March 27, 2017 Insurance Advocate by C Acunto

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

Digital Disruption: The Volcano that Keeps on Erupting Vol. 128 No. 6 | March 27, 2017

Empire Safety Council Urges Termination of PIRP “Fraudulent” Safety Courses

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Contents

March 27, 2017 | Volume 128 Number 6

On My Radar: Ownership Not Required to Have an Insurable Interest Barry Zalma

Looking Back: February, 1992

Courtside: Home Health Care Agency’s Insurer Had Duty to Defend and Indemnify in Class Action by Patients Lawrence Rogak

Classiﬁeds

In the Associations: PIACT Elects Ten to Board of Directors

[A D F E ATUR E S] 11

16 Digital Disruption: The Volcano that

NAIFA-NYS: State Sponsored Retirement Program: Is New York State on Deck?

Keeps on Erupting

[ FEATURES] 4

Foreword: By a Nose… Steve Acunto, Publisher

In Focus: Why Isn’t Your Agency Quoting Personal Lines Over the Phone? Kelly Donahue-Piro

New York and New Jersey’s Leading Insurance Magazine Since 1889.

On the Level: Time Spares No One N. Stephen Ruchman, CPIA

FOR ADVERTISING OR SUBSCRIPTION INFORMATION

Guest Opinion: Letter to Governor Cuomo

Call 914-966-3180 | email g@cinn.com

Guest Opinion: Narcotics, Pain, and Medicaid Alieta Eck, MD

info@insurance-advocate.com www.insurance-advocate.com INSURANCE ADVOCATE / March 27, 2017 3

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[ FOREWORD ]

STEVE ACUNTO

By a Nose…

uIn this issue we reproduce a letter sent by the Empire Safety Council to the Governor, calling for the immediate termination of the Internet Point Insurance Reduction Program (IPIRP). The letter calls for criminal charges for state official misconduct by those scheming to continue ineffective driver safety programs by fabricating scientific research; fraudulent driver safety courses; defrauding the public; compromising public safety. The Council has a point that we have presented in these pages before: PIRP programs need to have teeth and deliver the real results desired, or why use them at all? This is a cause that should be taken up by the industry as a safety driven business. M&A a Go Go keeps go go going forward: the merger of The Capacity Group of Companies and EPIC Insurance Brokers & Consultants, the national retail insurance brokerage and employee benefits consulting firm, forms a giant-sized new enterprise, becoming one of the largest full-service independent insurance brokerage groups in the nation. From 15 locations across the country, The Capacity Group offers top-rated providers of specialty insurance and financial services solutions. EPIC, founded in 2007, already one of the 20 largest U.S. retail insurance brokers, ranks #26 among the top commercial insurance broker/consultants globally, with a reputation for service excellence. “The Capacity Group has been delivering strategic guidance and service around the risk management, insurance and benefit consulting needs of our clients for more than 25 years,” said The Capacity Group’s President and Chief Executive Officer, Robert Lull. “We believe the decision to join with EPIC will help us deliver an even broader and deeper set of capabilities and added value to our clients, with the same commitment to service delivery excellence that has always been a hallmark of our firm. We are thrilled to join forces with a unique and successful company like EPIC.” EPIC will now operate as The Capacity Group–an EPIC Company, and The Capacity Group’s leadership team will continue to play vital roles within the larger EPIC organization. Said EPIC CEO, John Hahn, “We found a strong cultural partner in The Capacity Group, in an important and highly desirable region where we have wanted to be an even larger partner in the community and see strong opportunities for growth. The Capacity Group, under the leadership of their executive team alongside their impressive team of owner-operators, will add significant value to our clients across the country and create further opportunities for our employees’ long-term growth and career success.” EPIC Northeast Region President is Thomas O’Neil. The addition of The Capacity Group significantly expands EPIC’s capabilities, adding more than 280 top professionals in an additional 15 locations and a strong client base centered in the Northeast. Winner by a Nose: An anti-arson dog whose “nose” figured in dozens of arson convictions, was named New York’s top fraud ﬁghter for 2016. CONTINUED ON PAGE 6

4 March 27, 2017 / INSURANCE ADVOCATE

VOLUME 128 NUMBER 6 MARCH 27, 2017

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Kelly Donahue-Piro Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Director of Operations and Creative Services Gina Marie Balog 914-966-3180, x113 g@cinn.com EDITORIAL ASSISTANT COPYEDITOR & PROOFREADER Maria Vano mariavano9@gmail.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x111 circulation@cinn.com PUBLISHED BY CINN Media, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 613-1595 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN MEDIA, INC.

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 20 times a year, and once a month in July, August, September and December by CINN ESR, Inc., 22 Bedford Road, Greenwich, CT 06831. Periodical postage paid at Greenwich, CT 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 $135.00. 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 2017. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

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

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[ FOREWORD ] CONTINUED FROM PAGE 4

The trained yellow Labrador retriever, Scooter, had a memorable 10year career before passing away in October 2016. She investigated several hundred fires with the Rockland County Sheriff ’s Department, and also worked cases for adjacent counties. Her longtime handler, Det.

Doug Lerner (pictured above), accepted the Fraud Fighter of the Year award posthumously from the New York Alliance against Insurance Fraud earlier this month. The Alliance comprises more than 100 insurers combating insurance crime by educating New Yorkers about fraud’s high costs to consumers throughout the state. Scooter was a rescue dog, and joined the Rockland County fire unit in 2006. She and Lerner were inseparable in teaming to investigate fires. Arson dogs such as Scooter can smell 100,000 times better than humans. She could discover tiny amounts of gasoline or other fire starters amid piles of blackened ruins. Her evidence proved crucial in helping earn arson and insurance-fraud convictions, said Alliance chair Jim Berrigan, in presenting the award. The conviction rate is four times higher for law enforcement departments with canine crime fire fight-

ers. Scooter was graduated from a rigorous national training program to become a certified arson dog— where only about one of 10 canines graduate. Most are Labrador retrievers. Their keen noses and inquisitive, outgoing personalities make them natural fits for scouring rubble for clues, the Alliance stated. The training of Scooter and her handler was

of Niagara University with a Bachelor of Arts degree in Accounting. Jason Galiano has joined York as Vice President of Sales for York’s Public Entity division. As the largest third-party administrator (TPA) in public entity, York Public has been a trusted public entity partner for more than 50 years, partnering with more than 5,800 public entities and public employers, including states, cities, schools, counties, utilities and parks. Jason will focus on the eastern half of the US, especially in the Northeast. “We are thrilled to have Jason join the Public Entity team,” said Jon Lord, Managing Vice President of Sales for Public Entity. “His 20+ years of experience in managed care and in partnering with public agencies gives him deep understanding of the issues our clients face and how to create effective claims and manfunded by a grant from State Farm. aged care solutions for them and Jodie A. Papa, Manager and their injured workers.” Jody Moses, Licensed Adjuster for the National President of York Public Entity, said Fire Adjustment Co., Inc. “The addition of Jason to (NFA) has been named our team reinforces our Fourth Vice President of commitment to delivering the National Association excellent service and of Public Insurance results to our public entity Adjusters (NAPIA). Ms. clients. Jason will play a Papa is the Officer in key role in helping York charge of Membership and continue to expand our Education for NAPIA. The presence in the Northeast JODIE PAPA NFA is a fourth-generation and to enhance the solufamily owned and operated tions we bring to our public adjusting firm that began in clients.” Prior to joining York, he Buffalo, New York in 1922, and is was Group Vice President of Sales North America’s largest public for Concentra. Jason earned a BS adjusting and loss-consulting firms. degree from the University of NFA has expanded covering losses Illinois at Urbana-Champaign, a both in the United States and Master of Science from Canada. Jodie Papa was Treasurer, Northeastern Illinois University, Secretary and Board Member for and is pursuing an Executive MBA NAPIA. She has worked for NFA at the University of Chicago, Booth since 2001, has been a Licensed School of Business. He will be based Adjuster since 2006, and was elevated in York’s Downers Grove, IL to Manager in 2015. She is a graduate office.[IA]

6 March 27, 2017 / INSURANCE ADVOCATE

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[ IN FOCUS ]

K E L LY D O N A H U E - P I R O

Why Isn’t Your Agency Quoting Personal Lines Over the Phone? uIf you’re like most agencies in America, you are worried about the growing demands on your agency. Technology is swirling all around you but it’s expensive and most of you fear staff mutiny by disrupting their routine. Customers routinely and increasingly care more about price than your service and the big meganational brands are spending over $1 billion dollars annually on marketing. So how does David compete when facing Goliath? Well, we focus on what we can control and we devise a better way to do more with less. In my travels to visit with agents from coast to coast, I have to say I remain very frustrated with our industry. What I’m saying is I don’t think we are doing ourselves ANY favors. We complain that customers only care about price, yet we take an app and email them a rate and expect the customer to value us? They are valuing that you found the cheapest rate for them. You gave them no reason to value your agency. In today’s growing and busy world we aren’t the easiest industry to deal with. We are open when our clients are at work and some of you even close at lunch. Thank you for being even more inconvenient. We don't invest in technology to help customers when we aren’t open, and even worse we fear technology may make us work past 5pm. If you really want to grow your business, you are routinely working past 5pm. For many of you, your processes make it about price during the sale. When you just email a quote, you are selling on price. How are you going to sell them on your service? Expect re-writes and lower retention—we gave them no other reason. And by no means can you give us the excuse that it was a shopper or web lead. They are still people in your community and you must find better ways to serve them. You can’t hope for referrals every month. If you want to grow, you have to learn how to serve your markets with the best processes available. For 2017, I have committed to transforming this industry by pulling together 8 March 27, 2017 / INSURANCE ADVOCATE

Customers routinely and increasingly care more about price than your service and the big mega-national brands are spending over $1 billion dollars annually on marketing. So how does David compete when facing Goliath? a quote on the phone movement. Yes, quoting personal lines on the telephone. When introducing this through the first quarter of the year, I think most agents would have rather done a book roll. However, I’m not crazy and this is a reality. It can be done and I’m going to tell you how and why. We have to quote on the phone. In my mind there is simply no other way to survive. Now I will strongly also advocate for the 80/20 rule—20% of the time you won’t be able to (these are the larger accounts). However, 80% of the time you have to go for it. Why? Do you know what it takes to generate a lead today? Even a referral? It’s a lot and it’s expensive. If most agencies don't see profit until year two-plus, why are we making our process so difficult? It’s because we fear doing things differently and being uncomfortable. In order to quote on the phone, we recommend a tiered approach to get comfortable with it. The first order of business is to divorce yourself from the quote sheet. Instead, put your headset on (if your agency doesn’t have headsets, stop reading this and hop on Amazon and get them) and type the information right into your rater. I never understood why we took a quote sheet to type it into the rater after. Seems inefficient to me. Once you break up with the quote sheet you should be able CONTINUED ON PAGE 25

Kelly Donahue-Piro, founder and president of Agency Performance Partners, is a no-nonsense effectiveness expert who has helped hundreds of insurance agencies identify and capitalize on sustainable improvement opportunities. Her specialties include agency culture assessment and change; management and supervisory coaching and benchmarking; customer retention strategy development; digital marketing strategy, planning and implementation; and sales planning, management and skillbuilding. In 2014, she created Agency Performance Partners with a mission to “partner with insurance entrepreneurs who dream to take their business to the next level and beyond, by relentlessly pursuing excellence in worldclass service and sales strategies.” The centerpiece of the organization’s transformational work is its Agency Performance AssessmentTM, a comprehensive survey tool Kelly created to zero in on organization-wide improvement opportunities and provide the foundation for a customized agency action plan. Mrs. Donahue-Piro is an engaging speaker who is available to conduct in-person and online agency success presentations that complement her firm’s one-on-one on-site and virtual consulting practice. Connect with her on social platforms, via email at kelly@agencyperformancepartners, or by phone at 401-415-6205.

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Stay in the know on Paid Family Leave! After Paid Family Leave (PFL) was announced in 2016, we made a commitment to you: to ensure a successful implementation of PFL for everyone involved — from brokers to policyholders and claimants. With that in mind, we are now launching your go-to-resource for all PFL related information. Check back often! You’ll ﬁnd updated information throughout the year as regulations are issued and more details unfold.

Visit www.newyorkpﬂ.com to keep yourself updated.

This material is for producer (agent and broker) use only. It is not intended for the general public. ShelterPoint is a registered Service Mark. All images licensed through iStockphoto.

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[ON THE LEVEL]

N. STEPHEN RUCHMAN, CPIA

Time Spares No One uHow 2017 is flying by us! I feel like I just finished my last column and the first quarter of the year is almost over. I hate to say it, but my last column in the Advocate warned you this was coming: On Feb. 17, Gov. Cuomo announced that New York is the first state in the country to enact cybersecurity requirements for financial services companies. And it bears repeating that despite what you may have heard, ALL insurance agents, brokers and companies licensed in New York state (even nonresident licenses) are subject to the requirements of this regulation. The regulation takes effect March 1, 2017, and covered entities have 180 days, or until Aug. 28, 2017, to become compliant (although some provisions of the rule include a phase-in period). According to the experts with whom I work at PIA, “covered entity” means “any person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.” There is a limited exemption to the new cybersecurity regulation that partially exempts insurers, agents, brokers and excess-line brokers with fewer than 10 employees or less than $5 million in gross annual revenue in the last three fiscal years from New York business operations of the covered entity and its affiliates; or have less than $10 million in year-end total assets. However, these entities still have to comply with certain aspects of the regulation, including: conducting a risk assessment, establishing a cybersecurity program and written cybersecurity policy, limiting access privileges, adopting a third-party provider security policy, and notifying the superintendent when cyber events happen. Every single agency—even those that meet the above exemptions—must conduct a periodic risk assessment of its information systems; and then there are additional requirements based on the results of this risk assessment. As I mentioned in my last column, PIA has been working to mitigate the burden 10 March 27, 2017 / INSURANCE ADVOCATE

While I’m talking about time and milestones, I should share that PIANY’s Long Island RAP is literally just around the corner… of this regulation on agents since the NYDFS first publicly announced it was thinking about them last summer. Since then, the association has met several times with NYDFS to discuss concerns and submitted comments on the initial proposal in November, and again submitted comments on the secondary proposal. A lot of work went into these discussions by PIA staff and board members. PIA then developed resources and provided its members with information about the rules and how to comply with them. The newest and most exciting development is that PIA has partnered with TAG Solutions to develop a program to help agencies that do business in New York State to comply with these complicated regulations (regardless of from what state they do business). The program is offered at a significant and exclusive discount to PIA members. In fact, the discount is so significant that it would pay for the member’s association dues (in most cases multiple times over!). I am eager to share this information with all agencies, because the March 1 deadline has passed us and the program is a major benefit. Folks, if you think the Governor or DFS is fooling around, I wouldn’t be so sure: This is going to be a tremendous financial hardship for all agencies, but especially for smaller agencies, since we continue to feel the pain of commission cuts and taking on the work carriers used to do. This could be the straw that breaks the camel’s back. If your business uses a computer system, or any type of automation, you are vulnerable. If you stick your head in the sand on this, you could be the test case—I wouldn’t want to be that guy. While I’m talking about time and milestones, I should share that PIANY’s Long

N. Stephen Ruchman, CPIA, is a retired independent agent 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 he 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.

Island RAP is literally just around the corner: April 26 at the Crest Hollow Country Club in Woodbury, N.Y. Long Island RAP is PIA’s oldest Regional Awareness Program and PIA has held this event at the Crest Hollow for a few years now. I have to say I’m very excited—the area, and the club itself, are very nice. LIRAP has a tradition of great speakers and this year is no exception. Legendary New York Islander Clark Gillies will keynote the lunch. All hockey fans—especially Islander fans—know Gillies, who was called “Jethro” back in the ‘80s. He is, of course, Canadian by birth, but we Long Islanders have adopted him as one of our own, as he’s lived here for decades and become part of our community. The Islanders retired Gillies’ number 9 Jersey in 1996 and he was elected to the Hockey Hall of Fame in 2002. Two awards will be presented at Long Island RAP this year, as well. Barry Goldstein, chairman and CEO of Kingstone Insurance Co., will receive the Executive of the Year award and Johanna Keep, CMS LLC, senior vice president personal lines, will accept the LIRAP Distinguished Insurance Service award. The New York State cybersecurity regulations have come and Long Island RAP is fast approaching. Now is the time to get the most out of your business relationships: Make sure your agency is compliant and that you’ve registered to attend the show. [IA]

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By Alyssa Snyder, NAIFA-NYS Counsel

State-Sponsored Retirement Program: Is New York State on Deck?

GOVERNOR ANDREW CUOMO announced in January them to decide if they want to auto-enroll their employees and of 2016 the creation of the SMART Commission (“Saving contribute to the employee accounts. More to Achieve Richer Tomorrows”). This commission was California, Maryland, Illinois, Connecticut, and Oregon’s procreated as Cuomo’s vehicle to study available options for the grams, though, are all structured around non-ERISA plans. Parcreation of a state-administered retireticipation is mandatory for employers, and ment savings program for workers whose their employees are automatically enrolled, employers do not offer a retirement Educating employers and unless they opt out. Employers in Califorplan. nia are prohibited from contributing to Over the course of the year, many their employees’ accounts if doing so employees on the surveys have been published supporting would trigger ERISA, while the other availability of qualified, the notion that private-sector workers states (except for Maryland, which doesn’t are not adequately saving for retirement. address contributions by either employers low-cost, personalized However, these surveys have not anor workers) don’t allow employer contriswered the underlying question – why butions at all. options within the isn’t the private sector adequately saving? Aside from the differences in the enHow can the state create a solution if it existing financial services rollment process, the majority of all these does not fully understand the reasons bestate-sponsored retirement programs market may well be the provide for a Payroll IRA and a default hind it? If New York wants to create a successful retirement program, it should contribution rate. most effective avenue not jump into the creation phase without its own due diligence. NEW YORK for New York. New York is on deck as one of the OTHER STATES next states to probably create a stateThirty (30) state legislatures have taken steps towards estab- sponsored program, though Gov. Cuomo has yet to announce lishing their own state-sponsored retirement programs, eight of how it would be structured or its enrollment features, and his which—Massachusetts, Washington, New Jersey, California, commission has not issued any report. Maryland, Illinois, Connecticut, and Oregon—have enacted If New York is going to implement a unique effective statelegislation. sponsored system, rather than just following the lead of others, These states have created programs that establish one of three it needs to take a step back and study the reasons behind the systems: a state-sponsored ERISA plan; a state-sponsored non- inadequate savings of private-sector workers. New York cannot ERISA plan; or a plan to collaborate with the existing private expect to solve a problem it does not understand. retirement market and with employers to offer plans. In its fifth nationwide public opinion research project, the Massachusetts’s program offers an ERISA state-sponsored National Institute on Retirement Security (“NIRS”) conducted plan in which the employer remains subject to ERISA’s fiduciary a survey and found that the top three reasons why saving for reobligations, but the state assumes the administrative and man- tirement is difficult have nothing to do with a lack of available agement responsibilities. work-sponsored programs. In fact, according to the survey the Washington and New Jersey both have chosen to provide top three factors include the rising cost of long-term care, their private-sector employees with the option of selecting an salaries that don’t keep up with financial obligations, and inERISA plan or a non-ERISA plan. Under Washington’s pro- creasing debt. gram, the state acts as more of a guide for employers, encourNew York may find through its own research that, similar to aging them to adopt an employee retirement plan by giving the Washington’s program, simplifying the retirement savings employers, whose participation is voluntary, options in the ex- process is best. Educating employers and employees on the availisting private-sector retirement market. ability of qualified, low-cost, personalized options within the Some states, such as Massachusetts, Washington, and New existing financial services market may well be the most effective Jersey, have programs that are voluntary for employers and allow avenue for New York. INSURANCE ADVOCATE / March 27, 2017 11

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[ G UEST OP I N I O N ]

Empire Safety Council 176 Terry Road Smithtown, NY 11787 P.631-360-2160 F.631-360-2161 www.EmpireSafetyCouncil.com February 22, 2017 Hon. Andrew M. Cuomo Governor, New York Executive Chamber State Capitol Albany, New York 12224 Re: Immediate Termination of the Internet Point Insurance Reduction Program (IPIRP); criminal charges for state official misconduct by scheming to continue ineffective driver safety programs by fabricating scientific research; fraudulent driver safety courses; defrauding the public; compromising public safety Dear Governor Cuomo: The Empire Safety Council (ESC), a New York-based and approved accident prevention course sponsor, is all about highway safety and improving the skills of New York drivers. That is why we are calling for the immediate termination of the Internet Point Insurance Reduction Program (IPIRP) in this state due to a scheme backed by willfully-fraudulent studies conducted by NYS Department of Motor Vehicles (DMV) officials that were the basis of recommendations to the Commissioner and the Legislature to extend the IPIRP program beyond the previously scheduled expiration date in 2014. The effectiveness of the IPIRP program is supposed to be evaluated by means of independent statistical analysis by the DMV of driver improvement. After reviewing the damning evidence contained herein, I am sure you will agree that New York’s analysis is fraudulent, its evaluations scientifically worthless and that certain state officials should be prosecuted for fraud, misleading the legislature and the Executive and violating the public trust. DMV OFFICIALS DELIBERATELY SCHEME TO MISLEAD THE COMMISSIONER, LEGISLATURE AND THE PUBLIC Why would DMV officials do this? The answer can be found in language in the 2013 contract itself between DMV and the Institute for Traffic Safety Management and Research (ITSMR) University at Albany, Research Foundation of SUNY: “Without this study and recommendations to the Governor and the legislature, the law authorizing IPIRP will sunset in May, 2014, eliminating an increasingly popular customer alternative to the classroom courses. In addition, since the sponsor fee to New York State for completers of IPIRP is $8 per student vs. $2 for the classroom course, elimination of IPIRP would also represent a substantial revenue loss to New York State.” The institutional bias in insuring that IPIRP was extended is glaring. DMV telegraphed what they needed the study conclusions to be to avoid the revenue loss upwards of $3 million and the end of a popular program. By diverting more and more students each year away from the classroom course and

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[ GUE ST OP I NI ON ] onto the internet, the state reaps four times the revenue per student. The push to favor the internet for motor vehicle-related transactions is also promoted by DMV as a way to accomplish the Administration’s desire for the state to employ more technology, and in DMV’s case to reduce lines at its local offices. It is a scandal that driver safety has been compromised by the very agency that is charged with making vehicle travel safer by rigging the study and making state revenue a priority. STUDY WRITTEN BY DMV GHOST WRITER; NOT WRITTEN BY ITSMR RESEARCHERS Information about the research done under contracts awarded by DMV to ITSMR was the subject of extensive FOIL requests ESC made to DMV, ITSMR and the State Comptroller’s office, seeking proof that the research contracted by DMV to be conducted by ITSMR was actually done by ITSMR. These contracts verify that ITSMR’s scope of work included the responsibility for ITSMR to conduct these studies and provide other deliverables, but discussions with ITSMR officials contradicted the claim. However, after ESC’s inquiry with the office of Research Misconduct and Ethics for the Institute, it was made clear that ITSMR did not actually conduct the research for which it is credited and for which it has been paid by DMV. When I asked the Vice President of Research about what appeared to be obvious omissions in the analysis and evaluation that the Institute provided, I was told that since the Institute denies that the research is their work product, the DMV may change the document and omit any analysis and evaluation made by the Institute since it is exclusively the department’s own research, however misleading the cover page (stating that the study was “conducted by the Institute for Traffic Safety Management and Research, University at Albany, Research Foundation of SUNY) may be. Further, in correspondence to ESC in response to a FOIL appeal, the Vice Chancellor for Policy and Chief of Staff, FOIL Appeals, SUNY wrote: “This evaluation was conducted by the NYS Department of Motor Vehicles (NYSDMV), not the University at Albany.” The IPIRP study does not even list any authors or staff at either agency who worked on the contracted study. CLEAR EVIDENCE OF FRAUD The DMV study of the IPIRP Pilot is exposed as intentional scientific misconduct knowing that the validity of the methods does not meet ethical standards. To be clear, the 2007 study methodology comments by the author on page 29 states: “In sum, the findings from this pilot study indicate that the prescribed design may not be viable for use in assessing PIRP effectiveness.” Subsequently, the author has left this statement out of the 2013 study intentionally. This fraudulent and flawed study diminishes the negative impact of a program that is bad public policy by knowingly using invalid methods. Furthermore, it was related to me by Department officials in 2008 that the 2007 study results confirmed that PIRP had “near zero” effectiveness and that therefore as a result there was no reason for PIRP applicants to submit research documentation of effectiveness prior to approval in contemplation of 2336 of the Insurance law. In other words these IPIRP applicants had no verifiable research documentation that their courses were effective, so DMV did an obviously flawed study by a fraudulent author to get the IPIRP program off the ground. All applicant courses were approved without a study of effectiveness in violation of the law. The Department then hired again the same author to conduct another study and compare the two studies

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[ G UEST OP I N I O N ] using the same invalid methods. This is intentional misconduct. Unbelievably, the Department justifies doing so on the basis that the December 2007 study was not viable in assessing PIRP effectiveness. Fraud is intentionally falsifying and/or fabricating research data, and misleading reporting of the results. The facts in this letter can be easily verified by reviewing the documentation and interviewing the persons involved, as I have done. DECISIONS AFFECTING PUBLIC SAFETY RELIED ON FRAUDULENT STUDY, RECOMMENDATIONS The situation should outrage you, the legislators, the motoring public and the insured in this state that the results of these studies were the basis for the recommendation in a report dated February 2014 by DMV to continue the IPIRP program beyond the 2014 sunset date. Relying on this recommendation, the Legislature included a five-year extension of the IPIRP program as part of the 2014-2015 state budget to April 1, 2020. It is this extension I am urging be repealed in this budget. The Vehicle and Traffic Law, Article 12B, states that: “the purposes of this article are to further highway safety by preserving the quality and efficacy of the accident prevention program” and the law and regulations have established strict criteria for initial approval and continual course sponsorship approval. Standards for course approval require each applicant to provide proof of effectiveness that shall be verifiable research documentation showing evidence of effectiveness in terms of reduced accidents, convictions, or both and shall employ accepted research principles. The law further states that submission of any fraudulent or intentional misleading data will disqualify organizations and all owners and principals from participation or application approval for a period of 10 years. This should apply to public officials as well. ESC has brought this matter to the attention of the State Inspector General and the State Comptroller. Both have indicated that they are reviewing this matter. Public officials involved in fraud should be prosecuted. Tragically, these studies knowingly used invalid methods to perpetuate and promote a state sponsored program held out to the public as improving their driving skills and justifying insurance and point reduction benefits, when in fact there is no credible evidence that driving skills improve. ESC’s interest is in the integrity of a state sponsored driver improvement program that justifies point and insurance reduction benefits to drivers who complete state-approved classroom and internet training. ESC finds that the research that supports the NY IPIRP program is fraudulent, existing laws and regulations are not being followed, and security and user verification standards for the internet programs are ineffective. It should be noted that the biometric User/Identity Validation methods prescribed in Part 141 of the Department’s Rules and Regulations are not being used at all by any IPIRP course sponsor. In fact, all sponsors have chosen to use a method not prescribed in Part 141 which is that the student designates a phone as its User/Identity Validation. This method can be easily defeated and the user may give their phone to another person to take the course for them or have someone finish the course for them as well. Because of these and other flaws, the safe driver outcomes of the IPIRP program courses are nonexistent and are not being demonstrated nor verified as the law requires. In addition, the insurance discounts of 10% for students taking IPIRP are unjustified by the state studies, and become a cost passed on to all insured as higher premiums. THE ECONOMIC IMPACTS Fake research and lax regulation and oversight of state-sponsored IPIRP is jeopardizing the public and traffic safety by not delivering on the promise of improving driving skills and accident avoidance techniques. We know that the proliferation of IPIRP and its undeserved endorsement by the state of

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[ GUE ST OP I NI ON ] New York has driven students away from classroom training. All of the state approved IPIRP sponsors are out-of-state companies and the bulk of the monies collected for taking the courses goes to these companies. As a result, the industry employment numbers for well trained and quality classroom instructors has plummeted in New York. Instead, students are flocking to the internet with the false promise that they are taking effective steps to improve their chances of avoiding serious accidents, traffic violations and property damage. Insurers are required to provide an insurance discount to these drivers, increasing premiums for all drivers. WHAT SHOULD BE DONE? Governor, you have the power to end the IPIRP program immediately and demonstrate to New Yorkers that the state is committed to endorsing only driver safety programs that are proven to work as advertised. In light of the deceptions involved in the DMV-ITSMR research contracts and the resulting threat to public safety, ESC is urging that your budget be amended to terminate the IPIRP program. You should also call for prosecutions of state officials who were involved in this fraud. Please contact me to answer any questions you may have or if you or your staff require additional information. I look forward to hearing from you on this extremely important driver safety matter. Sincerely,

William Bonds, President Empire Safety Council cc: Theresa L. Egan, Executive Deputy Commissioner, NYSDMV

We reproduce this letter as a guest opinion. Ed.

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Digital Disruption: The Volcano that Keeps on Erupting A McKinsey Report on the Effects Preface There is a lot of noise out there. Insurance CEOs constantly hear about digital marketing, digital distribution, digital IT architecture, and digital attackers, as well as digital technologies such as telematics, automation, and machine learning, to name but a few hot topics. What is harder for them to discern is the bigger picture. What does success look like for an insurer in a digital world, and how is it achieved? This compendium—“Digital disruption in insurance: Cutting through the noise”—helps paint that picture by drawing on McKinsey’s experience in the industry and that of some 30 executives whom we interviewed. Importantly, we spoke not just to incumbents but those who are helping to force change in the industry, including for example giant technology companies, companies that promote the use of data-collecting sensors in our homes and cars, and newcomers to insurance. All shared their insights on what is happening in insurance and why, and where success lies. The compendium’s underlying premise is stark—but some executives are beginning to face up to it. They know that staying competitive in a digital world will require far more than the addition of a direct sales channel or a few automated processes. Even the term “digital transformation” can underplay the response required, suggesting as it does that the change needed is purely technological. What is actually required is a fundamental rethink of the corporation, for which digital technology is but the catalyst. It forces companies to rethink the sources of revenue and efficiency. It forces them to rethink the organizational and talent model. And ultimately it forces them to rethink the business model and the role they will play in an ecosystem that cuts across traditional industry boundaries. They will have to reinvent themselves. Resistance to what lies ahead is futile. Insurance has been relatively slow to feel the digital effect owing to regulation, large in-force books, and the fact that newcomers seldom have the capital needed to take insurance risk on to their balance sheets. But the industry is not impregnable. Companies that fail to adapt will weaken under the pressure exerted by those that use digital technology to slash costs and get better returns on their investments. And they will be left floundering once digital’s relentless force ultimately breaches both the industry’s business model and boundaries. Already, in personal auto insurance, we see how sensors fitted in vehicles will be likely to put premiums under pressure as driving becomes safer. And we have only to glance at other industries to understand how, in a world in which data and analytics are king, powerful new digital competitors with large customer bases in their core businesses can rapidly invade new ones. Chinese e-commerce giant Alibaba now also owns one of the world’s largest technology finance companies, with financial services and products that include insurance.

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Acknowledging the urgency to undertake a digital transformation—both to reap its rewards and fend off threats—is one thing. Knowing how to manage one is quite another. Ask any executive who is in the midst of the task, and they will attest that it is a formidable effort that touches every part of the organization, and that there is no rule book that will guarantee an easy ride. This remains virgin territory because no one in insurance has yet completed a transformation—it could take as long as a decade. Nevertheless, lessons are emerging that will answer the burning questions posed by those about to embark on the challenge, such as: • Where should I start, with cost-cutting or growth initiatives? And should I let a thousand ﬂowers bloom, or pick selectively? • Do I need to rip out my IT systems and start again? • Do I need to set up a new digital unit, and if so, will it cannibalize my other business? • How do I attract all that new, whizzy talent I will be needing—and will these newcomers really understand what makes my company successful? • Do I need a chief digital officer? • Our heritage makes us risk averse. But now I am being told we need to experiment and innovate. How do we change—safely? This compendium explores the answers to those questions. We hope it will help executives to understand where value lies in a digital world, at the same time as offering a clear, practical approach for capturing it. Tanguy Catlin is a senior partner in McKinsey’s Boston office, where Christopher Morrison is an associate partner. Johannes-Tobias Lorenz is a senior partner in the Düsseldorf office, and Holger Wilms is an associate partner in the Washington, DC, office. TANG UY CAT L I N

JOHAN N ES -TOB I AS LOR ENZ

Facing digital reality Regulation, product complexity, and insurers’ large balance sheets have kept digital attackers from insurers’ gates. That is changing, but in ways incumbents should embrace. They can flourish in the digital age—if they move swiftly and decisively.

uDigital technology destroys value. That might sound counterintuitive given the extent to which it can make business systems more efficient—and companies are urged to embrace its many possibilities. Yet new McKinsey research shows that although digital technology propels some companies to become clear market winners, for many more its impact depletes corporate earnings and the overall value of an industry.1 Consumers, not companies, are often the ultimate winners. So it is likely to be in insurance. For a long time, the traditional insurance business model has proved to be remarkably resilient. But it too is beginning to feel the digital effect. It is changing how products and services are delivered, and increasingly it will change the nature of those products and services and even the business model itself. We firmly believe that opportunities abound for incumbent insurance companies in this new world. But they will not be evenly shared. Those companies that move swiftly and decisively are likely to be those that flourish. Those that do not will find it increasingly challenging to generate attractive returns. A triple prize: Satisfied customers, lower costs, higher growth The goal must be to meet customers’ expectations, which have been transformed by digital technology. Customers want simplicity—one-click shopping, for example. They want 24-hour access CONTINUED ON PAGE 18

1 Jacques Bughin, Laura LaBerge, and Anette Mellbye, “The case for digital reinvention,” McKinsey Quarterly, February 2017.

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Attackers at the gate

and quick delivery, clear, relevant information about a product’s features, particularly in relation to pricing, and innovative, tailored services designed for the digital age. They have the same expectations whatever the service provider, insurers included. And as Matthew Donaldson, CEO of UK-based BGL, the company behind the comparison site Comparethemarket, points out, although some insurers are holding back from the commitment needed to meet these expectations, demand must ultimately be satisfied. In the shorter term, fulfilling this goal is a chance for insurers to improve profits in their core business. Higher customer satisfaction, driven by the improved service and faster processing times that digitization delivers, is itself a driver of profit through increased customer retention.2 At the same time, by digitizing their existing business, carriers can remove significant cost across the value chain, further increasing customer lifetime value. Automation can reduce the cost of a claims journey by as much as 30 percent, for example.

Complex regulation was and remains a deterrent to new market entrants. So is the size of incumbents’ in-force books which, coupled with customers’ tendency in P&C and particularly life insurance not to switch providers, makes it hard for new entrants to rapidly capture market share. Moreover, incumbents have the advantage of large capital reserves, as start-ups seldom want to take risk onto their balance sheets because of the capital they need to offset it. And they have the advantage of underwriting skills built on years of experience and proprietary data. This resilience explains why the industry as a whole lags behind many other sectors in its digital maturity. But the situation is changing. Money now pouring into the industry suggests it is no longer regarded as impregnable. Venture capitalists globally invested $2.6 billion in insurtechs in 2015, and nearly $1.7 billion in 2016. (Exhibit 1). Although these newcomers are populating every part of the value chain, their focus to date has been on the more easily accessible slivers of the industry—mainly distribution, particularly in P&C insurance (Exhibit 2). They are not about to overturn today’s value chain. But there are longer-term trends afoot that might.

“Insurers of the future wil play more of risk avoidance role and less of a risk mitigation one.” – Andrew Rose, CEO US insurance compare.com

There are revenue improvement opportunities too. The notion that insurance is a low-engagement, disintermediated category in which customer relationships can be delegated to agents and brokers is increasingly obsolete. Instead, digital technology and the data and analysis it makes available give insurers the chance to know their customers better. That means they can price and underwrite more accurately, and better identify fraudulent claims. They can also offer clients more tailored products—auto insurance that charges by the mile driven, for example. And they can offer them in a more timely manner. In an analog world, an insurer will be unaware when a customer holding a home insurance policy puts that home on the market. In a data-rich digital world, that need not be the case, and the knowledge that a home is up for sale becomes an opportunity to offer new home cover, new auto cover, and perhaps a life product to help cover a mortgage on the new house. Longer-term growth opportunities reside in innovative insurance products and protection services. Concerns about cyber security will create demand from companies and even households for products that prevent and protect against the breach or loss of data, and damage that might ensue. And more products fit for a sharing economy will surely emerge—for homeowners who suddenly become hoteliers when they take a guest through AirBnB, for example. This is all good news for insurers, particularly at a time when low interest rates and tighter regulation constrain performance. But while opportunities abound, there is no guarantee that today’s incumbents will be the ones to capture them. Digital is opening the gates to new attackers that will erode their advantages. 2 Alex Rawson, Ewan Duncan, and Conor Jones, “The truth about customer experience,” Harvard Business Review, September 2013, hbr.org.

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Eroding advantages Insurers are threatened by three trends: a shift toward preventing risk rather than insuring against it, the increasing power of those companies that own and analyze data, and the investment of huge amounts of capital in insurance-related capital market instruments by institutional investors seeking high returns. Risk prevention. Digital technologies that give rise to everincreasing amounts of data and ever more penetrating insights might make for more accurate pricing of risk, but they also help mitigate risk, reducing premiums. Take auto insurance. Forward collision avoidance, blind-spot assist, and adaptive cruise control are already fitted in many new cars, making vehicles safer. Already, 20 percent of vehicles globally are expected to come with safety systems by 2020, reducing the number of accidents and thus the value of personal auto insurance policies. Entirely self-driving cars could become ubiquitous in the next two decades, at which point liability is likely to shift from individual drivers to manufacturers. In the United States, we estimate auto insurance premiums could

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decline by as much as 25 percent by 2035 due to the proliferation of safety systems and semi- and fully-autonomous vehicles. The same shift toward risk prevention is apparent in other sectors. In the home, sensors can send an alert to the owner if a risk of flood is detected, automatically shutting off the water system if there is no response, and in commercial properties, connected devices on manufacturing equipment can give owners early warning of maintenance requirements. Smart devices that monitor health are also increasingly popular. There are two main effects. Data from connected devices can be used to assess risk more accurately. But it is also a powerful tool to lower risk—to prevent accidents in the home, reduce maintenance and downtime, or improve health. This logically leads to a model whereby consumers pay not for premiums in order to be compensated for damages they might incur, but for gadgets or services that predict and help prevent that risk. “Insurers of the future will pay more of a risk avoidance role and less of a risk mitigation one,” says Andrew Rose, CEO of US insurance comparison website Compare.com. The value creation from underwriting thus diminishes. The power of data and its analysis. Data and analytics are changing the basis of competition. Leading companies use both not only to improve their core operations but to launch entirely new business models. Insurers have valuable historic data. Yet in a few years’ time, will they be able to keep pace and still add underwriting value when competing with newcomers that have access to more insightful, often real-time new data culled from the Internet of Things (IoT), social media, credit card histories, and other digital records? Knowledge about how fast someone drives, how hard they brake, or even (more controversially) what they get up to as displayed on social media is arguably more revealing data on which to assess risk than simply age, zip code,

and past accident record. (Facebook recently moved to prevent its users’ online activity being used by insurers in the United Kingdom—proof of the potential power of access to good data.) And what if those with the necessary data and analytical skills and platforms that reach millions—a Google or an Amazon—not only offered well-targeted, tailored products, but also began to cherry-pick low-risk customers? If they did so in significant numbers, the insurers’ business model, whereby premiums collected from low-risk policyholders contribute to the claims of high-risk ones, could fall apart. Auto manufacturers are arguably close to changing the game for insurers. The fitting of connected devices as standard in cars is not far off, potentially giving manufacturers unique access to data that could accurately ascertain the risk of their customers, as well as ready-made access to drivers in need of an insurance product. How would incumbents fare in such an evolving ecosystem? Institutional investors. For more than a decade, large institutional investors have been pouring money into insurance-linked instruments on the capital markets in search of non-correlated returns and higher yields in a low interest rate environment, disintermediating reinsurers in the process. To date, they have focused mainly on reinsuring property catastrophe risk—a sum of $70 billion in 2015. But now they have their eyes on the primary market. For the moment, interest centers on “short-tail” lines of business. Yet ultimately, why would, say, a large manufacturer of sensors that gathered to optimize agricultural productivity not consider offering a crop insurance product to farmers, with the backing of investors? The data gathered would aid risk analysis, and payments could be triggered automatically (and cheaply) CONTINUED ON PAGE 20

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when sensors detected damaging weather conditions. Despite these potential threats, our view is that today’s carriers, many of which have a century-old record of creating value for their policyholders and shareholders, remain in a strong position to flourish in a digital age. For the time being, they have expertise no one else has, making them valuable partners in the ecosystems that are evolving to offer consumers both risk prevention and risk mitigation services. They still have large balance sheets that enable them to underwrite large pools of risk. And they have the trust of policyholders who need to know their insurance company will still exist when they make a claim or their policies mature, perhaps decades from now. But for many carriers, the window of opportunity is narrow. Once cracks appear, digital technology has the power to break business models within the space of just one or two innovation cycles. Retail music, book stores, travel, and media are some of the highprofile sectors that have already felt its force, transforming their economics and sometimes toppling what were once industry heavyweights. The question for incumbents is therefore whether they are nimble enough to rise to the opportunities that digital offers. The evidence that they will need to move quickly is compelling. Uneven distribution of rewards First, digital diminishes value. McKinsey’s global survey of a wide range of industries has shown that digital technology shrinks revenue growth at an average rate of 3.5 percent a year and growth in earnings before interest and tax (EBIT) at an average rate of one percent a year. For some industries, the figure is as high as 12 percent for revenue and 10 percent for EBIT. Our analysis of auto cover, the insurance segment that has been first to feel digital’s impact, suggests a similar dynamic is unfolding in the insurance industry. US auto insurers have already

lost on average $4.2 billion in underwriting profit a year over the past five, with expenses and losses consistently outweighing premiums. They should expect further annual profit declines of between 0.5 and one percent if they fail to use digital technology to improve efficiency and effectiveness. In the shorter term, corrective measures could lead to huge profit improvements. By digitizing existing business, our research suggests, a large incumbent could more than double profits over the course of five years. In the longer term, however, earnings from traditional business will face headwinds as driving becomes less risky owing to the use of sensors and telematics or because, in the case of autonomous cars, liability is transferred to manufacturers. Fifteen years on, profits for traditional personal lines auto might fall by 40 percent or more from their peak (Exhibit 3). Second, in a digital economy, the effects of a shrinking economic pie are compounded by the fact that the pie will not be evenly divided—the result of economies of scale and network effects. Hence, not all carriers will be able to sustain the performance described in the analysis above. For many, digital’s threats might well outweigh the opportunities. Again, the signs are already apparent. In direct auto insurance in Spain, Germany, and the United States, a single player has captured the lion’s share of profits, up to 70 percent, leaving a long tail of sub-scale, often unprofitable carriers competing for the remainder (Exhibit 4). Third, the winners will be those that move decisively. Our cross-industry research showed that those companies that initiated disruption fared best, generating revenue and EBIT growth that was on average between one and two percentage points higher than that of more ad hoc responders. These companies made big bets—to innovate products or reshape the value chain, for example—rather than following in others’ wake. In insurance, this is borne out by the companies featured in Exhibit 4: HUK24, Direct Line, and Progressive were all first movers. A similar dynamic is likely to play out across the industry. Digital technology will take longer to disrupt more complex business lines, such as life insurance, and technological innovation may disrupt them in ways we cannot yet foresee. But given its impact to date in industry after industry, it would be foolhardy to bet against it. What it takes to transform rapidly and at scale Against this backdrop, we interviewed some 30 executives in incumbent and attacking companies to understand their views on how the industry is changing and how to respond. The single message most constantly repeated was the need for incumbents to accelerate their response (see box, “The need to commit to speed”). Most know they cannot afford to wait until evolving technologies turn the market upside down and the competitive advantages they enjoy today evaporate. If history tells them anything, it is that they need to get ahead of the curve. And they will need to do so at scale, ultimately transforming the entire business. What holds them back, however, is deciding how to address the challenge given its enormity. The new value drivers Success will be grounded in recognizing the drivers of value in a digital age. There are five of these.

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Technological leadership and innovation. Winning companies will need to do more than follow technological trends and innovation. They will need to lead them. Innovation is a vital component of a digital transformation. Customer ownership. Incumbents have not had to worry much about customer ownership. Their only competitors have been other insurers, and most have felt secure enough to cede customer contact to intermediaries. Today, however, customer access and “ownership” are keys to the largest profits, and insurers must fight for them. Their success will depend upon offering superior products and services. Technical underwriting skills alone will not suffice. Efficiency (cost savings) and effectiveness (higher returns). Digital technology puts margins under pressure as premiums fall under the weight of price competition and as new ways of mitigating risk emerge. Under these conditions, insurers will need to harness digital to make their operations more efficient, aggressively lowering costs. They will also need to make them more effective by, for example, improving the accuracy of their pricing and underwriting to improve loss ratios. Scale and network effects. In a digital world, initial investments are sizeable but marginal costs are close to zero. Scale therefore matters. It also delivers network effects, helping to build a company’s access to more and better data, talent, and partners to the extent that it becomes a barrier to entry for others. Some companies have built hyper-scale data platforms that enable them to blur traditional industry definitions by spanning product categories and customer segments, creating new ecosystems and value chains in the process. Speed and agility. The strength of an insurer’s in-force book

will not protect it indefinitely. Incumbents need to move quickly to compete with digital competitors that have the agility to keep pace with evolving technology and customer needs. That means letting go of slow decision-making processes and outdated ways of working, and adopting a new culture and talent base that is more comfortable with experimentation, testing and learning, and sometimes even with failing. A roadmap for the future These new value drivers will inform the roadmap insurers chart to transform their businesses and secure their future competitiveness. They will shape their strategy, helping them to understand the forces that are disrupting the industry. They will make clear the huge value to be created by digitizing their current businesses, as well as the imperative to innovate. They will demonstrate the need for significant investments in IT and a change in perspective whereby IT becomes a strategic function, not a cost center. They will make plain the new capabilities required to take full advantage of IT’s potential, including automation, advanced analytics, and blockchain. And they will highlight the importance of culture and talent change if the transformation is to be successful. Insurers should not underestimate the changes that digital will bring to their industry and the challenges they will pose. Neither should they overlook the significant short-term profit improvements that are within their grasp if they digitize their core businesses, nor shy away from innovating to be part of an exciting future that is unfolding for the industry. If they act decisively, they will be among its leaders. [IA] INSURANCE ADVOCATE / March 27, 2017 21

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[ G UEST OP I N I O N ]

A L I E TA E C K , M D

Narcotics, Pain, and Medicaid uA new law has hit the people of New Jersey, the home of the toughest narcotics laws in the nation, in an effort to stem deaths from heroin and opioid addiction. A similar law is coming to your state, if not already there. The target? Law abiding physicians—as if physicians were the cause of this scourge. Now patients with extensive dental work and major surgery are not allowed to receive more than five days of Percocet in one script. If they are still in pain after five days, they must obtain a written prescription for five or 25 more days. If patients have cancer or chronic pain, they can continue to obtain a script for 30 days at a time. The problem is very serious, with 1,600 N.J. deaths from overdoses of opioids and heroin in 2015, yet who is trying to determine the cause? Heroin is already illegal. This law will have no impact on the illegal heroin trade. The assumption is that patients take these medications beyond the time that they need them. By 30 days, the pain is believed to be gone, but the addiction has been established. But in fact, many people with remediable causes for pain do not have access to pain-ending surgery or pain-control physicians. In our free clinic, the Zarephath Health Center in central N.J., we see patients who have very poor access to care. Half of these patients are on Medicaid, the government program that was extended in our state under ObamaCare. In our 14 years of existence, we have discovered three areas that are very poorly served by Medicaid: psychiatry, pain control, and elective surgery. One of our patients, a woman in her 20s, fell and fractured her femur, the long bone in her leg. For various reasons, she did not have immediate surgery and was sent home. Then it became impossible to find a doctor for her. She could not walk, was wheelchair bound, and was in constant physical and emotional pain. When the pain became unbearable, she would call 911 and be transported to the emergency room, where she was callously told that her leg 22 March 27, 2017 / INSURANCE ADVOCATE

Enabling more patients to obtain adequate pain care would be far more helpful than more bureaucratic paperwork for preventing addiction—and would save taxpayer money besides. was still broken—nothing new, not an emergency. Muscle spasms would cause her to scream in pain. We prescribed opioids and began to explore the story behind the story. The problem seemed to be poor Medicaid payment combined with full liability exposure for the doctor. We finally found a doctor and offered to pay a fair fee with our charitable donations. Once the patient’s hip was replaced, she stood up for the first time in three years. Another Medicaid patient suffered extensive burns on her face, neck, and torso from a grease fire. The burn hospital saved her life, but once she was discharged there was no follow-up. She was bounced back and forth between the burn hospital and her local hospital. Her head was pulled to the side as contractures formed, and she could not sleep because of the pain. Many phone calls later, we found a plastic surgeon to take on her case. But the road to recovery will be long and hard, and she is still in pain without access to a pain-control specialist. A man came in with shrapnel lodged between the bones in his knee. Imagine walking on little pellets, with severe knee pain with each step. His Medicaid would pay for narcotic pain medicine, but he could not find an orthopedic surgeon to remove the shrapnel. Many months later he did have the surgery, and now he must be weaned off the narcotics. Many such patients turn to the painkiller that is available to them and relatively inexpensive: Street heroin may cost less than OxyContin. It is easy to see why patients resort to this. They are desperate

Dr. Alieta Eck graduated from the Rutgers College of Pharmacy and the St . Louis University School of Medicine in St. Louis, MO. She studied Internal Medicine at Robert Wood Johnson University Hospital in New Brunswick, NJ and has been in private practice with her husband, Dr. John Eck, MD in Piscataway, NJ since 1988, affordablehealthinc.org. She has been involved in health care reform since residency and is convinced that the government is a poor provider of medical care.

for relief, and unable to find care that is legal. Many are arrested. But nothing is done to relieve the cause that started them down this path. Now they are felons, and their lives often spiral downward. New Jersey taxpayers spend $15 billion a year on the Medicaid system that fails so many. The real safety net is charity. Caregivers in our clinic are all volunteers, and charitable donations cover costs of about $15 per visit—far less than Medicaid costs. Under a proposed law, NJ S239, the state would assume malpractice liability for the practices of doctors who donate four hours per week in a charity clinic— including the surgeons, pain specialists, and psychiatrists that are not available under Medicaid. Enabling more patients to obtain adequate pain care would be far more helpful than more bureaucratic paperwork for preventing addiction—and would save taxpayer money besides.[IA]

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[ O N MY R A DA R ]

BA R RY Z A L M A

Ownership Not Required to Have an Insurable Interest Every Interest in Property Where a Peril May Cause Damage to the Insured is an Insurable Interest Insurance is a contract of personal indemnity. It does not insure property. Rather it insures the person insured against the risk of loss of described property. Therefore if a person is not named as an insured, that person may not recover regardless of his interest in the property. On the other hand, a person who has no ownership interest in property but would be damaged by its loss has an insurable interest. In A.B. Petro Mart, Inc. v. Ali T. Beydoun Ins. Agency, Inc., Court of Appeals of Michigan, — N.W.2d —-, 2016 WL 4922684 (Sept. 15, 2016), the Michigan Court of Appeals was asked to determine who was entitled to recover under a policy and what is an insurable interest.

FACTS A.B. Petro Mart, Inc. (Petro Mart) and Aref Bazzi (Bazzi) appeal the trial court’s order that granted summary disposition in favor of defendant Prime One Insurance (Prime One). Plaintiffs filed this suit to recover insurance benefits related to the destruction of a gas pump at a gas station Petro Mart operated. There is no question that Petro Mart did not own the gas pumps—Bazzi did. Petro Mart instead operated the pumps in the course of selling gasoline at the gas station. There also is no dispute that Petro Mart insured the gas pumps with Prime One. The trial court granted summary disposition in favor of Prime One with respect to Petro Mart’s claim because it determined that Petro Mart did not possess an insurable interest in the gas pumps. Pursuant to Michigan law, an insurance contract to protect an insured from loss of property is an indemnity contract for fortuitous events. In order to be entitled to indemnity under such an insurance contract, the insured must have an insurable interest in the property. In Michigan, as in most states, legal interest is not syn24 March 27, 2017 / INSURANCE ADVOCATE

The insured, the broker who acquired the policy, and the insurer’s ignorance caused this lawsuit and none are without fault. onymous with insurable interest because an insured’s pecuniary interest in the insured property is sufficient to constitute an insurable interest. This dispute arises from an incident where an automobile ran into and caused the destruction of one of the gas pumps located at the gas station in Detroit. The crash started a fire and destroyed the pump. Bazzi was the sole shareholder and owner of Petro Mart, and Petro Mart is the entity that operated the gas station. However, the gas pumps themselves were owned by Bazzi. Petro Mart insured the gas pumps by purchasing an insurance policy with Prime One, which provided, among other things, $30,000 in coverage for gas pumps. After the accident Prime One eventually declined coverage because it asserted that Petro Mart did not have an insurable interest in the gas pumps, as Bazzi—not Petro Mart—owned the pumps. The trial court noted that there was no dispute that Bazzi owned the pumps and that Petro Mart merely operated them without any leasehold agreement.

ANALYSIS Under the clear language of the policy, the only named insured is Petro Mart. While Bazzi signed the insurance application, he is not named anywhere in the policy itself. Indeed, the policy provides that “A B Petro Mart, Inc.” is the sole named insured. Thus, without being a party to the insurance contract, Bazzi cannot maintain a breach of contract claim against Prime

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 Insurance Law, 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/Pro ductDetails.aspx?productId=214624, or 800-285-2221 which is presently available. Legal Disclaimer: The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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[ ON MY R A DA R ] One. It is clear that the contract itself did not provide any basis to conclude that Prime One undertook any promise directly to or for Bazzi. Because Bazzi is neither a party to the contract nor a third-party beneficiary, he cannot maintain his action for breach of contract against Prime One. Accordingly, the trial court correctly granted summary disposition in favor of Prime One against Bazzi. Under Michigan law an insured must have an ‘insurable interest’ to support the existence of a valid insurance policy. The reason for this requirement is based on public policy concerns. Specifically, it arises out of the venerable public policy against “wager policies” that are insurance policies in which the insured has no interest, and they are held to be void because such policies present insureds with unacceptable temptation to commit wrongful acts to obtain payment. Michigan’s common law instructs that an “insurable interest” is not synonymous with “ownership.” Instead, an insurable interest can arise from any kind of benefit from the thing so insured or any kind of loss that would be suffered by its damage or destruction. Insurable interest may be defined as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage. An insurable interest may be derived by possession, enjoyment, or profits of the property, security or lien resting upon it, or it may be other certain benefits growing out of or dependent upon it. In dismissing Petro Mart’s claim, the trial court principally relied upon the fact that Petro Mart did not have either an ownership or leasehold interest in the gas pumps. While it is true that Petro Mart had neither of these interests and was not responsible for the repair of the pumps, these facts, standing alone, do not preclude a finding of an insurable interest. One of the aspects of Petro Mart’s business was selling gasoline at the insured location. The court found it incontrovertible that Petro Mart had more than an incidental, pecuniary interest in the gas pumps. Petro Mart necessarily received income and profits from the use of the gas pumps, including the one that was destroyed in the accident. To determine insurable interest, the insurer must determine whether the insured would suffer a direct, pecuniary loss from the property’s destruction. If the answer is

The fact that Petro Mart was not financially responsible for repairing any damage to the pumps is not controlling—it still had a pecuniary interest due to the commercial business it operated. “yes” then there is an insurable interest. Without question Petro Mart would gain some advantage by the continuing existence of the gas pumps and, conversely, suffer some loss or disadvantage by the destruction of the pumps. Importantly, Petro Mart generated income from the sale of gasoline through the use of the pumps. The loss of one of those gas pumps results in a direct and actual pecuniary loss. The fact that Petro Mart was not financially responsible for repairing any damage to the pumps is not controlling—it still had a pecuniary interest due to the commercial business it operated. We note that while any lost business profits appear to not be recoverable under the insurance policy, this fact is immaterial in determining whether Petro Mart had an insurable interest in the gas pumps themselves. Because Petro Mart had a clear, substantial, and direct pecuniary interest in the pumps, the court concluded that it had an insurable interest in the damaged gas pump. Because Petro Mart’s ability to operate its gas station is financially affected by the functioning or non-functioning of the insured gas pumps, it had an insurable interest and the decision of the trial court, with regard to Petro Mart, was therefore reversed.

ZALMA OPINION A professional insurer should know that ownership is not required to create an insurable interest. Since Petro Mart was damaged by the loss of the pump the determination of coverage should have been easy. Instead, the claim was denied incorrectly and the case had to go through summary judgment motions and an appeal to resolve an obvious issue. Of course, the problem could have been avoided by naming Bazzi as an insured on the policy. The insured, the broker who acquired the policy, and the insurer’s ignorance caused this lawsuit and none are without fault.[IA]

IN FOCUS CONTINUED FROM PAGE 8

to quote monoline auto (or auto with renters and/or condo) and re-markets on the phone. Now where do we get pushback on this? Well we believe the caller would not like to spend time with us on the phone (Untrue. If they know we will solve their problem, they are willing to wait; especially if you are carrying on a conversation.) and we would rather email them pricing and hope for the best. Now, put your business hat on. If I have a caller and I’m taking up 20-30 or even 40 minutes of their time, I’m stopping them from calling anyone else and I’m able to ask for the business right on the phone. Yes, that is accurate. So explain to me why getting off the phone is a better sales strategy? It’s just not, but we have to train and coach ourselves out of our comfort zone for the 80% of the calls we can quote on the phone. Next for home, start by getting your RCE and tell the customer what you are doing! What an awesome time to explain RCE. Then pull up Zillow and confirm the information. Heck, you can even copy and paste it from Zillow to your rater. Now, agency owners, in order for this to really work you should state to your team where you want them to place business. When they see that carrier come up as an option they can bridge to that market. You don’t have to put your lead with the cheapest; you have to put them with whom you feel is the best. Also remember, before you bridge, you can get commitment on the rater rate. Get a yes and then finalize the details. Here is the best news. You can stop emailing quotes with this process and hope they buy because of your great email. You can ask for the sale and get it done ASAP. Now when we launch this in an agency, it’s a six-month transformation. But agencies start to see 20-40% increase in closing ratio. Ask yourself “Do I need more leads or a better process?” [IA]

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[ COURTSIDE ]

L AW R E N C E R O G A K

Home Health Care Agency’s Insurer Had Duty to Defend and Indemnify in Class Action by Patients

Lawrence N. ("Larry") Rogak has been practicing insurance law since 1981. He has defended over 23,000 lawsuits and arbitrations and has represented over 75 different insurance companies and self-insured corporations. Lawrence N. Rogak LLC is listed in Best's Recommended Insurance Attorneys, a distinction that requires written recommendations from at least 12 insurance carriers. A 1981 graduate of Brooklyn Law School, Mr. Rogak has published more books and articles on insurance law than any other New York attorney in the field.

Americare Certified Special Servs., Inc. v Nautilus Ins. Co. Plaintiff, a home health care agency, had been sued in a class action on behalf of patients whose services had been reduced due to State budget cuts to Medicaid. Plaintiff's general and professional liability insurer disclaimed. After the class action suit was settled, Plaintiff brought this DJ action against its insurer. After losing in Supreme Court, Plaintiff appealed to the Appellate Division, which ruled in Plaintiff's favor. Because the plaintiffs in the class action suit had alleged physical and emotional injuries, Plaintiff's insurer had a duty to pay both settlement and defense costs.—LNR

J U S T

uIn an action, inter alia, for a judgment declaring, in effect, that the defendant is obligated to pay the settlement and defense costs incurred by the plaintiff in an underlying action entitled Johnson v Shah, commenced in the United States District Court for the Eastern District of New York, under Case No. 11-Civ-1956, the plaintiff appeals from an order of the Supreme Court, Kings County (Silber, J.), dated January 27, 2014, which denied its motion, in effect, for summary judgment declaring that the defendant is obligated to pay the settlement and defense costs the plaintiff incurred in the underlying action, and, upon searching the

R E L E A S E D -

N E W

T H I R D

record, awarded the defendant summary judgment dismissing the complaint and, in effect, declaring that the defendant is not so obligated. ORDERED that the order is reversed,

E D I T I O N

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[ COURTSIDE ] on the law, with costs, the plaintiff's motion, in effect, for summary judgment declaring that the defendant is obligated to pay the settlement and defense costs the plaintiff incurred in an underlying action entitled Johnson v Shah, commenced in the United States District Court for the Eastern District of New York, under Case No. 11-Civ-1956, is granted, and the matter is remitted to the Supreme Court, Kings County, for the entry of a judgment, inter alia, declaring that the defendant is so obligated. The plaintiff, Americare Certified Special Services, Inc. (hereinafter Americare), is a certified home health care agency (hereinafter CHHA) approved to participate in the Medicaid program. Americare was named as a defendant in an underlying class action lawsuit also asserted against Personal Touch Home Care, Inc. (hereinafter Personal Touch), another CHHA, and various state and local officials involved in administering the Medicaid program in New York. The named plaintiffs in the underlying action, who received Medicaid-funded home health services from Americare or Personal Touch, sought class certification, declaratory and injunctive relief, and compensatory damages. They alleged that, in response to state budget cuts which changed the reimbursement rates applicable to Medicaid-funded home care services in a manner designed to discourage providing unnecessarily high levels of services to particular patients, Americare and Personal Touch had terminated or reduced their home health services even though their patients' medical needs remained the same. Americare and Personal Touch allegedly did so without affording patients the statutory due process protections to which they were entitled in violation of the Medicaid Act (42 USC § 1396) and the Americans with Disabilities Act (42 USC § 12131) and their implementing regulations, the Rehabilitation Act of 1973 (29 USC § 794), and the due process clause of the Fourteenth Amendment to the United States Constitution. The plaintiffs in the underlying action also alleged that other CHHAs throughout the state routinely engaged in similar practices. Americare sought defense and indemnification in the underlying action under two insurance policies issued to it by the defendant, Nautilus Insurance Company (hereinafter Nautilus)—a healthcare general liability policy and a healthcare professional

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liability policy—which were in effect at the time of Americare's alleged improper reduction or termination of home health services. Nautilus disclaimed coverage on the grounds that the allegations of the class action complaint fell outside the scope of both policies and both policies excluded coverage for non-monetary damages. Americare undertook its own defense in the underlying action, and ultimately entered into a stipulation of settlement pursuant to which it agreed to pay $50,000 to the plaintiffs' counsel for damages and attorneys' fees. Following the settlement, Americare commenced this action against Nautilus, seeking, among other things, a judgment declaring, in effect, that Nautilus is obligated to pay the settlement and defense costs Americare incurred in the underlying action. Americare moved, in effect, for summary judgment declaring that Nautilus is so obligated. The Supreme Court denied the motion, and, upon searching the record, awarded Nautilus summary judgment dismissing the complaint and, in effect, declaring that Nautilus is not so obligated. Americare demonstrated, prima facie, that Nautilus was obligated to defend and CONTINUED ON PAGE 30

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indemnify it in the underlying action by submitting evidence establishing that the class action complaint contained claims for compensatory damages for physical and emotional injuries falling within the scope of coverage of both the general liability and professional liability policies, and that the $50,000 payment was to settle these covered claims (see Servidone Constr. Corp. v Security Ins. Co. of Hartford, 64 NY2d 419, 423-424; Dreyer v New York Cent. Mut. Fire Ins., 106 AD3d 685, 687; Stellar Mech.

Servs. of N.Y., Inc. v Merchants Ins. of N.H., 74 AD3d 948, 953; Medrano v State Farm Fire & Cas. Co., 54 AD3d 662, 664). In opposition, Nautilus failed to raise a triable issue of fact. Accordingly, the Supreme Court should have granted Americare's motion, in effect, for summary judgment declaring that Nautilus is obligated to pay the settlement and defense costs Americare incurred (to be determined by the Supreme Court) in the underlying action (see State Ins. Fund v American Hardware Mut. Ins. Co., 64 AD3d 581, 583; Medrano

PIACT Elects Ten to Board of directors uHARTFORD, Conn.—Ten Connecticut independent insurance agents were elected to serve on the board of directors of the Professional Insurance Agents of Connecticut Inc. today at the association’s Annual Convention held at the Foxwoods Resort Casino in Mashantucket, Conn. The following individuals were re-elected to serve for a three-year term: • Ken Distel of Avon, Conn. Distel is area vice president of RPS Distel in Farmington, Conn. An active member of PIACT, Distel was elected president for 2017-18. He served as president-elect of the association in 2016-17, treasurer in 2015-16 and secretary in 2014-15. Currently, Distel is vice president of the Administrative/ Nominations Committee. He also is a member of the Executive/Budget & Finance and Legislative/Business Issues Committees. • Nicholas Fanelli, CLU, CPCU, CIC, of Norfolk, Conn. Fanelli works for Raynard & Peirce, an associate of the Newberry Insurance Group in N. Canaan, Conn. Active in PIACT, Fanelli is a member of the Legislative/ Business Issues Committee. He also is an ex-officio member of the Western Advisory Council. • Michael A. Krause, CIC, of Branford, Conn. Krause is vice president of Anderson-Krause Inc. in Branford, Conn. Active in the association, Krause was elected president-elect of PIACT for 2017-18. 30 March 27, 2017 / INSURANCE ADVOCATE

He also is vice president and chairman of the Association Programs Committee and a member of the Executive/Budget & Finance Committee. • Herbert Olson, CPCU, ARM, CIC, of E. Hampton, Conn. Olson is a sales producer for John M. Glover Agency in Berlin, Conn. Active in PIACT, Olson is a member of the Legislative/ Business Issues Committee. • Robert J. Oman, CPCU, of Madison, Conn. Oman is owner of The Stone Agency in Guilford, Conn. Active in PIACT, Oman is a member of the Legislative/Business Issues Committee. • Gerard Prast of Wallingford, Conn. Prast is assistant vice president for XS Brokers with offices in Quincy and Worster, Mass., West Hartford, Conn., and Philadelphia. Active in the association, Prast was elected treasurer of PIACT for 2017-18. He also is business issues vice chairperson of the Legislative/Business Issues Committee and an ex-officio member of the Western Advisory Council. • Kimberly Tompkins, CIC, AIS, AINS, CRIS, ACSR, PHM, CPIA, of Prospect, Conn. Tompkins is agency operations manager for Housing Authority Insurance in Cheshire, Conn. Active in PIACT, Tompkins is the education vice chair of the Association Programs Committee. The following individuals were re-elected to serve for a two-year term:

v State Farm Fire & Cas. Co., 54 AD3d at 664). Since this is, in part, a declaratory judgment action, we remit the matter to the Supreme Court, Kings County, for the entry of an appropriate judgment, inter alia, declaring that Nautilus is obligated to pay the settlement and defense costs Americare incurred in the underlying action (see Lanza v Wagner, 11 NY2d 317). [IA] 2016 NY Slip Op 01792 Decided on March 16, 2016 Appellate Division, Second Department

• Cindy Donaldson of New Hartford, Conn. Donaldson is owner of Red Barn Consulting LLC in New Hartford. In addition to PIACT, Donaldson is a member of the N.W. Connecticut Chamber of Commerce and the Connecticut Banking Association. • Robert S. Reade Sr., CPRIA, LUTCF, CPIA, of Berlin, Conn. Reade is vice president of sales for William Raveis Insurance in Shelton, Conn. A PIACT member since 2005, Reade has served on the Association Programs Committee and the Western Advisory Council. • Nicholas W. Ruickoldt, CPIA, of West Haven, Conn. Ruickoldt is an agent/broker for The Russell Insurance Agency in Southport, Conn. and is past president of the Connecticut Young Insurance Professionals, an affiliate of PIACT which promotes the professional and personal growth of those new to the insurance field by providing education and networking opportunities. In 2014 Ruickoldt received the CTYIP Young Insurance Professional of the Year award. The award is presented by CTYIP to honor a member of the association’s board of directors who has contributed a great deal of time and talent to help support the association and its programs. As a result of the CTYIP award, Ruickoldt received the PIA National Young Insurance Professional of the Year award in 2015. [IA]

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