Insurance Advocate March 25, 2019

Vol. 130 No. 6 | March 25, 2019

Puff, The Magic Drag-On Insurers Legal Tokes Betoken Weeding of Insurance Regs...And More

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Foreword: AT ISSUE: NYDOBI and Businesses’ Use of Captives, Reinsurance Steve Acunto, Publisher

6

HR Update: The Reasonable Accommodation Trap Alfred T. DeMaria

8

Guest Opinion: Thought Police (Oops, Medicare) For All Marilyn M. Singleton, M.D., J.D.

10

In the Associations: Connelly Elected President of PIACT Prast Elected President-Elect of PIACT PIACT Names Officers for 2019-20

11

In the Associations: PIACT Re-elects Six to Board of Directors PIACT Young Insurance Professionals Elect O&D’s

22

Guest Opinion: Consider the Alternative...

Aaron Hodari

24

On My Radar: Arbitration Awards Need Abuse to Be Overturned Barry Zalma

26

Looking Back: March 12, 1994

28

Courtside: Insurer Need Not Provide Rationale for Provider EUO Demand Lawrence N. Rogak

29

Workers’ Comp: Workers’ Comp Schedule Rating Plans Can Be Used to Increase or Reduce Premiums Donald T. DeCarlo and Roger Thompson INSURANCE ADVOCATE / March 25, 2019 3

Vol. 130 No. 6 | March 25, 2019

12 PUFF, THE MAGIC DRAG-ON INSURERS

[ FOREWORD ]

STEVE ACUNTO, EDITOR & PUBLISHER

AT ISSUE: NJDOBI and Businesses’ Use of Captives, Reinsurance

4 March 25, 2019 / INSURANCE ADVOCATE

hen Applied Underwriters filed a petition against the New Jersey Department of Banking and Insurance (NJDOBI) on March 5th, the company placed the ability for businesses in the state to choose captives for risk retention squarely on the table.

At its core, the issue is about the limiting of choices available to New Jersey business owners to provide for their companies’ statutorily required workers’ compensation coverage in full compliance and in a manner that is both dollarwise for them and beneficial to the safety and care of their employees.

The essence of the NJ DOBI’s position is that, should a business retain risk, which by definition changes the ultimate cost of risk for that business, any retention vehicle will have, in effect, changed the rating of the policy in violation of the state’s right to review and approve insurance policy rates and forms.

The target, specifically, was a program named EquityComp delivered by Applied from 2008 to 2016 to the general satisfaction of businesses and their professional insurance agents in the state.

The essence of the conflict here lies in the Department’s disregard of the use of captive reinsurance; that is, the NJDOBI would forbid the use of a captive to retain risk. That’s it in a nutshell, as we see it. The Department is holding that it has extraterritorial jurisdiction over any reinsurance transaction that follows a New Jersey policy.

We hold that the Department has a fair point, albeit a relatively small one: there is the need for oversight of policy rates and forms, for sure, but we feel that as long as a New Jersey workers’ compensation policy remains in full compliance and is fully insured by the financial strength of an admitted insurer, business owners should be free to retain any amount of risk they desire through subsequent reinsurance.

The Department’s position seems to counter a long-standing practice and a growing trend. Rewind back to 2012 when the New Jersey Compensation Insurance Rating Bureau—a separate body from the NJDOBI that is responsible for workers’ compensation rates and forms—reviewed and permitted the EquityComp program’s structure and then followed up over the years periodically affirming its views...and the NJDOBI position seems out of synch with the realities of the review process and, most importantly, with the desires of business owners seeking cost-wise solutions through an insurance provider renowned for its care of injured workers—an important characteristic of Applied Underwriters according to independent sources.

The broader question for insurers and businesses is this: will New Jersey prove to be hostile or unduly challenging for captive insurance, an increasingly preferred mechanism for risk retention? According to NAIC stats, captive insurance now commands more than $81 billion of the nation’s insurance dollars and is a growing sector, making a discouraging approach seem faulty for a state whose leaders have targeted economic growth.

What appears to be a matter of rates, filings and the like may now appear to the industry to be a broader indicator of the NJDOBI’s philosophical approach to business encouragement and accommodation in the Garden State, not to mention a specific referendum on its approach to accommodating captives.

Applied may be the test case to the NJDOBI, but there is no winner for sure if ultimately consumers are penalized, that is, the business owners, injured employees and the tax-paying public, whose costs are affected by businesses statutory costs and by a drop in the rather substantial taxes captive entities contribute to the state.

We hope that this matter is worked out amicably and that captives will wind their way up and down and on and off the Garden State Parkway profitably, observantly and smoothly— within a reasonably enforced speed limit. SA

S I N C E

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VOLUME 130 NUMBER 5 MARCH 25, 2019

www.insurance-advocate.com EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Jamie Deapo Alfred T. DeMaria Sari Gabay Lawrence N. Rogak Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Gina Marie Balog-Sartario 914-966-3180, x113 g@cinn.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x113 circulation@cinn.com PUBLISHED BY CINN Global Initiatives P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | info@cinn.com www.cinn.com President and CEO Steve Acunto

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INSURANCE ADVOCATE / March 25, 2019 5

[ HR UPDATE ]

ALFRED T. DEMARIA

The Reasonable Accommodation Trap uMany employers mishandle workplace disability issues and, acting out of what they believe to be “common sense,” become victims of savvy employment lawyers who exploit the nuances of disability law. Here are common mistakes to avoid.

Failure to recognize that an accommodation request was made. A best practice is to have a policy that requires employees to consult with your human resources department, or upper management – rather than supervisors – if they need an accommodation.

Requesting too much medical information in order to provide an accommodation. Both federal and state laws restrict an employer’s ability to make disability-related inquiries.

Denying an accommodation request because the employee did not provide a solution. Even if an employee does not offer a solution, the employer must still engage in the interactive process to determine if a reasonable accommodation can be made.

If the reasonable accommodation obligation is ignored, serious liability can be incurred.

Ending the accommodation dialogue with the employee because no reasonable accommodation would allow the employee to perform the job’s essential functions. If an employee cannot perform the essential functions of the job, the employer should see if other accommodations can be made such as reassigning the employee to an open position, telecommuting, allowing the employee to work part time or providing the employee with an unpaid leave of absence. Even if the request is unreasonable, the employer must engage in interactive dialogue.

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

Mr. Zalma recently published on Amazon.com with links at the Zalma Books site, with the following: Non Fiction books: • “Insurance Fraud & Weapons to Defeat Insurance Fraud” In Two Volumes • “The Compact Book on Adjusting Liability Claims: A Handbook for the Liability Claims Adjuster” • “The Compact Book on Adjusting Property Claims” • “Ethics for the Insurance Professional” • “Rescission of Insurance” • “The Insurance Examination Under Oath”

• “Random Thoughts on Insurance Volumes IV and V: Digests from Barry Zalma’s Blog: ‘Zalma on Insurance’” Fiction: • “HEADS I WIN, TAILS YOU LOSE” • “Candy and Abel: Murder for Insurance Money” • “Murder And Insurance Fraud Don’t Mix” • “Murder & Old Lace”

Alfred T. DeMaria is a Senior Partner at Clifton Budd & DeMaria, LLP and is recognized as one of the preeminent management labor attorneys in the field. He has extensive experience in all areas of employment law, including advice on avoiding liability under disability, race, gender, age and related anti bias laws.

Mr. DeMaria advises on compliance with all federal, state and local laws governing the employment relationship, including the defense of lawsuits brought by employees against the companies that employ them.

Prior to his work at Clifton Budd & DeMaria, LLP, he served as a trial attorney with the National Labor Relations Board.

Claim the “we have never done that before” defense. Just because it has never been done before does not mean that it cannot be a reasonable accommodation. Telecommunication is one example that is becoming more popular as a “reasonable accommodation.”

Failing to document the interactive process that the employee/employer engaged in. Often, no documentation means no defense once the employee contacts an attorney familiar with the law.

Believing that allowing the accommodation will be an “undue hardship.”

This legal defense is hard to prove and is rarely recognized. For all practical purposes, it is unavailable.

If the reasonable accommodation obligation is ignored, serious liability can be incurred. Most employers are no match for wily plaintiffs’ lawyers having a high degree of familiarity with the nuances of the law. Note, however, employers are NOT required to provide indefinite leaves of absence as a reasonable accommodation.[IA]

6 March 25, 2019 / INSURANCE ADVOCATE

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[ GUEST OPINION ]

MARILYN M. SINGLETON, M.D., J.D.

Thought Police (Oops, Medicare) For All uThe new Medicare for All bill (H.R. 1384) has come and hopefully will go the way of the pet rock. Everybody now knows the basics: the government will take care of all medical, dental, vision, pharmacy, and long-term care services with no out-of-pocket expenses. The bill prohibits parallel private insurance, and has the glaring absence of a financing mechanism.

But as usual, bills contain hidden gems. Section 104 of the bill tracks the Affordable Care Act’s “anti-discrimination” rule, making it clear that no person can be denied benefits, specifically including abortion and treatment of gender identity issues “by any participating provider.” The bill does not correspondingly reaffirm the federal laws protecting conscience and First Amendment religious freedom rights of medical personnel.

Such protections relate to participation in abortion, sterilization, assisted suicide, and other ethical dilemmas.

Most sane individuals agree that we do not want our government to control any aspect of our individual lives—particularly not our religious beliefs and moral codes. When the Department of Health and Human Services (HHS) sought to clarify such conscience protections, thousands of commenters offered evidence of discrimination and coercion to violate the tenets of the Oath of Hippocrates and their own ethics.

Some left their jobs or left the medical profession entirely when their conscientious objections were not honored.

Conscience protections are vital in this time of unabashed devaluing of life. Last year, the Palliative Care and Hospice Education Training Act (PCHETA), passed the House but died in the Senate. This bill would have dedicated $100 million in additional taxpayer dollars to persuade patients to forgo treatment that might prolong life in exchange for a steady stream of increasing doses of narcotics. Already 8 March 25, 2019 / INSURANCE ADVOCATE

some families feel they are not merely offered hospice as a choice but are steered toward it when their older relatives fall ill, even when the medical prognosis is uncertain.

The focus on palliative care and lowering costs by reducing “aggressive” end-of-life treatment is one more incremental under-the-radar step along the road to government control over life and death. A culture of hastening death has gradually evolved, disguised as “death with dignity.” California, Colorado, Oregon, Washington, Mont ana, Vermont have legalized physician-assisted suicide with 20 other states considering implementing such laws.

Subtly devaluing life primes the pump for rationing of medical care at all stages by a government-run program that is the exclusive purveyor of medical “benefits.” Our western counterparts with single payer have discovered that offering fewer benefits is the simplest way to control costs. The “Complete Lives System”—the brainchild of ObamaCare physician architect Ezekiel Emanuel—includes worrisome determinants of who should receive care. The system prioritizes adolescents and persons with “instrumental value,” i.e., individuals with “future usefulness.”

This year, legislators were not so subtle. It is bad enough that our elderly are pushed into hospice, but now the compassionate legislators have set their sights on newborns. New York passed, and Virginia floated laws that permit the killing of babies after birth. The U.S. Senate garnered only 53 of the 60 votes needed to pass the Born Alive Survivors Protection Act which would mandate medical care and legal protections to infants born alive after an attempted abortion.

Starting in the 1970s, the federal government clearly saw a need to protect medical personnel from the tyranny of the government mandates that could

Dr. Singleton is a board-certified anesthesiologist. She is also a Boardof-Directors member and Presidentelect of the Association of American Physicians and Surgeons (AAPS).

She graduated from Stanford and earned her MD at UCSF Medical School. Dr. Singleton completed 2 years of Surgery residency at UCSF, then her Anesthesia residency at Harvard’s Beth Israel Hospital. While still working in the operating room, she attended UC Berkeley Law School, focusing on constitutional law and administrative law. She interned at the National Health Law Project and practiced insurance and health law.

She teaches classes in the recognition of elder abuse and constitutional law for non-lawyers.

violate religious or moral convictions.

Personal liberty is an integral part of our democratic republic. While a physician’s calling is to render treatment to all patients, this is balanced with an individual physician’s moral beliefs. This is no more apparent than in legislation permitting physician assisted suicide and post-delivery “abortions.” Sadly, under threat of discrimination lawsuits, some physicians have acquiesced to patients’ requests for medications and surgical procedures that conflict with their moral code.

As anthropologist, Margaret Mead so brilliantly wrote, “One profession, the followers of [Hippocrates], were to be dedicated completely to life under all circumstances…This is a priceless possession which we cannot afford to tarnish, but society always is attempting to make the physician into a killer—to kill the defective child at birth, to leave the sleeping pills beside the bed of the cancer patient. … It is the duty of society to protect the physician from such requests.”

We must not let the government bury our conscience and beliefs under layers of bureaucracy. Medicare for All may mean independent thought for none.[IA]

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[ IN THE ASSOCIATIONS ]

Connelly Elected President of PIACT u HARTFORD, Conn.—Mark R. Connelly, CIC, of Fairfield, Conn. (pictured right), was elected president of the Professional Insurance Agents of Connecticut, at the association’s Annual Convention, March 7-8, at Foxwoods Resort Casino in Mashantucket, Conn.

Connelly is president and CEO of Fairfield County Bank Insurance Services LLC, in Ridgefield, Conn.

An active member of PIACT, Connelly served as president-elect from 2018-19; and currently serves as vice president of the Administrative/ Nominations Committee. He also is member/consumer relations chairperson of the Association Programs Committee and is a member of the Executive/Budget & Finance Committee.

Active in his community, Connelly is treasurer for the American Institute for Neuro-Integrative Development Inc., a school for autistic children in Southport, Conn. [IA]

Prast Elected PresidentElect of PIACT u HARTFORD, Conn.—Gerard Prast, of Wallingford, Conn. (pictured right), was elected president-elect of the Professional Insurance Agents of Connecticut Inc., at the association’s Annual Convention, March 7-8, at Foxwoods Resort Casino in Mashantucket, Conn.

Prast is vice president for XS Brokers, which has offices in Quincy and Worcester, Mass., West Hartford, Conn., Philadelphia and Orlando, Fl. An active member of PIACT, Prast served as vice president of the association in 2018-19 and treasurer in 201718. He currently is vice president of the Association Programs Committee and a member of the Executive/Budget & Finance Committee. He also is an ex-officio member of the PIACT Western Advisory Council.

10 March 25, 2019 / INSURANCE ADVOCATE

Active in the industry, Prast is treasurer of the New England Surplus Lines Association. He also served on the board of the National Association of Professional Surplus Lines Offices, Ltd.[IA]

PIACT Names Officers for 2019-20 u HA RT F O R D, C o n n . — T h e Professional Insurance Agents of Connecticut Inc., elected officers today during the association’s Annual Business Meeting held at the Foxwoods Resort Casino in Mashantucket, Conn.

Following are the new officers who will lead PIACT in 2019-20: President: Mark R. Connelly, CIC, of Fairfield, Conn. Connelly is president and CEO of Fairfield County Bank Insurance Services LLC in Ridgefield, Conn.

• President-elect: Gerard Prast, CPIA, of Wallingford, Conn. Prast is vice president for XS Brokers Insurance Agency Inc. with offices in Quincy and Worcester, Mass., West Hartford, Conn., Philadelphia and Orlando, Fl. • Vice president: Shannon Rabbett, CIC, of Windsor, Conn. Rabbett is principal of Rabbett Insurance Agency in Windsor, Conn.

• Vice president: Nathan Shippee of Bolton, Conn. Shippee is vice president of sales & marketing for Workers’ Compensation Trust in Wallingford, Conn.

• Treasurer: Bud O’Neil, CPIA, Bristol, Conn. O’Neil is an insurance agent with C.V. Mason & Co., in Bristol.

• Secretary: J. Kyle Dougherty, CIC, Orange, Conn. Dougherty is president of Dougherty Insurance Agency Inc., in Stratford, Conn.[IA]

www.insurance-advocate.com

[ IN THE ASSOCIATIONS ]

PIACT Re-elects Six to Board of Directors u HA R T F O R D, C o n n . — S i x Connecticut independent insurance agents were re-elected to serve on the board of directors of the Professional Insurance Agents of Connecticut today at the association’s Annual Convention held at the Foxwoods Resort Casino in Mashantucket, Conn.

The following individuals were reelected to serve for a three-year term: • Marissa Barbera, of Westport, Conn. Barbera is president of Charter Oak Insurance Agency in Darien, Conn.

• Mark R. Connelly, CIC, of Fairfield, Conn. Connelly is president and CEO of Fairfield County Bank Insurance Services LLC, in Ridgefield, Conn. An active member of PIACT, Connelly was elected president of the association for 2019-20. He served as president-elect from 2018-19; and currently serves as vice president of the Administrative/Nominations Committee. He also is member/ consumer relations chairperson of the Association Programs Committee and is a member of the Executive/Budget & Finance Committee.

• Loretta Lesko, CIC, of Shelton, Conn. Lesko is vice president of operations for the DiMatteo Group Inc. in Shelton. Active in PIACT, Lesko is chairperson of the Administrative/Nominations Committee. She also is a member of the Business Issues Committee and the Glenmont National Alliance Committees. Lesko also is chairperson of the associations Western Advisory Council.

• William F. Malloy Jr., CIC, of Stamford, Conn. Malloy is president and owner of William F. Malloy Agency Inc. in Stamford.

An active member of PIACT, Malloy is a member of the

L e g i s l at i v e / B u s i n e s s Is s u e s Committee.

• Kevin P. McKiernan, CIC, CPIA, of Wilton, Conn. McKiernan is president of Abercrombie, Burns, McKiernan & Co., in Darien, Conn. Active in the association, McKiernan is a member of PIACT’s Association Programs and the Glenmont National Alliance Committees. He also is an ex-officio member of PIACT’s Western Advisory Council.

• Shannon R abb ett, CIC, of Windsor, Conn. Rabbett is principal of Rabbett Insurance Agency in Windsor, Conn. Active in PIACT, Rabbett was elected vice president of the association for 201920. She also served as treasurer for 2018-19; and serves as conference chairperson of PIACT’s Association Programs Committee and is budget & finance chairperson of PIACT’s Executive/Budget & Finance Committee. [IA]

• Ryan Kelly, of Merit Insurance, in Shelton, Conn., will serve as vice president; • Justin Sloan, of BSP Insurance in Meriden, Conn. will serve as treasurer; • Ryan Keating, of the Michael J. Keating Agency, in West Hartford, Conn., will serve as secretary; Elected to serve on the CTYIP board of directors are: Cr ystal Cathcart of MarketStance in New Haven, Conn.; Kathleen Bailey, ACSR, CLCS, of The Russell Agency, in Southport, Conn., Brad Barcusky of Philadelphia Insurance Co., in East Hartford, Conn.; Scott Burns of XS Brokers in Hartford, Conn.; Anthony DeSalva of Georgetown Financial Group in Georgetown, Conn.; Michelle Hinckley of Insurance Provider Group in Wethersfield, Conn.; Ryan Keating of Michael J. Keating Agency in West Har tford, C onn.; Nick Khamarji of ronoco in Easton, Conn.; John Mastroianni of Sal’s Clothing Restoration in North Haven, Conn.; Jacklyn Meeker of The Russell Agency in Southport, Conn.; Frank Pingelski of Tooher-Ferraris Insurance Group in Wilton, Conn.; Justin Sloan of BSP Insurance in Meriden, Conn.; James Kannengeiser of Shoff Darby in Trumbull, Conn.; Ryan Kelly of Merit Insurance, Shelton, Conn.; Brian

PIACT Young Insurance Professionals Elect O&D’s u HARTFORD, Conn.—Officers of the Professional Insurance Agents of Connecticut Inc. Young Insurance Professionals were elected today during PIACT’s Annual Convention, at Foxwo o ds Res or t C asino in Mashantucket, Conn.

• Kathleen Bailey, CPIA, ACSR, CLCS, of The Russell Agency, in Southport, Conn., will serve as president; • Anthony DeSalva, of Georgetown Financial Group, in Georgetown, C onn., w i l l s er ve as v ice president-elect;

Glasser of J.P. Maguire, Waterbury, Conn.; Matt Lynn of Healy-Lynn Insurance, Naugatuck, Conn.; and Robyn Ricciardone of RPS Cowles & Connell, Meriden, Conn.

The CTYIP is an organization dedicated to the professional and personal growth of newcomers to the insurance industry. It is an affiliate of PIACT, a trade association representing professional, independent insurance a g e n c i e s a n d t h e i r e mp l oy e e s throughout the state.[IA] INSURANCE ADVOCATE / March 25, 2019 11

Puff, The Magic Drag-On Insurers Legal Tokes Betoken Weeding of Insurance Regs...And More

BY PAUL WHITE AND SHANNON SANTOS

12 March 25, 2019 / INSURANCE ADVOCATE

Paul White, Partner at Wilson Elser Moskowitz Edelman & Dicker LLP, focuses his practice on complex insurance coverage and bad faith litigation and represents defendants in commercial litigation. Paul’s insurance coverage practice includes advising and representing insurers in bad faith litigation and insurance policy disputes, including first-party property policies, general liability coverage, errors and omissions insurance, and media liability insurance. He also advises and represents insurers in subrogation actions on property losses.

In addition, Paul has litigated and arbitrated disputes throughout the United States involving domestic and foreign insurance agents and brokers in all lines of coverage. He has broad experience in the business practices of all types of insurance intermediaries, including brokers at every level in the broking process, from producers to managing general agents to London Market brokers.

Shannon Santos, Of Counsel at Wilson Elser Moskowitz Edelman & Dicker LLP, handles a diverse range of matters on behalf of insurers, including coverage and extra-contractual litigation, coverage advice and defense of insurers. Her practice emphasizes third-party liability and first-party commercial and personal claims. Shannon has handled a variety of coverage matters involving construction defects, property, and personal and advertising injury.

INSURANCE ADVOCATE / March 25, 2019 13

uThe cannabis business continues to expand throughout the United States with 33 states that allow some use of medical cannabis, 10 states that allow adult use of cannabis and most others that allow for limited medical use of CBD (cannabidiol). In fact, only four states bar the use of all cannabis products. While the federal Controlled Substances Act (CSA) continues to identify cannabis as a Schedule I drug, the Obama and Trump administrations have ushered in an era that provides some assurance to the cannabis industry that personal use of marijuana and operation of state-regulated cannabis businesses will not be the targets of federal prosecution. In turn, the expansion of the legal cannabis industry requires that it be able to manage risk through insurance for property and liability losses.

The current cannabis insurance market overwhelmingly comprises surplus lines carriers. There also are several smaller admitted carriers that operate in California. Several major commercial carriers should enter the market by the end of 2019, both on a surplus and admitted basis. Federal legalization will, of course, greatly accelerate this process. Unlike other business models, however, the application of insurance policy language to cannabis losses is in its infancy. Given questions on coverage, some states such as Oregon require insurers to clarify how policy language will apply. Other states such as California have encouraged the expansion of insurance products for cannabis.

The ultimate arbiter of the scope of insurance coverage for cannabis is the judicial system. The courts interpret policies, providing guidance to insurers and policyholders alike on the scope and limitations of coverage. Such decisions also prove instrumental in allowing both policyholders and insurers to assess risk and to identify needs going forward. While property and liability policies differ in their insuring clauses, conditions, and exclusions, there is overlap on some issues. Insurers also are likely to draft language that addresses risks unique to the industry for future policies that cross insurance product lines. The following cases highlight several issues peculiar to the cannabis world.

Choice of Law / Insurable Interest / Contraband Exclusion A consistent theme in both contract law and insurance law is that courts will not enforce contracts that have an illegal object. In this respect, one of the threshold issues insurers and policyholders confront is whether insurance coverage disputes will be governed by state law or federal law. If state law applies in a jurisdiction where the insured’s cannabis business was operating legally, an insurance contract will likely be enforceable. However, if federal law applies − or the insured is operating outside the bounds of applicable state law, for example by selling medicinal marijuana for recreational use − the insured may be deemed to be engaged in illegal cultivation or distribution, leaving the contract potentially unenforceable.

In Tracy v. USAA Ins. Co., 2012 WL 928186 (D. Haw. Mar. 16, 2012), an insured engaged in growing marijuana at home in accord with state law, and filed a claim when the marijuana plants were stolen. The insurer argued that if the federal court applied its policy language covering theft of plants to provide 14 March 25, 2019 / INSURANCE ADVOCATE

coverage for theft of the insured’s marijuana plants, it would violate public policy since cannabis is illegal under federal law.

The insurer sought summary judgment, asserting the insured did not have an insurable interest in the plants since they were federally prohibited. The court agreed: The rule under Hawai’i law that courts may decline to enforce a contract that is illegal or contrary to public policy applies where the enforcement of the contract would violate federal law. … The Court therefore assumes, for purposes of the instant motion, that the “Trees, Shrubs and Other

A consistent theme in both contract law and insurance law is that courts will not enforce contracts that have an illegal object.

In this respect, one of the threshold issues insurers and policyholders confront is whether insurance coverage disputes will be governed by state law or federal law.

Plants” provision of the Policy covered the loss of Plaintiff ’s medical marijuana plants. Even in light of that assumption, this Court cannot enforce the provision because Plaintiff ’s possession and cultivation of marijuana, even for State-authorized medical use, clearly violates federal law. To require Defendant to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy. … The Court therefore CONCLUDES that, as a matter of law, Defendant’s refusal to pay for Plaintiff ’s claim for the loss of her medical marijuana plants did not constitute a breach [of] the parties’ insurance contract.

In Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Colo. 2016), the court reached a different result. There, the insured operated a retail medical marijuana business, which Atain Specialty Insurance Company (Atain) insured through a Commercial Property and General Liability insurance policy. The insured made a claim for smoke and ash damage from a wildfire that impacted the ventilation system of the business and caused damage to the marijuana plants. Id. at 823. The insured’s policy included a “contraband” exclusion that barred coverage for “contraband, or property in the course of illegal transportation or trade.” Id. at 832.

The court declined to apply the exclusion to preclude coverage for damage to the marijuana plants and held “the Policy’s ‘Contraband’ exclusion is rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.” Id. at 833.

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Moreover, the court reasoned: [I]t is undisputed that, before entering into the contract of insurance, Atain knew that Green Earth was operating a medical marijuana business. It is also undisputed that Atain knew— or very well should have known—that federal law nominally prohibited such a business.

Notwithstanding that knowledge, Atain nevertheless elected to issue a policy to Green Earth. … The record suggests that the parties shared a mutual intention that the Policy would insure Green Earths’ [sic] marijuana inventory and that the ‘Contraband’ exclusion would not apply to it.” Id. at 833-834.

Finally, the Green Earth court expressly rejected the Hawaii court’s rationale in Tracy, observing that since Tracy there has been a “continued erosion of any clear and consistent federal public policy,” and further noting that Atain had agreed to insure a marijuana business “of its own will, knowingly and intelligently.” Id. at 835.

Criminal Acts Exclusion In K.V.G. Properties, Inc. v. Westfield Ins. Co., 900 F. 3d 818 (2018), K.V.G Properties sought coverage under a first-party property policy for damage to its physical office space arising from its tenants’ cannabis-growing operation. Indeed, the tenants not only had been caught growing marijuana but also had removed walls, cut holes in the roof, and altered ductwork to accommodate their business. Although Westfield denied coverage on multiple grounds, the Sixth Circuit focused its analysis on whether the criminal acts exclusion precluded coverage.

The property at issue was located in Michigan where cultivation of cannabis is a federal crime but is protected in certain circumstances under Michigan law. Westfield argued that its tenants’ conduct was criminal irrespective of whether federal law or Michigan law applied and that, consequently, the demand for coverage was precluded under the policy’s criminal acts exclusion. The United States District Court in Michigan agreed and dismissed K.V.G. Properties’ claim. While recognizing K.V.G. Properties could have a “strong federalism argument” had it been in compliance with Michigan law, the Sixth Circuit agreed that the conduct was outside the bounds of Michigan’s marijuana law and affirmed the dismissal.

Accident / Increased Risk Exclusion In Nationwide Mut. Fire Ins. Co. v. McDermott, 603 Fed. Appx.

374 (6th Cir. 2015), an insured suffered a fire loss that Nationwide learned, after making a $160,209.50 payment, was caused by the insured’s butane extraction method in the cultivation of marijuana. Nationwide then denied coverage when it learned that the insured had been “operating an illegal marijuana and THC manufacturing facility in the basement,” which caused the fire. Id. at 376. The Nationwide policy provided coverage for accidental fire losses but excluded coverage for any loss “occurring while the hazard [was] increased by a means within the control and knowledge of an insured” and further required that the insured “notify [Nationwide] as soon as possible of any change which may affect 16 March 25, 2019 / INSURANCE ADVOCATE

the premium risk under [the] policy,” including “changes … in the occupancy or use of the residence premises.” Id. The trial court granted summary judgment on two grounds: first, the court found that the loss did not qualify as an “accident” under the policy because it was the result of a butane extraction process; and second, the court found that a Nationwide policy exclusion for losses that occur while an insured has increased the risk of hazard applied since the insured was using the basement as an illegal marijuana lab, which resulted in an increased hazard without having notified the insurer. The Sixth Circuit did not rule on whether the fire was an “accident” but affirmed the trial court’s order granting summary judgment on the basis that the insured’s change of use of the property, without notice to the insurer, increased the risk of hazard and was excluded by the policy.

Since marijuana is still identified as a Schedule I substance under the CSA, insurers may seek to rely on the “controlled substances” exclusion to bar coverage for liability claims arising out of a marijuana business.

Conversion Exclusion In Swish v. Manhattan Fire & Marine Ins. Co., 675 F. 2d 1218 (11th Cir. 1982), the owner of a small aircraft had leased it to a lessee who attempted to use the plane to smuggle marijuana into the United States from the Bahamas. Law enforcement intervened, but damaged the plane while removing various equipment.

The lease on the plane specifically prohibited the lessee from using the aircraft to carry cargo or engage in illegal activity. The insurance policy at issue included an exclusion for “conversion.”

The insurer denied the owner’s claim for property damage coverage on the basis that the plane had been converted for illegal purposes and the exclusion expressly precluded coverage for conversion, including any “loss or damage during or resulting therefrom.” Id. at 1219. The court agreed, finding that the claimed loss occurred during an ongoing conversion when the lessee was using the plane in an illegal manner.

Similarly, the court in National Union Fire Ins. Co. of Pa. v.

Carib Aviation, 759 F. 2d 873 (11th Cir. 1985) applied the conversion exclusion to preclude coverage where a lessee of an airplane rented it to purportedly fly from Miami to Orlando but instead flew to the Bahamas to transport marijuana. The plane crashed during the flight, and the court held that the plane had been “converted,” and coverage was precluded.

CONTINUED ON PAGE 18

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“Controlled Substances” Exclusion Since marijuana is still identified as a Schedule I substance under the CSA, insurers may seek to rely on the “controlled substances” exclusion to bar coverage for liability claims arising out of a marijuana business. A plain reading of the exclusion applies to bar coverage for any loss related to marijuana.

However, carriers must be cognizant of the changing impressions when it comes to cannabis and the protections naturally provided to the insureds.

The Insurance Services Office homeowner’s form includes the following “controlled substances” exclusion: “Bodily injury” or “property damage” arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812. Controlled Substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the lawful orders of a licensed health care professional.

The court in Prudential Prop. & Cas. Ins. Co. v. Brenner, 350 N.J. Super. 316 (2002) was asked to interpret a similarly worded exclusion in a homeowner’s policy arising from the involvement of the homeowner’s son in the attempted theft of marijuana that left a drug dealer dead. The boy admitted participation in the theft but denied any plan involving murder.

The insurer denied coverage based on the controlled substance exclusion. The court agreed with the insurer. While the court acknowledged that the homeowner’s son was in the drug dealer’s home only to steal marijuana and that the drug dealer’s death was connected to an “ill-conceived plan” that went “wildly and sadly awry,” the court held that the “language employed unmistakably encompasses more than the completed act of manufacture, use or transfer of a controlled danger substance” and precluded coverage. Id. at 323.

In contrast, the appellate court in Keckler v. Meridian Sec. Ins. Co., 967 N.E. 2d 18 (Ind. Ct. App. 2012) reversed a trial court’s application of the controlled substances exclusion in circumstances where a teenager involved in an automobile accident was observed to have “glassy eyes” and had a bag of marijuana in the car. While the trial court applied the exclusion to preclude coverage, the court of appeal reversed, finding that there was no evidence that the teen had used marijuana.

The appellate court rejected the insurer’s argument that public policy favored application of the exclusion since drug possession laws were violated, reasoning that Indiana does not apply a public policy exception to overcome coverage provided under the relevant policy. The court elaborated that, even if the law endorsed the insurer’s public policy argument, it would be an extraordinary result for the court to deny coverage for “bad behavior” that had nothing to do with the accident. Id. at 26.

Reasonable Expectations / Growing Plants Insurers generally do not extend coverage to growing plants, although there are exceptions. As is pertinent to a 18 March 25, 2019 / INSURANCE ADVOCATE

broader liability coverage examination, in Green Earth, supra, the insured argued that the policy should cover the loss of its growing plants, because the insured sought to insure its plants through the purchase of business insurance. Id. at 830. The insured relied on the reasonable expectations doctrine to argue that the court should “honor the reasonable expectations of an insured where circumstances attributable to an insurer have deceived a [sic] objectively reasonable insured into believing that it is entitled to coverage for a certain loss.” Id. at 831, citing Bailey v. Lincoln Gen. Ins. Co., 255 P.3d 1039, 1053 (Colo.

2011). The court rejected application of the doctrine as it was not sufficient to merely claim an expectation of coverage.

Rather, the court determined there must be some showing that the expectations are reasonable. Green Earth, supra, at 831, citing Bailey, supra, at 1054. The court specifically noted that, “the extrinsic evidence in the record indicates that Atain repeatedly, plainly, and conspicuously advised Green Earth that growing plants would not be covered, and there is no evidence

The federal crop insurance program, which frequently is involved in either the underwriting or reinsurance of crop insurance in the United States, does not cover cannabis.

The consequence of this policy is that surplus lines insurers will have difficulty underwriting crop loss since they will not have access to the federal crop insurance program.

that Green Earth ever objected.” Green Earth, supra, at 831.

In Huynh v. Safeco Ins. Co., 2012 WL 5893482, at 1 (N.D. Cal. Nov. 23, 2012), a property owner’s tenant operated an illegal marijuana grow house that damaged the building. The court held that an “illegal growing of plants” exclusion precluded coverage for the landlord’s claim. Although California had legalized marijuana for medical purposes at the time, the tenant’s grow house was illegal. Consequently, the court evaluated coverage on the premise that the tenant’s operation was illegal under both state and federal law. The conclusion may have been different − and certainly would have prompted more discussion − had recreational marijuana been legal in California as it is today.

Growing Crops It also is worth noting that growing crops presents a risk management issue pertinent to the marijuana business. The federal crop insurance program, which frequently is involved in either the underwriting or reinsurance of crop insurance in the United States, does not cover cannabis. The consequence of this policy is that surplus lines insurers will have difficulty underwriting crop loss since they will not have access to the fedCONTINUED ON PAGE 20

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eral crop insurance program. To the extent surplus lines may be willing to extend crop loss coverage, it is likely to be for smaller exposures, and premium pricing is likely to be increasingly prohibitive as exposures increase. Whether legalization of cannabis at the federal level would open access to the federal crop insurance program remains to be seen, but would be a logical step.

Vandalism Coverage / Mold Exclusio n In Bowers v. Farmers Ins. Exchange, 991 P. 2d 734 (Wash.

App. 2000), an insured property owner sought coverage for damages arising from mold growth that occurred after its tenant converted the property to a marijuana grow house.

The court was asked to determine whether coverage under the vandalism coverage applied and whether the mold exclusion precluded coverage. The insurer argued that the tenant’s alteration of the home was not vandalism but an intentional act. The court read coverage broadly and rejected this argument, holding that the tenant’s disregard for the integrity of the property constituted vandalism. The court further found that the mold growth was secondary to the vandalism. See also, Kochendorfer v. Metropolitan Prop. & Cas. Co., No. 2:11cv-01162 (W.D. Wash. 2012) (court granted insured property owner motion for summary judgment, finding that damages from marijuana grow operation arose from tenant vandalism, not the marijuana grow operation).

The “Pollution” Exclusion It is an inevitable fact that some cannabis businesses will be sued for nuisance or pollutant reasons. The production and harvesting of marijuana plants necessarily involve smells and production materials, which may be found to be offensive to neighboring businesses or residences. The nature of the business, coupled with the “drug” component, already causes highly publicized pushback from neighbors trying to avoid such businesses in the same vicinity, which could include pollutant claims such as smoke, dust, chemicals, and pesticides. Carriers will then have the burden of establishing whether a “pollution exclusion” applies. Under standard CGL policies, a pollution exclusion applies for liability arising out of the dispersal of pollutants. The issue will be whether any claims against a cannabis business will include claims of exposure to anything that constitutes a “pollutant” under policy language and applicable law.

In MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 652 (2003), the California Supreme Court held that a pollution exclusion for bodily injury “resulting from the actual, alleged, or threatened discharge, dispersal, release or escape of pollutants” applies only to traditional environmental pollution. The California court followed a Colorado decision in holding that “while a reasonable person of ordinary intelligence might well understand carbon monoxide is a pollutant when it is emitted in an industrial or environmental setting, an ordinary policyholder would not reasonably characterize carbon monoxide emitted from a residential heater which malfunctioned as ‘pollution.’ It seems far more reasonable that a policyholder would understand it as being limited to irritants and contaminants commonly thought of as pollution and not as applying to every possible irritant or contaminant imaginable.” Id. at 65220 March 25, 2019 / INSURANCE ADVOCATE

653, quoting Regional Bank of Colo. v. St. Paul Fire & Marine Ins. Co., 35 F.3d 494, 498 (10th Cir. 1994).

On the other hand, in Deni Assocs. v. State Farm Fire & Cas. Ins. Co., 711 So.2d 1135, 1138-1139 (Fla. 1998), in examining a pollution exclusion for “any personal injury or property damage ‘arising out of the actual, alleged or threatened discharge, dispersal, release or escape of ’ … any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalines, chemicals and waste,” the Florida Supreme Court stated, “we cannot accept the conclusion reached by certain courts that because of its ambiguity the pollution exclusion clause only excludes environmental or industrial pollution.”

To date, there is no national published opinion on whether contaminants, smoke, chemicals, or other irritants used in marijuana cultivation or operations qualifies as a pollutant for application of this exclusion. “Whether marijuana smells qualify as pollutants probably depends on their intensity, range, duration, and location. The occasional waft from a dispensary in a commercial district may not be a pollutant, while a wide-ranging, intense stench in a residential neighborhood may be.” Gottlieb, Lawrence & Matt Munson, Insurance Issues Raised by the Legalization of Recreational Marijuana; Vol. 46, No. 1, Am. Bar Ass’n: The Brief, p. 34, Fall 2016. There is simply insufficient information about the court’s interpretation of cannabis as a pollutant to provide any guidance on how courts will interpret application of this exclusion.

Law Enforcement Raids An individual or entity in the cannabis business runs the risk of being raided by law enforcement officials and having their plants or inventory seized. As a general rule, an entity cannot insure against losses suffered during a government raid premised on illegal drug activity. However, at least one insurer is offering an insurance product that provides such protection for state raids in circumstances where the insured is in compliance with state law. Presumably, if federal law legalizes marijuana or recognizes the ability of states to legalize and regulate the cultivation and distribution of marijuana, similar coverage for federal raids will follow.

Summary The foregoing discussion is by no means exhaustive of the issues likely to confront the insurability of the cannabis industry. Other policy provisions that currently exist are likely to become subjects for coverage consideration. In this respect, be aware of insurance policy language that excludes coverage for property in the course of illegal transportation or trade, limited coverage or sub-limits for outdoor plants, exclusions for employee dishonesty, and limitations or exclusions in homeowners’ policies for losses arising from a home business. These are likely to be issues in the evolution of cannabis insurance coverage law.

For further information on cannabis and hemp law and policy, please contact the authors or other members of the Wilson Elser cannabis practice. Additional information can be found at www.wilsonelser.com/cannabis.[IA]

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AARON HODARI, CFP®, CIMA®

Consider the Alternative..

Why Alternative Investments Have a Place in Your Portfolio uThink about the characteristics that make a strong portfolio: diverse, cost-efficient, tax-efficient, risk-managed.

These qualities should be true of every portfolio, no matter the size or an individual’s risk profile. The clients we meet with all want a portfolio that checks these boxes, but doing so is easier said than done.

This is why we often look to alternative investments. The world of alternatives provides access to unique opportunities that, when used correctly for the right investor, can help achieve the portfolio traits mentioned above.

WHY ALTERNATIVES?

The catch-all phrase of “alternative investments” is a bit of a misnomer, since it can mean different things to different people. Hedge funds are alternative investments, as are structured settlements and cryptocurrency assets (but that’s a discussion for another day).

The reason we preach the value of alternatives to certain clients is because they can have a low correlation to the U.S. stock market, which comprises many investors’ main risk exposure.

Achieving an asset mix with low correlations helps protect against downside and bouts of volatility, especially as traditional assets are becoming more correlated than ever. As BlackRock noted, alternatives took less heat during the dot-com crash and financial crisis compared to their mainstream peers.

On top of this, alternatives can generate higher rates of returns due to the wide scope of their investment universe.

But of course, not all alternatives are created equal. With this in mind, there are two types of alternatives we feel make a strong case for portfolio inclusion: real estate and private debt.

22 March 25, 2019 / INSURANCE ADVOCATE

REAL ESTATE

Perhaps the most well-known type of alternative investment, real estate investing has become increasingly popular in recent years. We find real estate attractive in part for its returns. The average 20-year return of REITs (11.8 percent) residential real estate (10.6 percent), and commercial real estate (9.5 percent) all outperform the S&P 500 (8.6 percent).

The total equity market cap of the FTSE Nareit All REITs Index is over $1.1 trillion according to the National Association of Real Estate Investment Trusts, more than double the market’s $438 Billion value in 2007. This growth is due in part to the increasing variety of REIT specializations and countless fintech platforms that have democratized access to the market, increasing investor exposure to the market.

However, the rising popularity of real estate investing has had an unintended consequence: it has increased the correlation of the asset to equities and the overall market. This can be problematic for us, as we are generally trying to diversify away from equities when including a real estate allocation in a client portfolio.

This is why we prefer to allocate to non-publicly traded real estate funds over publicly traded REITs. Private placement real estate gives us access to institutionally managed real estate assets directly valued by leading firms without having to worry about external market forces having an impact on price and volatility. It’s a best-of-both-worlds solution for our investing needs.

PRIVATE DEBT

In the wake of the financial crisis, many traditional lenders scaled back

Aaron Hodari is a managing director at Schechter, a boutique, third-generation wealth advisory and financial services firm located in Birmingham, MI. For 80 years, Schechter has quietly advised wealthy families on financial matters including: Institutional quality investment advisory services, private capital and alternative investments, advanced life insurance planning, income and estate taxes, business succession and charitable planning. The views expressed in this article are those of the author and many not reflect those of Schechter or their affiliates.

their business lending activity, paving the way for institutional funds and investors hungry for entry into the private lending markets to get a bigger piece of the pie.

And the market is expected to continue to grow, both in the U.S. and abroad. A 2017 report from the Alternative Investment Management Association said the global private credit market will break the $1 trillion threshold by 2020. AIMA CEO Jack Inglis called the private credit market “a permanent feature of the lending landscape.” Inglis noted that performance across the industry continues to be strong relative to other asset classes, which in turn has attracted more fundraising from investors.

Why would investors flock to such an obscure, illiquid type of investment? It comes down to returns. In a survey from BNY Mellon, 96 percent of respondents

[ GUEST OPINION ] said private debt had performed at or better than their expectations—higher than for any other type of alternative investment.

According to Preqin, between June 2013-June 2017 private debt funds recorded double-digit annualized returns.

Direct lending strategies led the charge, returning 13.8 percent. Between the rising rate environment and equity’s volatile 2018 finale, the returns for an uncorrelated asset class like private debt are hard to argue with. Diversification, manager selection, and an understanding of the illiquidity are critical – but for the right investor, it can be a valuable part of the portfolio.

THE RIGHT ALTERNATIVE FOR THE RIGHT INVESTOR

These investments are not for everyone. As Legg Mason points out, alternative investments come with quite diverse returns. Their liquidity can vary greatly as well.

But for the right investors who have the desire, capital, and risk profile to look elsewhere, alternatives can provide a great cushion to protect your portfolio and potentially increase your returns.

There’s a place for traditional investments with every investor, but don’t forget to consider the alternatives when building your portfolio.

Investment Risk: Alternative investment products, including real estate investments, private equity, hedge funds, and other notes & debentures, are considered highly speculative, involve a high degree of risk, and therefore may not be suitable for all investors.

Alternative investment managers often engage in speculative investment practices, such as the use of leverage, that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.[IA]

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[ ON MY RADAR ]

BARRY Z ALMA

Arbitration Awards Need Abuse to Be Overturned Arbitrators have Substantial Discretion to Determine the Scope of Their Contractual Authority to Fashion Remedies uArbitration is controlled by strong public policies favoring arbitration as a speedy and relatively inexpensive means of dispute resolution. For that reason arbitration awards are almost never overturned unless the aggrieved party can prove the arbitrators exceeded their powers, acted as a result of conflict of interest, or acted wrongfully.

In QBE Insurance Corporation v.

American Claims Management, Inc., D073345, Court of Appeal, Fourth Appellate District Division One State of California (February 4, 2019) Appellant American Claims Management, Inc. (ACM), a third party claims service administrator, entered into a contract to handle insurance claims on behalf of respondent QBE Insurance Corporation (QBE). ACM appeals a judgment entered after the superior court confirmed an arbitration award in QBE’s favor. The arbitration panel (the Panel)1 concluded that ACM violated the parties’ contract in handling a claim by a QBE auto insurance policy holder, Galdino Cortes, who was involved in a vehicular accident that injured three members of the Cardona family. The Panel awarded QBE total damages of $18,450,855.73, which included interest, attorney fees and costs.

ACM contends the Panel exceeded its powers because it: • “ignored California law” as shown by its failing to cite “a single California case or statute in discussing whether ACM breached the contract or must indemnify QBE”; • “created new California law in violation of California statutes and public policy; • held ACM liable for the entire $15 million settlement although, at most, ACM is assertedly only liable to indemnify QBE for the $1,250,000 that QBE paid to Cortes 24 March 25, 2019 / INSURANCE ADVOCATE

The appellate court must, when asked to review an arbitration award, narrowly and deferentially review the arbitrators’ award. under the settlement agreement, and not the $13,750,00 settlement with the Cardonas • manifestly disregarded the law under the Federal Arbitration Act (FAA); and • “miscalculated amounts owed to QBE.” ACM specifically contends the Panel improperly included in its award “damages relating to attorneys’ fees in the Cardona[ ] litigation”; “fees and interest, for obligations incurred before the Panel determined the duty to indemnify arose”; and attorney fees in the arbitration.

FACTUAL BACKGROUND

The parties stipulated to the following facts during arbitration: In February 2011, Cortes was involved in a traffic collision with the Cardonas. Cortes’s insurance policy had a $30,000 liability limit per accident. That month, the Cardonas mailed a policy limits demand to ACM, giving it 15 days to respond.

After a late attempt to accept the offer, the case went to trial and the Cardonas obtained a judgment against Cortes in the amount of $20,974,903.

ACM did not timely communicate to QBE its receipt of the demand letter. The Panel wrote in its final award: “In what would become a disturbing pattern, ACM also neglected to inform

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 51 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Mr. Zalma’s books are available as Kindle books or paperbacks at Amazon. com and can be reached at http:// zalma.com/zalma-books/ Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/ bzalma on Facebook at https://www. facebook.com/barry.zalma and you can follow him on Twitter at https:// twitter.com/bzalma.

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QBE that [] Cardona had called ACM . . . to follow up on his demand letter, that the demand letter expired . . . , and that [an ACM employee who was subsequently fired] failed to contact Cardona until [after the demand letter’s deadline]. In other words, ACM apparently chose to withhold from QBE evidence of its own negligent performance

[ ON MY RADAR ] under the Agreement that . . . had potentially exposed ACM to hundreds of thousands, if not millions of dollars for bad faith.”

ACM and QBE later stipulated that $15 million was a reasonable amount to settle the Cardona lawsuit against QBE, and it was a good faith settlement. QBE subsequently paid the Cardonas that amount.

QBE sued ACM to recover the $15 million settlement plus more than $1 million in legal fees that QBE incurred in the related action.

Arbitration Ruling The Panel ruled on QBE’s breach of contract claim that QBE had proven its prima facie case and “ACM was deficient in its performance of its responsibilities to QBE under the [Claims Management Agreement (CMA)].”

The Panel ruled: “The starting point for the Panel’s analysis of contract damages is with ACM’s failure to timely review the letter demand, timely respond thereto and ultimately pay policy limits on behalf of Cortes. Had it done so, QBE would have only incurred an expenditure of $30,000[ ], [Cortes’s] full policy limits. . . . [¶] QBE ultimately paid $15 [million] to resolve the Cortes and Cardonas claims. All but $30,000[ ] of this payment was required because of ACM’s breach.”

Trial Court Proceedings ACM is contesting the Panel’s decision and findings because it does not agree with the award. All of ACM’s arguments were unavailing. ACM was trying to re-litigate the merits of the award regarding whether QBE is entitled to indemnity. That is an issue squarely within the CMA for the Panel to decide.

DISCUSSION

Considering the strong public policies favoring arbitration as a speedy and relatively inexpensive means of dispute resolution, the scope of judicial review of private, binding arbitration awards is extremely narrow. Even an error of law apparent on the face of the award that causes substantial injustice does

not provide grounds for judicial review.

With respect to contractual remedies, arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies. Judicial review of their awards must be narrow and deferential.

Although a court may correct an arbitration award when the arbitrators exceeded their powers or may correct an award if the correction can be made without affecting the merits of the decision upon the controversy submitted.

The appellate court must, when asked to review an arbitration award, narrowly and deferentially review the arbitrators’ award. Following the rule dealing with arbitration awards the appellate court concluded that ACM’s contention the Panel’s final award is in excess of its powers failed because the recovery or non-recovery of fees is one of the contested issues of law and fact submitted to the arbitrator for decision and, therefore, the arbitrator’s decision was final and could not be judicially reviewed for error.

In addition, the court concluded that on their face, ACM’s several claims amount to nothing more than assertions of legal error whose conclusion was provided by the agreement to the arbitrators.

When parties contract to resolve their disputes by private arbitration, their agreement ordinarily contemplates that the arbitrator will have the power to decide any question of contract interpretation, historical fact or general law necessary, in the arbitrator’s understanding of the case, to reach a decision.

Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case.

Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be vacated because of such error, for the arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement.

The judgment was affirmed and QBE Insurance Company was awarded its costs on appeal.[IA]

ZALMA OPINION

The court followed the standard rule with regard to arbitration awards – it affirmed the finding because there was no proof of collusion, undisclosed conflict of interest or evidence that the arbitrators exceeded the powers provided to them by the contract authorizing arbitration. Professional liability claims people understand the hazards of short time limit policy demands and the failure to respond or advise the insurer placed QBE in a situation where it was required to pay $15 million on its $30,000 policy because of the error of the adjusters. The only issue not touched by the appellate court is whether ACM had sufficient errors and omissions insurance to pay the $15 million judgment or if ACM has sufficient assets to pay the judgment. [IA]

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INSURANCE ADVOCATE / March 25, 2019 25

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INSURANCE ADVO CATE - 26 YEARS AGO

26 March 25, 2019 / INSURANCE ADVOCATE

INSURANCE ADVO CATE - 26 YEARS AGO

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Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com INSURANCE ADVOCATE / March 25, 2019 27

[ COURTSIDE ]

LAWRENCE N. RO GAK

Insurer Need Not Provide Rationale for Provider EUO Demand Dynamic Balance Acupuncture, P.C. v State Farm Ins. Edited by Lawrence N. Rogak In this no-fault suit, State Farm moved for summary judgment on the grounds of the provider’s failure to respond to two EUO requests. Civil Court denied the motion, finding an issue of fact as to the reasonableness of the EUO requests. The Appellate Term reversed, holding that the insurer was not required to respond to the provider’s demand for a justification of the EUO requests.—LNR uAppeal from an order of the Civil Court of the City of New York, Kings County (Katherine A. Levine, J.), entered March 9, 2016. The order, insofar as appealed from, denied defendant’s motion for summary judgment dismissing the complaint. ORDERED that the order, insofar as appealed from, is reversed, with $30 costs, and defendant’s motion for summary judgment dismissing the complaint is granted.

In this action by a provider to recover assigned first-party no-fault benefits, defendant moved for summary judgment dismissing the complaint on the ground that plaintiff had failed to appear for duly scheduled examinations under oath (EUOs). In an order entered March 9, 2016, the Civil Court denied the motion, but found, in effect pursuant to CPLR 3212 (g), that defendant had established the timely and proper mailing of the EUO scheduling letters and the denial of claim forms, as well as plaintiff ’s failure to appear for the EUOs. The Civil Court further found that the only remaining issues for trial were the location of the generation of defendant’s EUO letters and matters relating to the reasonableness of its EUO requests. Defendant appeals from so much of the order as denied its motion 28 March 25, 2019 / INSURANCE ADVOCATE

To establish its prima facie entitlement to summary judgment dismissing a complaint on the ground that a provider had failed to appear for an EUO, an insurer must demonstrate, as a matter of law, that it had twice duly demanded an EUO from the provider, that the provider had twice failed to appear, and that the insurer had issued a timely denial of the claims... for summary judgment dismissing the complaint.

To establish its prima facie entitlement to summary judgment dismissing a complaint on the ground that a provider had failed to appear for an EUO, an insurer must demonstrate, as a matter of law, that it had twice duly demanded an EUO from the provider, that the provider had twice failed to appear, and that the insurer had issued a timely denial of the claims (see Interboro Ins. Co. v Clennon, 113 AD3d 596, 597 [2014]; Integrative Pain Medicine, P.C. v Praetorian Ins. Co., 53 Misc 3d 140[A], 2016 NY Slip Op 51520[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2016])—all elements that the Civil Court found to have been established pursuant to CPLR 3212 (g).

Plaintiff does not argue that defendant did not demonstrate its prima facie case. Rather, plaintiff argues that defendant’s EUO requests were unreasonable,

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.

in that defendant did not respond to plaintiff ’s letter demanding that defendant provide its good faith reasons for requesting plaintiff ’s EUO. However, as plaintiff failed to submit proof that it had mailed such a letter, its argument lacks any basis (see e.g. Professional Health Imaging, P.C. v State Farm Mut. Aut. Ins. Co., 52 Misc 3d 132[A], 2016 NY Slip Op 50997[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2016]).

In any event, defendant would not have been required to provide the reason for its demand in response to an objection from plaintiff (see Flow Chiropractic, P.C. v Travelers Home & Mar. Ins. Co.,44 Misc 3d 132[A], 2014 NY Slip Op 51142[U] [App Term, 2d Dept, 9th & 10th Jud Dists 2014]).

Plaintiff ’s remaining contentions are without merit.[IA] 2019 NY Slip Op 50171(U) Decided on February 8, 2019 Appellate Term, Second Department

D ONALD T. DECARLO AND RO GER THOMPSON

Workers’ Comp Schedule Rating Plans Can Be Used to Increase or Reduce Premiums uIn 2017, of the 38 states where the National Council on Compensation Insurance (NCCI) -the insurance rating and data collection bureau specializing in workers’ compensation for the majority of states- made rate filings, 36 of those filings were for decreases; many of which were double digit decreases. The trend continued in 2018 where NCCI filings showed decreases proposed in 36 states. In 13 of those states, the rate filings decreases were greater than 10%: In states where rates are approved by independent bureaus, there is a similar downward trend in compensation rate.

The New York Department of Financial Services approved a 11.7% decrease in workers’ compensation loss costs effective October 1, 2018. In New Jersey, the insurance commissioner approved a 5.1% rate decrease for workers’ compensation premiums on a new and renewal basis. And in California, the rate filing approved, effective January 1, 2019, a decrease in workers’ compensation pure premiums costs an average of 8.4%.

The continuing trend to reduce workers’ compensation rates and/or loss costs at the state level prompts insurers to look for ways to increase premiums based on available pricing mechanisms.

To that end, the majority of states allow discretionary credits or debits by insurers. These are generally known as schedule rating plans and work much like experience modification factors.

They are percentage discounts or surcharges that further adjust the modified premium. A 25% schedule credit would further reduce an employer’s premium charges by 25%, while conversely, a 25% schedule debit would increase an employer’s premium by 25%.

Schedule rating is used to alter manual rates to reflect individual risk char-

In New York, to be eligible for schedule rating, the annual manual premium must be $2,500 or greater and the maximum schedule rating adjustment is limited to plus or minus 5% exclusive of any other approved credit or debit program (e.g. Safety Incentive Program, Drug and Alcohol Prevention Program, etc.).

acteristics and unique employer traits that are expected to have a material effect on the insured’s future loss experience that are not actually reflected in the manual rate. For example, if a company implements a new loss control program, it is expected that future losses will be lower than that indicated by the actual historical experience; consequently, an underwriter can use schedule rating to reflect this.

These schedule credits and debits are filed by the rating organizations on behalf of the insurers with state regulators and are intended to be used on a rational and specified basis. If approved, the insurer can then apply up to that maximum credit or debit for a particular policyholder. While some states permit schedule rating for any size risk, a number of states establish an eligibility level of $1,000 minimum annual premium at manual rates. In New York, to be eligible for schedule rating, the annual manual premium must be $2,500 or greater and the maximum

[ WORKERS’ COMP ]

Donald T. DeCarlo, Esq. is the principal of an independent law firm in Fresh Meadows, NY, which focuses on mediation/arbitration and regulatory and insurance counseling.

Previously, he was Partner at Lord Bissell & Brook LLP and headed its New York office. He was Senior Vice President and General Counsel of The Travelers Insurance Companies, Deputy General Counsel for its parent corporation Travelers Group, Inc. and Executive Vice President and General Counsel for Gulf Insurance Group.

Mr. DeCarlo is a Certified ARIASUS Arbitrator and Umpire, a Master Arbitrator for the NYS Insurance Department, and an Arbitrator for the American Arbitration Association and Center for Dispute Resolution. He is the Founder, Chairman and President of The American Society of Workers Comp Professionals, Inc. (AMCOMP).

In addition, Mr. DeCarlo is a Director of 17 companies in the insurance industry.

Mr. DeCarlo has authored numerous scholarly articles in legal and trade journals and is a co-author of two books on workers compensation insurance, Workers Compensation Insurance & Law Practice – The Next Generation and Stress in the American Workplace – Alternatives for the Working Wounded.

Mr. DeCarlo Chairs an Advisory Committee of the World Trade Center Captive Insurance Company, and formerly served as Chairman and Commissioner of the New York State Insurance Fund (NYSIF) for 10 years.

He also served as an Inspector for the NYS Athletic Commission.

CONTINUED ON PAGE 30 INSURANCE ADVOCATE / March 25, 2019 29

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[ WORKERS’ COMP ] CONTINUED FROM PAGE 29

schedule rating adjustment is limited to plus or minus 5% exclusive of any other approved credit or debit program (e.g.

Safety Incentive Program, Drug and Alcohol Prevention Program, etc.). In New Jersey, the premium size must be greater than the minimum premium for that classification and the schedule rating credit or debit is limited to 25%.

Schedule rating permits the premium for a risk to be modified in accordance with a table that delineates those characteristics of a risk that may not be reflected in its experience. The following lists those characteristics to be considered along with a number of possible specific considerations associated with each: • Premises/Work Environment • General housekeeping • Preventative maintenance • Workplace hazards/housekeeping • Workplace design • Ergonomics • Classification Peculiarities • Exposures or hazards not considered in the classification • Exposure variations due to technology changes • Medical Facilities • First aid or medical assistance on site • Emergency and disaster plans • Industrial hygiene • Alcohol or substance abuse programs • Safety Devices • Written safety programs • Loss control programs • Personal protective equipment • Routine inspection and maintenance reviews • Accident investigation and analysis • Employees – Selection and Supervision • Pre-employment physicals • Drug screening • New hiring and job-specific training • Management • Cooperation with insurer • Safety organization • Return-to-work programs The characteristics denoted above may be objective (e.g., on-site first aid or medical assistance) or subjective (e.g., quality of company management).

Objective characteristics are generally 30 March 25, 2019 / INSURANCE ADVOCATE

Note that in this current depressed workers’ compensation premium rate environment, premium rates can be adjusted to reflect increased risk characteristics that more accurately reflect the insured’s claims exposure. easier to quantify and validate. However, schedule rating often requires significant underwriting judgment. In general, state insurance laws and regulations require that the filed schedule rating guidelines be applied consistently and documentation is frequently required to support the application of each credit and debit.

Schedule rating premium adjustments must be reported under unique statistical codes on unit statistical reports submitted to the NCCI. All schedule debits and credits are to be based on evidence that is contained in the file of the insurer at the time the schedule debit or credit is applied. The effective date of any schedule debit or credit shall not be any date prior to the receipt in the insurer’s office of the evidence supporting the debit or credit.

Where experience rating is used in addition to schedule rating, it is important to recognize that a new characteristic (e.g., a newly implemented safety program) reflected in the schedule rating adjustment will eventually be reflected in the loss experience. The key is for the underwriter to avoid double-counting the effect of a risk characteristic in both the experience modification and schedule rating.

Note that in this current depressed workers’ compensation premium rate environment, premium rates can be adjusted to reflect increased risk characteristics that more accurately reflect the insured’s claims exposure.[IA]

Roger Thompson is a retiree from Travelers Insurance following thirty years of service in the area of Workers Compensation. Prior to his retirement, Mr. Thompson was Director for Worker’s Compensation Legislative and Regulatory Issues. A graduate of the University of California, Santa Barbara, he began his career with Travelers in Des Moines, Iowa in 1969 and subsequently transferred to the Home Office in Hartford, Connecticut in 1976.

During his career with Travelers, Mr. Thompson worked with various trade associations including the American Insurance Association (AIA), The International Association of Industrial Accident Boards and Commissions (IAIABC) and served on the Research Committee at the Workers Compensation Research Institute (WCRI).

Mr. Thompson is married with two sons and four grandchildren.

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