate $500,000 limit applied to each family's claim, and that her grandchildren could
therefore recover an additional $350,000. Supreme Court granted Nesmith the declaration she sought, saying it could not conclude that the children in the two cases were injured by exposure "to the same conditions." The Appellate Division reversed (Nesmith v Allstate Ins. Co., 103 AD3d 190 [2013]). The Appellate Division held that, under Hiraldo, the renewal of the policy could not make an additional limit available; that, under the plain terms of the noncumulation clause, the number of claims and claimants could not do so either; and that the injury to Young's children and Nesmith's grandchildren resulted "from continuous or repeated exposure to the same general conditions," so that the injuries were only one "accidental loss" within the meaning of the policy (id. at 193-194). We granted leave to appeal (21 NY3d 866 [2013]) and now affirm. II Hiraldo involved a single child, who had lived in the building in question for three years while three successive Allstate policies, each with a limit of $300,000, were in force. The plaintiffs claimed that the child had been exposed to lead paint continuously during the terms of all three policies, and that therefore $900,000 in coverage was available to him. We rejected the argument, relying on a noncumulation clause not significantly different from the one involved in this case (see 5 NY3d at 512). (The policy in Hiraldo referred simply to "loss" rather than "accidental loss," but no one suggests that that difference is relevant here.) We found the argument of the Hiraldo plaintiffs to be inconsistent with the policy's plain statement that Allstate's liability was limited to the amount shown on the declaration page, $500,000, "[r]egardless of the number of . . . policies involved." Here, Nesmith does not, and could not under Hiraldo, argue that the annual renewals of the landlord's policy increased the limits of the available coverage. And the noncumulation clause is equally clear in saying that the number of "injured persons", "claims" and "claimants" makes no difference. Nesmith's only argument is that the alleged injuries to Young's children and Nesmith's grandchildren were separate continued on page 46
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[ COURTSIDE ] continued from page 45
losses because they did not result "from continuous or repeated exposure to the same general conditions." We reject this argument. Young's children and Nesmith's grandchildren were exposed to the same hazard, lead paint, in the same apartment. Perhaps they were not exposed to exactly the same conditions; but to say that the "general conditions" were not the same would deprive the word "general" of all meaning. Nesmith argues that, because the landlord made an effort to correct the problem after Young's children were exposed and before Nesmith's grandchildren moved in, the "conditions" that injured her grandchildren must have been new ones. But she makes no claim, and the record provides no basis for inferring, that a new lead paint hazard had been introduced into the apartment. The only possible conclusion from this record is that the landlord's remedial efforts were not wholly successful, and that the same general conditions — the presence of lead paint that endangered children's health — continued to exist. Because Young's children and Nesmith's grandchildren were injured by exposure to the same general conditions their injuries were part of a single "accidental loss," and only one policy limit is available to the two families. Accordingly, the order of the Appellate Division should be affirmed with costs PIGOTT , J.(dissenting): The majority recognizes that this appeal presents a different set of circumstances than those in Hiraldo v Allstate Ins. Co (5 NY3d 508 [2005]), yet it reaches the same conclusion. Because I cannot agree with the majority's theory that the "noncumulation clause" limits the insurer's maximum total liability to only one policy limit under the circumstances presented here, I dissent. The "noncumulation clause" at issue in this case provides: 4. Our Limits of Liability Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability 46 December 22, 2014 / INSURANCE ADVOCATE
To accept that position would mean that, for purposes of insurance coverage, the insured's alleged failure to remove lead paint in the building before the Nesmiths moved in was equivalent to the landlord having done nothing at all.
Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss." Fairly read, this provision provides that the policy limit - $500,000 limit for "each occurrence" - applies to limit the liability for lead exposure of children in one family during the course of that family's tenancy. Indeed, this is what we held in Hiraldo. However, the insurer seeks to expand that reasoning to a situation that was clearly unknown to the insured at the time he procured the additional insurance: that coverage for liability of any kind had diminished considerably. For purposes of this litigation, it is undisputed that the Nesmith children moved into the apartment during the second renewal period and lived in the apartment from September 1993 to September 1994. They, like the Young children, were injured as a result of lead paint hazards. According to the majority, because $350,000 was paid to the Young children, who were injured during the policy period from 1992 to 1993, the insured had only $150,000 coverage for the claim made by the Nesmith children.
The majority finds that this case turns on the interpretation of the "same general conditions" language of the "Limits on Liability" clause and reasons that because the Young children and Nesmith children were exposed to the same hazard, lead paint, in the apartment only one policy limit is triggered. However, this interpretation is inconsistent with the reasonable expectations of the insured (see generally Ace Wire & Cable Co., Inc. v Aetna Cas. & Sur. Co., 60 NY2d 390, 398 [1983] [insurance contracts must be interpreted according to "the reasonable expectation and purpose of the ordinary businessman"]). To accept that position would mean that, for purposes of insurance coverage, the insured's alleged failure to remove lead paint in the building before the Nesmiths moved in was equivalent to the landlord having done nothing at all. In other words, if there is any possibility of a nexus between the cause of the injuries during policy year one and the cause of injuries in any later policy year, even if the injuries were suffered by different children from different families living in the apartment at different times, coverage is only available under the first policy year. It would also mean that when the insured renewed his policy and paid his premium, he procured less protection with respect to lead paint claims. If the insured knew that his later policies would not cover lead paint injuries occurring after his remediation efforts, he surely would not have continued purchasing the insurance at essentially the same premium from the same insurer. [IA]
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