Insurance Advocate October 29, 2018

Vol. 129 No. 17 | October 29, 2018

INSURANCE REGULATIONS AT A CROSSROADS: Lessons Learned From the Last Ten Years Israel Bonds Honors Wolfe, Hughes at Annual Luncheon PAGE 8

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Vol. 129 No. 17 | October 29, 2018

14 Insurance Regulation at a Crossroads

Contents

4 Foreword: “I Can’t Get No...” or Can I?

Steve Acunto, Publisher 6 On the Level: Final Thoughts

N. Stephen Ruchman 8 In the Associations: Israel Bonds’ Insurance Division Holds Annual Luncheon 10 HR Updated: Termination Check List To Bullet Proof Legal Challenge

Alfred T. DeMaria 12

Guest Opinion: What The Election Means To Your Medical Care Jane M. Orient, M.D.

13 In the News: Hiscox Study: More Than One-Third of US Workers Feel They’ve Experienced Harassment in the Workplace 24 On My Radar: Forge a Certificate of Insurance – Guilty of Crime

Barry Zalma 26

Looking Back: October 16, 1993

28 Courtside: Claims File Content Subject to Discovery, Even Those Parts Created During Litigation

Lawrence Rogak info@insurance-advocate.com www.insurance-advocate.com

29 Legal Update: What Happens When a Life Insurance Policy Designates an Ex-Spouse as the Beneficiary

Sari Gabay

[ FOREWORD ]

STEVE ACUNTO

“I Can’t Get No...” or Can I? uJust to pass along some new data on small business employee satisfaction, the category of most agencies, it appears that the triumphs and challenges of small businesses can augur the mega trends of the American economy. Aflac just conducted its 2018 Small Business Happiness Survey with 1,000 small business employees across the U.S. to determine the state of small business. The big picture results were promising­— 91 percent of respondents said they feel optimistic about the future of small business—but employees believe there is still room for improvement on key areas like equal pay.

The study found that: • Only 30 percent of small business employees surveyed think the industry is achieving complete success when it comes to equal pay. Of the same group, 22 percent say that little to no success has been achieved and 48 percent say that success has been achieved but there is still room for growth.

• Nearly two-thirds (65 percent) of employees said that working at a small business is less stressful than a larger corporation. Similarly, 87 percent of small business employees somewhat or strongly agreed that working for a small business is more fun than working at a large business.

• Almost all respondents (91 percent) say they believe employee happiness is at least somewhat important to their company leadership. In fact, more than half of all small business employees surveyed (55 percent) say that employee happiness is very important to their leadership.

• The increasing desire to solve gender issues also aligns with recent findings from the 2018 Aflac CSR Survey, which surveyed employees from all businesses. Of that group, 60 percent of women say that paying men and women equally for the same work should be among a company’s top priorities. Additionally, 26 percent of HR managers surveyed said they believe their company pays men more than women for the same work.

In this issue we look at a serious matter: insurance regulations’ and regulators’ effects over recent history. Our contributors, Bill Marcoux and Nicholas Kourides are “top guns” among insurance attorneys and counsel and we are pleased to present them.

Actually, New York is blessed with at least 30 top insurance attorneys in private practice who have merited publication here and in other journals like ours. It has been suggested that I do a Top 50 NY insurance attorneys, but I already have enough enemies. Imagine numbering them. Or alphabetizing them. Or using good looks and personality. Or hourly rates. Let’s skip it.… InVEST, the insurance industry’s premier classroom-to-career education program, has announced that Applied Systems has donated $35,000 to the program. Reid French, CEO of Applied, announced the donation during a keynote presentation at this week’s Applied Net 2018, the flagship conference for Applied software users and the largest gathering of independent insurance professionals in the world. The InVEST contribution coincides with Applied Systems’ 35th anniversary this year and “reflects the company’s continued commitment to investing in the future of the industry”. “Through Applied’s generous gift to the InVEST program, young insurance professionals will be better equipped with financial literacy, insurance education and scholarships,” said Robert Rusbuldt, president & CEO of the Independent Insurance Agents & Brokers of America. “Companies, educators, volunteers, agents and industry leaders, like Applied Systems, are key to the success of the InVEST program. We applaud and thank them for their commitment to this critical program.” Founded in 1970 and based in Alexandria, Virginia, InVEST promotes insurance education to attract individuals to pursue a career in the insurance industry.

CONTINUED ON PAGE 30 4 October 29, 2018 / INSURANCE ADVOCATE

S I N C E

1 8 8 9

VOLUME 129 NUMBER 17 OCTOBER 29, 2018

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Jamie Deapo Alfred T. DeMaria Lawrence N. Rogak N. Stephen Ruchman 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, x111 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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[ ON THE LEVEL ]

N. STEPHEN RUCHMAN, CPIA

Final Thoughts u Ab o u t 1 5 y e a r s a g o, t h e Professional Insurance Agents of New York State received a call from Phil Gusman, who at that time was the editor of the Insurance Advocate, requesting I write a column for the publication. I was eager to do it. Some people told me this wouldn’t last two months … And here we are, after the fastest 15 years of my life – I’ve enjoyed bringing agents issues to the forefront and discussing industry issues as I see them through my life experiences. It’s been a good run.

Looking at many of my columns in which I observed industry trends or challenges agents face, I’m struck by the fact that not much has changed in our industry over the last decade plus. The mechanics of how we do business—automation service centers, technology, the media by which we communicate with clients—has evolved, in response policy changes or legislation and regulations. However, the one thing that has remained constant is the relationship between the agent and the insured.

Agents who maintain and nurture the channels of communication with their insured are the ones who succeed.

Communication is one of the most important factors in our industry today (and it always has been so).

Having been asked to write this column was a privilege. I was inspired by other contributors to the Advocate, such as Art Moll. He was a true friend and a mentor. He brought me to PIA and it has been an honor to carry on his contribution to the publication and our industry.

Over the years, one of the greatest rewards I’ve enjoyed has been feedback I’ve received from the readers of this publication. When fellow agents have contacted me to tell me they enjoyed or were motivated by my columns, I was motivated to continue to write them.

And it was a joy to hear what I wrote brought back memories to others.

As everyone will tell you, there is always someone behind the scenes. In this case, Mary Christiano, Director of 6 October 29, 2018 / INSURANCE ADVOCATE

Agents who maintain and nurture the channels of communication with their insured are the ones who succeed. Communication is one of the most important factors in our industry today (and it always has been so).

Communication at PIA in Glenmont, edited my work. I don’t think a day passed that I didn’t call her to give her ideas for this column. She has hundreds of pages of notes from my phone calls and I thank her.

Now, it’s time that I say farewell. It’s time to announce my third retirement, and as I have often said in this column, we need to make room for new blood.

I’m told the reason Phil called on me to write this column is that I have a unique ability to present the agents’ voice. There are a few things that gave me that ability. First, I represented the Advocate’s readership – the entrepreneurs who are independent brokers and agents. We are fiercely independent, and we work hard on behalf of our clients, employees and for our families and the carriers for which we market. Second, when asked to write this column, I had recently completed my presidency of PIANY, and I had access and knowledge that comes with the experience of being involved with PIA. Phil was a smart guy.

I’d like to thank the Advocate for the opportunity to start my editorial career, especially given that when I was in college, my mother would return my letters with the grammar and spelling corrected. Steve Acunto, who has published this quality publication has kept an expert staff and has a keen sense of the industry. When I first started Ruchman Associates in the 1960s, Steve was a young PR Pro and he developed my agency’s first brochure – As the commercial says, we’ve come a long way, baby! And I couldn’t forget Gina Balog-

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, 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.

Sartario, who has worked to place my columns every edition – thank you for your hard work.

My life experiences as an agent have been remarkable and I will never forget many of them.

So much of this column has been recollections and of lessons I learned in my career, so I think it’s fitting that I continue this tradition: My first claim as an agent was for a young man who was the same age as me. I started as an insurance major at Michigan state and I learned to love the profession. At the time I started, I went to work for Continental American life Insurance Company. It, like others, no longer exists as it was absorbed by another carrier. I had sold a life insurance policy to a fellow solder with whom I was in the army. A few years after he purchased the policy, he was diagnosed with leukemia. He passed several months after his diagnosis and I had to deliver a claim check to his parents and his sister. That was the day I entered the insurance business. Because, like everyone who sells insurance will tell you, it’s the delivery of a claim check that proves the power of what a policy can do for one’s family.

With that recollection, I offer my final advice to my dear readers and fellow agents and brokers. Be proud of what you do: We do good work that helps make families and lives whole when the unthinkable happens. We are professional, independent insurance agents.[IA]

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[ IN THE ASSOCIATIONS ]

Israel Bonds’ Insurance Division Holds Annual Luncheon, Honors Two Influential Industry Professionals u Development Corporation for Israel/Israel Bonds, the underwriter of debt securities issued by the State of Israel in the United States, held its Insurance Division Luncheon on October 17, 2018. Spanning over several decades, the annual event drew more than 255 industry professionals to the St. Regis Hotel in New York, and honored Keith J. Wolfe, President, U.S. Property & Casualty at Swiss Reinsurance Company and Thomas Hughes, Executive VP & General Counsel, Corporate Secretary for Greater New York Mutual Insurance Company.

Distinguished guests included the Honorable Robert Abrams, former attorney general of New York, and Asaf Shariv, senior Israeli diplomat and political advisor as guest speaker. Event honorees Keith J. Wolfe and Thomas Hughes both received the 2018 Israel Bonds Insurance Division Leadership Award at the luncheon.

As President of Swiss Reinsurance Company, Keith J. Wolfe is focused on serving the needs of US-based P&C insurance companies through brokers and direct client channels. He is based in the company’s Americas Division headquarters in Armonk, NY. Wolfe spent the first half of his 22year career in primary property insurance, holding various sales, operations and underwriting leadership roles at GE Insurance Solutions. In 2006, he joined Swiss Re via acquisition and relocated to Switzerland to focus on serving large, multinational insurance companies as part of the reinsurance business. He has been back in the US since 2009, leading the regional business since 2013.

Thomas Hughes, Executive Vice 8 October 29, 2018 / INSURANCE ADVOCATE

Before practicing law as an appellate attorney at law firms specializing in insurance law, Hughes served as a Law Clerk to United States District Court Judge Joe J. Fisher.

He spent 10 years with the Federal Bureau of Investigation’s Foreign Counterintelligence Division, earning a commendation from the FBI Director for “his exemplary service with respect to a security matter of great interest to the Bureau and the Nation.”

From left to right: Asaf Shariv, senior Israeli diplomat and political advisor; Martin Minkowitz, co-chairman Israel Bonds Insurance Division, partner of Stroock & Stroock & Lavan LLP; event honoree Keith J. Wolfe, President, U.S. Property & Casualty at Swiss Reinsurance Company; Israel Maimon, President & CEO of Israel Bonds; event honoree Thomas Hughes, Executive VP & General Counsel, Corporate Secretary for Greater New York Mutual Insurance Company; Andrew Chase, Executive Director, Greater New York Region of Israel Bonds.

Spanning over several decades, the annual event drew more than 255 industry professionals to the St. Regis Hotel in New York…

President & General Counsel, Corporate Secretary for Greater New York Mutual Insurance Company, has been with GNY for over 19 years. Prior to joining, Hughes was the New York State Assistant Solicitor General in charge of the Attorney General’s New York City Appeals & Opinions Bureau. While there, he briefed and argued nationally-significant appeals before state and Federal courts, including the U.S. Supreme Court.[IA]

Israel bonds are debt securities issued by the State of Israel. Israel Bonds is also the commonly known name of Development Corporation for Israel (DCI), which underwrites the bonds in the United States. DCI is a Financial Industry Regulatory Authority (FINRA) member broker-dealer. The bonds can help preserve capital, diversify personal or corporate investment portfolios, and provide protection from market fluctuations. Israel bonds are versatile securities that currently pay strong rates.

Since its founding in 1951, the Bonds enterprise has provided over $41 billion in global sales to help strengthen every aspect of Israel’s economy.

[ IN THE ASSOCIATIONS ]

From left to right: Stuart Garawitz, VP for Sales, Israel Bonds; Israel Maimon, President & CEO of Israel Bonds; Michael Zaremsky, Regional Head for New York Private Banking at Bank Leumi.

From left to right: Keith J. Wolfe, President, U.S. Property & Casualty at Swiss Reinsurance Company, accepts 2018 Israel Bonds Insurance Division Leadership Award from Elizabeth Heck, President and Chief Executive Officer at Greater New York Mutual Insurance Companies, Martin Minkowitz, co-chairman Israel Bonds Insurance Division, partner of Stroock & Stroock & Lavan LLP, and Andrew Chase, Executive Director, Greater New York Region of Israel Bonds.

From left to right: Thomas Hughes, Executive VP & General Counsel, Corporate Secretary for Greater New York Mutual Insurance Company, accepts 2018 Israel Bonds Insurance Division Leadership Award from Warren Heck, Chairman at Greater New York Mutual Insurance Companies, Martin Minkowitz, co-chairman Israel Bonds Insurance Division, partner of Stroock & Stroock & Lavan LLP, and Andrew Chase, Executive Director, Greater New York Region of Israel Bonds.

(All photo credits: Shahar Azran/Israel Bonds) INSURANCE ADVOCATE / October 29, 2018 9

[ HR UPDATE ]

ALFRED T. DEMARIA

Termination Check List To Bullet Proof Legal Challenge u Because of the proliferation of lawsuits among white collar employers challenging employee terminations, even those that appear to be completely valid on their face, it is important for insurance industry executives to make sure that each termination, no matter how justified it appears, is thoroughly vetted prior to termination. Here is a modern checklist that can help you avoid and or defeat lawsuits.

• How long has the employee been employed?

• Is the employer a member of a protected group?

• Did anyone make any assurances of job security to the employee?

• Does your handbook or any other company policy imply any form of job security?

• Will termination comply with the company practices in every respect?

• Have other employees been terminated for the same conduct?

• Can you prove the employee knew of or had reason to know his/her conduct was wrong or performance inadequate? (In other words, avoid having the termination come as a surprise to the employee).

• How many written warnings has the employee been given?

• How long ago was the last warning?

• Was the warnings specific?

• Was the basis for the warnings documented?

• When was the last performance appraisal and what does it say? (Avoid performance appraisals that are inconsistent with the reasons for termination.)

• When was the last salary increase and for what reason?

• Has the employee been recently promoted?

• Has the employee been given a reasonable time to improve after an unfavorable review?

10 October 29, 2018 / INSURANCE ADVOCATE

...it is important for insurance industry executives to make sure that each termination, no matter how justified it appears, is thoroughly vetted prior to termination.

• Was the employee promised a specific period in which to improve?

(Avoid “pulling the trigger”) prior to the time assigned for improvement.

• Are there any witnesses to a termination for improper conduct and are they reliable and available?

• What is the employee likely to say is the “real” reason for dismissal?

• Has the employee made any prior or contemporaneous claims of illegal conduct on the part of the company or its management? (For example, complaining about improper harassment of any type).

• Did the employee recently sustain a work-related injury or illness?

• Did the employee recently apply for FMLA Leave or return from it).

• What will be the impact of dismissal on the employee? (Is there reason to believe that the employee will seek out a lawyer to contest the termination?).

• Has the employee been, or claimed to be, a spokesperson for other employees regarding working conditions?

• D oes the employee appear to be getting legal advice, keeping a diary, making recordings of workplace discussions with supervisors and management, or trying to commit your company to a particular position?

• Is the primary manager of the employee angry with the employee

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.

or dissatisfied with the employee for a reason other than conduct or performance?

• How long has the primary manager supervised the employee? (Is there a difference between the new manager’s appraisal of the employee and the prior manager?).

• Is there any policy that provides the employee any form of procedural due process prior to being terminated? (Check your employee handbook for provisions giving the employee certain rights to grieve, appeal procedures and so forth).

• Is there a personality conflict between manager and the employee?

• If the dismissal is being called a layoff, is it really a reduction in force (layoff ) or an individual performance problem. (Be sure to cite the correct reason for the termination and avoid generalities such as “you are no longer a good fit for us”).

• Is there any pay issue that might give the employee an opportunity to claim federal or state wage and hour violations?[IA]

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[ GUEST OPINION ]

JANE M. ORIENT, M.D.

What The Election Means To Your Medical Care uPeople are marching with “Health Care Voter” signs, and this is generally believed to be one of the most important issues in the 2018 midterm elections. Republicans who got elected on the promise to repeal ObamaCare, and reneged, may now get unelected. Voters who supported them are dissatisfied, and Democrats demand still more government involvement in medicine.

On Twitter, #HealthCareVoter posts warned that the confirmation of Brett Kavanaugh to the U.S. Supreme Court would “rip health care away from people with pre-existing conditions.” This illustrates several profound misunderstandings.

By “health care,” most seem to mean health “insurance”—usually a prepaid health plan, which is not at all the same as medical care. The Supreme Court already decided that it is unconstitutional under the Commerce Clause to force people to buy a commercial product.

Remember stare decisis? Would it be ok to overturn the ACA decision, just not Roe v. Wade?

The Affordable Care Act (ACA or ObamaCare) ripped away Americans’ freedom to refuse to buy an unaffordable or objectionable insurance product, punishing such refusal by a “tax.”

Contrary to Obama’s promises, it also ripped away insurance plans that Americans had relied on for years. Some people had three or more policies cancelled, one after the other, forcing them into plans with less coverage and a much higher price. Many such plans ripped away actual medical care by excluding physicians or facilities that provided the needed specialized treatment.

What happened with pre-existings before ACA? Most people were unaffected because they had employer-sponsored coverage. Only the seven percent of Americans in the individual market faced underwriting for pre-existings. If they were insured before they became ill, the insurance contract generally pro12 October 29, 2018 / INSURANCE ADVOCATE

If the angry Health Care Voters who are agitating in the streets win, most ordinary Americans lose. Not seven percent, but 100 percent of Americans could lose their right to control their medical care—and the dollars they earn.

hibited dropping them from coverage or stopping treatment. Prudent people bought insurance at low cost when they were healthy and maintained continuous coverage. Those who didn’t often had access to a state high-risk pool— before ObamaCare did away with them.

Almost all got medical care—either they paid for it, or the doctor didn’t get paid.

ObamaCare removed the incentive to buy insurance before one “needed” it, since one could not be declined or charged more. The individual mandate did not prevent this system-gaming, the equivalent of buying fire insurance when your house is on fire.

Now Congress has reduced the ObamaCare tax to $0, and the Trump Administration has liberalized rules on short-term, limited-duration policies, allowing Americans to choose affordable policies that cover trauma and serious illness, while they buy routine, expected care the old-fashioned way, without the supervision of a health plan intent on saving its money. ACA lovers want to rip away this option, so that heathy Americans must be greatly overcharged or else forgo insurance.

If the angry Health Care Voters who are agitating in the streets win, most ordinary Americans lose. Not seven percent, but 100 percent of Americans could lose their right to control their medical care—and the dollars they earn.

Medical decisions will be politically

Jane M. Orient, M.D. obtained her undergraduate degrees in chemistry and mathematics from the University of Arizona in Tucson, and her M.D. from Columbia University College of Physicians and Surgeons in 1974. She completed an internal medicine residency at Parkland Memorial Hospital and University of Arizona Affiliated Hospitals and then became an Instructor at the University of Arizona College of Medicine and a staff physician at the Tucson Veterans Administration Hospital. She has been in solo private practice since 1981 and has served as Executive Director of the Association of American Physicians and Surgeons (AAPS) since 1989. She is currently president of Doctors for Disaster Preparedness. Since 1988, she has been chairman of the Public Health Committee of the Pima County (Arizona) Medical Society. She is the author of YOUR Doctor Is Not In: Healthy Skepticism about National Healthcare, and the second through fourth editions of Sapira’s Art and Science of Bedside Diagnosis, published by Lippincott, Williams & Wilkins. She is the editor of AAPS News, the Doctors for Disaster Preparedness Newsletter, and Civil Defense Perspectives, and is the managing editor of the Journal of American Physicians and Surgeons.

determined. Those who want free services that enable their lifestyle (contraception, abortion, treatment for sexually transmitted diseases) will be chanting in the streets. Old people with disabling hip pain, babies with heart defects, the girl with a ruptured appendix waiting in an endless line will suffer and die. Politically favored diseases or patients will get preferential treatment. Skilled physicians will be scarce. Most care will be rendered by minimally trained clinicians, relying on computerized “guidelines.” Writers of the guidelines generally have many

[ IN THE NEWS ]

Hiscox Study: More Than One-Third of US Workers Feel They’ve Experienced Harassment in the Workplace Sexual Harassment Tops List as Most Common Form of Employee Misconduct

uA recent study released by Hiscox, the international specialist insurer, revealed that more than one-third (35%) of employees feel they’ve experienced workplace harassment, 50% of whom said it was on account of their gender or sex. These findings are according to the 2018 Hiscox Workplace Harassment Study™, which surveyed 500 US adults employed full-time.

“As the spotlight on workplace harass-

lucrative connections with pharmaceutical companies and other corporate monoliths who thrive by getting favors from Congress.

There will be winners and losers, picked by an ever-growing bureaucracy.

Voters who aren’t chanting slogans amplified by media will have little influence. Congress will continue to exercise its tax-and-spend power as directed by powerful moneyed interests, but it has delegated most of its power to administrative agencies. Ruthless health plans will prosper as they set up high barriers to care, while independent physicians are squeezed out.

In the history of the world, the path to a centrally planned, restrictive collectivist system has generally been one-way. The system has many well-paid retainers, and millions of impoverished dependents incapable of seeking a way out.

Americans need to vote for freedom, competitive enterprises, and less not more government intrusion in their decisions. They need to be sure their candidate can pass the Single Payer IQ Test™, after they read the Study Guide themselves.[IA]

“As the spotlight on workplace harassment intensifies, companies must be aware of the peril they face by ignoring this issue.” ment intensifies, companies must be aware of the peril they face by ignoring this issue,” said Patrick Mitchell, Management Liability Product Head at Hiscox USA. “Businesses of all sizes face steep financial, reputational, and workforce consequences if they fail to take steps to prevent, detect and mitigate inappropriate behavior in the workplace.”

Gender and Seniority Key Factors While it’s important to note that companies should be careful not to overlook any potential incidents of harassment, 78% of those who were harassed said it was perpetrated by a male, and 73% said their harasser was in a senior position. The data also found instances where respondents explained that the harassment was committed by women against men, by members of the same sex and by non-company employees, such as customers or vendors. All of these scenarios represent incidents in which a company could be subject to liability and financial loss if they fail to appropriately protect their employees.

Harassment: Unreported Despite more than one in three employees noting they felt harassed, 40% of those respondents said they never reported the harassment to company management or the police. The top reason cited for the failure to report was the

fear the allegations would create a hostile work environment (53%). Of those who were harassed and did report it, 37% did not believe the incident was handled properly by their employer, and for women who reported harassment, this figure climbed to 49%. It’s not just victims who don’t report harassment. Fortyfive percent of all respondents said they have witnessed harassment in the workplace, 42% of whom did not report it.

Reactions Vary Companies of all sizes are subject to harassment claims. In fact, the percentage of respondents who indicated they had been harassed was the same (32%) at companies with fewer than 200 employees as it was at those with over 1,000 employees.

However, how companies approach harassment may vary. Fifty-four percent of respondents at companies with fewer than 200 employees said their firm does not offer anti-harassment training compared to only 21% of those at firms with more than 1,000 employees. And only 39% of those at smaller firms reported that their company had implemented new workplace harassment policies within the past 12 months versus 57% of their larger counterparts.

Changing Mindset In an era of increased transparency and social movements such as #MeToo and #TimesUp, employers are taking a more proactive approach to prevention.

Eighty-five percent of respondents said they believed people were more likely to report incidents on account of these social movements. Fifty-one percent of those surveyed said their companies had instituted new policies related to workplace harassment in the past 12 months.

Millennials have also known this time of open discussion to be more of the norm than their parents and grandparents. As such, Millennials were the most likely to say they were harassed (46%), compared to 35% of Gen Xers. Millennials were also more likely to report harassment to company management or the police (76%).

The Hiscox Survey was conducted by Wakefield Research among 500 US adults employed full-time, including 250 men and 250 women, between June 6 and June 11, 2018, using an email invitation and an online survey.[IA]

Reprinted with permission.

INSURANCE REGULATION AT A CROSSROADS: LESSONS LEARNED FROM THE LAST TEN YEARS

* BY BILL MARC OUX (PARTNER) AND NICHOL AS KOURIDES (SENIOR C OUNSEL), DL A PIPER

14 October 29, 2018 / INSURANCE ADVOCATE

“Overall, however, it was an era of relative regulatory calm, albeit with increasing activity among global regulators.�

INTRODUCTION

Insurance regulation is at a crossroads. Faced with an increasingly globalized and dynamic industry, the painful lessons of the financial crisis, dramatic and disruptive advancements in the use of technology, creeping protectionism and nationalism in many markets, competing regulatory agendas and good faith differences in regulatory approaches, insurance regulators are at an important juncture and have the chance to chart their course for the near to mid-term. The choices they make could lead to greater regulatory effectiveness and efficiencies, or result in further Balkanization of regulation and an ever heavier, costlier and at times conflicting set of regulatory rules for insurers.

The potential impacts on the insurance industry and those consumers who rely on it are significant.

This paper reflects on the evolution of insurance regulation over the past decade (2007-2017) and offers thoughts on some of the critical choices regulators and the industry need to make going forward. In doing so, it focuses on developments primarily from the onset of the financial crisis and the regulatory response to the crisis. It looks at the positive developments that have taken place and some of the important lessons learned. It also examines what some consider to be misdirected activities and inevitable overreactions to the crisis. This paper considers certain critical new developments that may present regulators with the opportunity to reexamine and perhaps redirect their limited, finite regulatory resources. It is not intended to be a comprehensive report of all key developments during this period, but it aims to highlight some key initiatives and the critical regulatory policies that we believe deserve attention.

This paper reflects our personal views.* It does not reflect the particular views of any of our clients, although our views have certainly been developed as a result of many decades of advising insurers and other financial services industry players on regulatory matters. We hope this analysis will contribute to the ongoing and much needed discussion over the evolution of insurance regulatory policy globally. Getting that policy right matters.

THE CALM BEFORE THE STORM

On January 1, 2007, insurance regulation was centered largely on legal entity regulation with almost complete deference to the domiciliary regulator of the insurer. A focus on group supervision was emerging, but nascent. Insurance holding company regulation had a long tradition in the US, while Solvency II, which was being developed (work began in 2001) included a more robust and comprehensive approach to group supervision, in addition to many other provisions. Also, enterprise risk management requirements were beginning to take root.

At the same time, the International Association of Insurance Supervisors (IAIS) was working on efforts to improve cooperation and communication among global regulators. They were also beginning to talk about common structures and common standards for assessing capital adequacy and solvency. Corporate governance and risk management practices were also emerging on their agenda, along with finite reinsurance concerns, insurance fraud and related matters. In February CONTINUED ON PAGE 16

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Bill Marcoux is the global head of DLA Piper’s Corporate Insurance Transactions and Regulatory Practice.

He has 30 years of experience in insurance and reinsurance regulatory and transactional matters, including with corporate restructurings, capital raisings, M&A transactions, market conduct and other enforcement actions. Before joining DLA Piper, Bill spent more than a decade at a global law firm in London as the head of the firm’s Insurance practice. While in Europe and Asia, he developed significant experience leading international insurance transactions.

Bill has extensive experience advising on cross-border transactions within Europe and Asia, as well as advising non-US insurers operating in the United States and US insurers expanding overseas.

16 October 29, 2018 / INSURANCE ADVOCATE

2007, the IAIS adopted its Multilateral Memorandum of Understanding, which it hailed as a breakthrough to promote close cooperation and information exchange among insurance supervisors.

Overall, however, it was an era of relative regulatory calm, albeit with increasing activity among global regulators.

THE STORM

By mid-2007, the landscape had changed radically, as global financial markets began to shudder. The early trauma was to the banking sector. It was not until mid-2008 that the crisis hit the insurance industry. Memories are short, but in September/ October 2008 the financial system was close to the precipice in its worst crisis since the Great Depression. In just a six- week period in September/ October 2008: (a) the US took control of Fannie Mae and Freddie Mac; (b) Lehman Brothers filed for bankruptcy; (c) Merrill Lynch announced its sale to Bank of America; (d) the Federal Reserve extended a $85 billion credit facility to AIG; (e) the Reserve Primary Money Fund NAV fell to below $1; (f ) Goldman Sachs and Morgan Stanley converted to bank holding companies largely to have access to the Federal Reserve Discount Window; (g) WaMu Bank failed and was sold to JP Morgan; and (h) Wachovia Bank was sold to Wells Fargo.

Although it is true that the financial crisis was primarily a banking and capital markets crisis, and not an insurance crisis, the near collapse of AIG made it inevitable that there would be enhanced prudential regulation for insurers, particularly non-bank systemically important financial institutions.

At the 2008 IAIS Annual meeting in Budapest, the IAIS became the de facto coordinating center for the global response to the crisis at AIG. US, UK and other global regulators met extensively, discussing developments, regulatory reactions and concerns. Although driven by external events, global regulators can and should be proud of the level of cooperation and coordination displayed during the crisis.

These events ushered in a decade of unprecedented international and, in many countries, domestic insurance regulatory activity. Some of this was merely an acceleration of developments already under way (eg, group supervision and peer review among regulators), but others, such as systemic risk regulation and a special focus on internationally active insurance groups, emerged directly out of the crisis.

The scale and severity of the crisis in the broader economic system created a sense of urgency and, indeed, fear, as regulators scrambled to keep up with fast moving events. Regulatory responses to the crisis included many positive steps, but as always, regulatory over reaction was a constant danger.

In certain jurisdictions, regulators began to evidence something close to a zero risk tolerance. Moreover, because the root cause of the crisis was in the banking sector, banking regulatory issues drove the response and dominated much of the regulatory thinking − even vis-à-vis the insurance sector.

Certainly the Federal Reserve Board, the Bank of England and the Financial Stability Board (FSB) – founded, in 2009, as a result of the financial crisis by the G20 leaders – all viewed the world through a banking lens.

As an immediate result of the financial crisis, the IAIS was directed by the FSB to develop a system for identifying globally systemically important insurers (G-SIIs) and to establish new capital standards for these insurers (known as the Basic Capital Requirement, BCR, and Higher Loss Absorbency, HLA).

Despite much debate – and some persuasive analysis that indicated that no insurer was of a scale and with a level of connectedness to the financial system to pose a systemic risk – the IAIS ultimately identified nine insurers as G-SIIs. In addition, the IAIS began development of a Common Framework for Supervision of Internationally Active Insurance Groups (ComFrame) which was to include a set of international supervisory requirements focusing on the effective group-wide supervision of a newly designated class of insurers called “internationally active insurance groups” (IAIGs). It was to be comprised of a range of quantitative and qualita-

tive requirements specific to IAIGs and to provide requirements and protocols for supervisors of IAIGs. ComFrame was to build on the IAIS Insurance Core Principles (ICPs) which lay out fundamental principles of effective insurance supervision. The ICPs essentially serve as a basic benchmark for insurance supervision in all jurisdictions. The ICPs were first issued in 1997 but were significantly revised in 2011 in response to the global financial crisis (and are currently being revised further).

In the US, there was also a flurry of activity resulting from the financial crisis. In June 2008, the NAIC launched its Solvency Modernization Initiative (SMI). The SMI was focused on reassessing the US solvency framework, revisions to US reinsurance regulation, enhancement of group supervision and corporate governance rules, among other matters. More recently, the NAIC followed up with its Macro Prudential Initiative (MPI) which is a logical continuation of its SMI project. The MPI was intended to promote greater insight into how insurers react to financial stress and how that reaction can impact policyholders, other insurers and financial market participants and the public. In 2011, the NAIC adopted the Own Risk and Solvency Assessment (ORSA) Manual, which provides guidance to insurers on how to conduct an ORSA. This was followed by the ORSA Model Act in 2012. Most importantly, the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was passed in 2010. That statute established the Federal Reserve Board as the regulator of systemically important insurers (as well as insurers that were subject to FRB regulation as savings and loan holding companies), the Financial Stability Oversight Council (FSOC) and the Federal Insurance Office (FIO).

Of course, the developments from 2008 on were not all coordinated or harmonized. When one considers the number of regulators (or other institutional actors) and the different demands − the Federal Reserve Board, the US Treasury, the state insurance regulators, the NAIC, the FDIC, the EU Commission, European Insurance and Occupational Pensions Authority

(EIOPA), major European regulators like the UK Prudential Regulatory Authority (PRA) and the Japan FSA, the Financial Stability Board (FSB) the IAIS, etc. − finding common ground and a common agenda was nearly impossible. For internationally active insurers, including the G-SIIs, it felt like they were taking fire from all sides.

As the decade of post-crisis regulatory transformation came to a close, two additional notable events took place. The first was the launch of Solvency II. On January 1, 2016, after a 14-year gestation period and billions of euros/pounds of development costs, Solvency II became effective. In addition, to its new capital, risk management and group supervision provisions, the EU launched its process of equivalence assessments of other jurisdictions. Some countries, such as Switzerland, Bermuda and Japan, applied for review and obtained various levels of equivalence. The United States said “no, thank you,” making it clear that it was not going to seek equivalence. Some other countries followed suit.

Secondly, on January 13, 2017, the US and the EU announced the completion of negotiations on a Bilateral Agreement between the European Union and the United States of America on Prudential Measurers Regarding Insurance and Reinsurance. This historic bilateral agreement, often referred to as the EU-US Covered Agreement, provides for a remarkable level of regulatory cooperation and, most importantly, regulatory recognition and deference. In this agreement both the EU and the US essentially agreed that each would recognize and defer to the other in important areas of group supervision (including group capital requirements) and reinsurance regulation and eliminate certain significant host country regulation in these areas.

Although there has been some well-pointed criticisms of the process surrounding the negotiations and of some of its provisions, the EU-US Covered Agreement is a precedentsetting agreement with significant implications for the future of insurance regulation.

Nicholas Kourides joined DLA Piper’s Insurance practice in 2017 as Senior Counsel in New York. He brings significant experience in corporate transactions, including mergers and acquisitions, restructuring and divestitures, as well as cross-border matters. He also has extensive expertise regarding financial services regulatory issues around the world.

CONTINUED ON PAGE 18 INSURANCE ADVOCATE / October 29, 2018 17

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A TURBO-CHARGED DECADE OF CHANGE

The last ten years has reshaped global insurance regulation profoundly. Some of the changes have been positive and clearly required.

As to be expected, some changes are viewed as excessive, uncalled for or misdirected. It is also true that the torrid pace of change over the last 10 years has created a serious case of regulatory fatigue among insurers (and we suspect some regulators). The changes have certainly consumed an extraordinary amount of management and regulatory resources.

Accordingly, it seems timely to consider what regulatory standards, protocols and practices have worked, what have been balanced and proportional and what efforts have been ineffective or excessive. Most importantly, the question “Where do we go from here?” needs to be addressed. As we look back over developments from 2007-2017, we also need to take stock of some of the regulatory successes and excesses.

THE SUCCESSES The first success to acknowledge is that leading into and during the financial crisis, the regulatory systems in the major insurance markets proved to have been effective and robust. Far too little has been written about how well global insurance regulation did work during the crisis and how well coordinated and responsive global insurance regulators were. To be sure, some serious deficiencies were revealed in regulatory policies and practices during the crisis, including some regulatory blind spots, weaknesses in group supervision and insufficient coordination among regulators, including a lack of crisis management procedures. However, we would argue that, overall, the system worked reasonably well in the face of an unprecedented global financial crisis. A Government Accountability Office report “Impacts of and Regulatory Response to the 2007-2009 Financial Crisis,” issued in June 2013 noted: “The effects of the financial crisis on insurers and policyholders were gen18 October 29, 2018 / INSURANCE ADVOCATE

“Far too little has been written about how well global insurance regulation did work during the crisis…” erally limited, with a few exceptions.

While some insurers experienced capital and liquidity pressures in 2008, their capital levels had recovered by the end of 2009. Net income also dropped but recovered somewhat in 2009. Effects on insurers’ investments, underwriting performance, and premium revenues were also limited.”

But as noted, improvements were needed − and many have been implemented. These include: Group-wide Supervision.

Group-wide supervision was re-emphasized and has been strengthened post-crisis. Today, there is a much more holistic approach to group supervision and it is much less likely that critical non-insurance affiliates will escape the umbrella of regulatory oversight or rigorous supervision, which was one of the serious problems that impacted AIG through its financial products subsidiary. The IAIS redoubled its efforts on group supervision, The Fed applied its form of consolidated group The Fed applied its form of consolidated group supervision to insurers over which it has charge, the NAIC amended its Insurance Holding Company System Model Act and Model Regulation by developing its “windows and walls” approach to provide greater access to non-insurance entities within the holding company structure and also launched a project to create a group capital calculation for US insurers. Supervisory colleges developed dramatically, providing valuable opportunities for global regulators of an insurance group to meet, share information, discuss issues with senior management and take a holistic assessment of the group’s operations.

Risk Management.

Enterprise-wide risk management (ERM) and the reporting structures related to it have improved dramatically.

Insurers have developed internal reporting requirements, with reports going to the highest levels of management and to the board, which are critical to a group’s understanding of the risks it faces. Further, senior risk and compliance managers report to and are part of the executive teams of insurance companies and frequently provide reports directly to the board. Moreover, rather than just focusing on a specific area or product, risk management is managed across the entire enterprise and product offerings. In addition, each entity is now required to develop its own ORSA which forces not only a topdown but also a bottom-up review. An ORSA requires an insurance company to issue its own assessment of its current and future risks. Critically, it provides management, the board and regulators with a document that links business strategy, risk and capital requirements.

Strong arguments can be made that the most significant holes in the insurance regulatory net pre-crisis were imperfect knowledge of risk exposure, ie, regulatory blind spots. All the capital in the world will not prevent the failure of a company which cannot effectively manage its enterprise-wide risk.

Corporate Governance.

Corporate governance policies and procedures have been substantially improved. This includes requirements that all policies and procedures are in writing, the roles and responsibilities of officers are clarified and delineated, persons of authority have accountability, any reported deviations are escalated to appropriate levels and board engagement and oversight of senior management have been enhanced.

Stress Testing.

Stress testing has become a widely accepted and important regulatory and management tool. Led mainly by the work of actuaries and chief risk

officers, insurers have become increasingly aware of and more sophisticated in assessing the impact on their companies of various scenarios of market and environmental conditions. This risk management tool has also acquired significant regulatory support.

Stress testing is now part of many regulatory ORSA and ERM requirements.

In 2016, EIOPA launched a stress test across the EU insurance sector which has now become an annual exercise.

For insurers, stress testing encompasses stress factors that face financial institutions at large, but must also recognize the unique impact on insurers from various stress scenarios, particularly where they include a potential increase in frequency and severity of claims. In addition, stress testing includes liquidity risk management. Liquidity testing is distinctly different from capital adequacy requirements and, we suggest, of greater relevance to insurers than additional capital standards. There is no doubt that its embrace by regulators and management has had a positive impact on the financial resilience of the insurance sector.

A stress test, however, is only as good as the scenarios and assumptions on which it is constructed.

Hypothetical and implausible scenarios undermine the usefulness of this tool. Accordingly, balance, reasonableness and proportionality are required in any stress test requirements.

requirements. When one considers the time, expense and effort of developing Solvency II capital models, the more than six years the IAIS has devoted to develop a global groupwide capital standard, the Insurance Capital Standard (ICS) and the ongoing effort by US regulators to create a group capital calculation (GCC) for US insurance groups, one has to question the balance, even while acknowledging the benefits derived from some of these efforts. Moreover, the attempt to export Solvency II’s capital standards via equivalence assessments and the development of the ICS has injected harmful friction into key regulatory relationships and the IAIS regulatory apparatus, including revealing very significant fault lines between US and EU regulators. Moreover, attempting to create and impose a uniformed capital

“All the capital in the world will not prevent the failure of a company which cannot effectively manage its enterprise-wide risk.”

THE EXCESSES

standard, impacting different countries with different accounting standards at different levels of development and under different circumstances has been characterized by some as an unattainable goal. It also seems to be a solution in search of a problem.

Disproportional Focus on Capital.

A disproportionate amount of time and effort has been spent on capital

Recovery and Resolution Plans.

Recovery and resolution planning was initially introduced for systemically important insurers under the Dodd-Frank Act, but then took on a life of its own. In its simplest form, providing a road map of steps to take in the event an insurer faces material financial stress or when an insolvent entity must be liquidated without putting the whole system at will” process provides an opportunity for a company to take a comprehensive look at its strategy and risk profile.

However, the recovery and resolutions plans demanded of non-bank SIFIs and G-SIIs morphed into plans containing thousands of pages and costing

As in any significant crisis where legislation and regulations are adopted in response to a crisis, the end result is that reforms generally go too far.

As William Blake said in The Marriage of Heaven and Hell: “The road of excess leads to the palace of wisdom…

You never know what is enough until you know what is more than enough.”

Without trying to detail each specific excess and with the acknowledgment that these regulatory initiatives also have had benefits, we suggest the following as being “too much of a good thing”:

tens of millions of dollars. ( J.P. Morgan claimed that it devoted more than a million hours annually to preparing its Recovery and Resolution Plans for US, UK and EU requirements.) Although the cost of preparing these plans will vary depending on the size and complexity of the insurer, the costs are not insignificant and could easily aggregate $15 million - $20 million or more for larger insurers. Moreover, it is questionable whether regulators working on resolution plans for nonbank SIFIs and G-SIIs have sufficient time and expertise to understand them or even to review and comment on them before the next plan is submitted (as the plans originally were to be prepared annually). This created little direction or transparency for the companies subject to the requirement.

As Mike Tyson once observed,

“everyone has a plan, until they get punched in the mouth.” Accordingly, one has to question whether the recovery and resolution planning being required will provide the road map for the crisis presented. Even if helpful in better understanding the “plumbing” of an insurer and how its corporate pieces fit together if there were a crisis, it is debatable whether the recovery and resolution plans required of insurers (to date) pass a cost/ benefit analysis. There is now an effort to expand the requirement for recovery and resolution plans to at least all IAIGs. Regulators need to consider carefully who needs to prepare such plans and the requirements for such plans.

This must include recognition of that fact that insurers are generally not susceptible to a “run on the bank” and therefore there is more time to react to an emerging crisis. Moreover, regulators need to recognize the patchwork of inconsistent laws governing the resCONTINUED ON PAGE 20 INSURANCE ADVOCATE / October 29, 2018 19

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olution of financial institutions and they need to acknowledge their own critical role in any recovery or resolution process. They need to consider how they will react and cooperate with each other in such situations. Far too little discussion has taken place on these important topics Systemically Important Insurers.

Designating certain insurers as systemically important nonbank financial institutions and global systemically important insurers was challenged from the beginning as unsupported by the facts and as a case of regulatory overreaction and political fallout from the financial crisis. Nevertheless, the IAIS on an international level and FSOC for the US dutifully went ahead identifying potential systemically important insurers and ultimately designated nine at the international level and four in the US. These insurers were then subject to enhanced prudential oversight, including the development of additional capital requirements, the preparation of recovery and resolution plans, the need to go through extensive stress and liquidity testing and other significant measures.

FSOC was created by the DoddFrank Act to identify risks to the financial stability of the US that could arise from the material financial distresses or failure of large interconnected banks or nonbanking financial companies. As part of that authority, FSOC was directed to determine whether a nonbank financial company’s material financial distress, or nature, scope, size, scale, concentration or interconnectedness, could pose a threat to the financial stability of the US and, if so, to designate it as a SIFI and subject it to supervision by the Federal Reserve and enhanced prudential standards. As a result, FSOC designated three large insurance companies and GE Capital. As FSOC began its work, it was widely argued that unlike banks, insurance companies are far less likely to have any systemic impact on the financial system. However, as noted above, with the near collapse of AIG, it was inevitable that certain large insurance companies would be 20 October 29, 2018 / INSURANCE ADVOCATE

designated. Fast forward to 2018 and only Prudential remains designated as a non-bank SIFI. The other three non-bank SIFIs were de-designated.

GE Capital sold most of its business; MetLife sued and was successful at the lower court level and the government’s appeal was ultimately withdrawn; and AIG dramatically reduced its assets and significantly derisked.

In response to these developments and further studies, many regulators have begun to reconsider systemic risk regulation. In an April 2017 Report to the President, the US Treasury questioned the entity-based designation approach and recommended going forward to prioritize an “activitiesbased” or “industry-wide” approach to address risks to financial stability.

Moreover, the Report advocated that FSOC should work with the relevant primary financial regulators for that entity before considering any designation and to conduct a cost-benefit analysis and be more rigorous and transparent in any determination.

Furthermore, the Report reiterated the requirement for a clear off-ramp process for designated nonbank financial companies to be de-designated. The Report referred to entity-based designation as a “blunt instrument” for addressing potential risks. The IAIS and US state regulators have followed suit and are now focused on activities-based systemic regulation.

The pivot away from an entity-based systemic regulation to an activities-based approach is reasonable.

It also reinforces the argument that the original entity-based approach, at least for insurers, did not address a major systemic risk – a valuable, but expensive, lesson to have learned. An activities-based approach, however, also has a real danger of capturing a far greater number of insurers in the systemic regulation net.

Accordingly, proportionality will be key.

WHAT THE FUTURE OF REGULATION MIGHT/SHOULD HOLD

It is of course much easier to look back and second-guess regulatory actions. It is far more difficult to propose a way forward and to do so in light

of the emerging hot-button issues, including data and the digitization of the industry, InsurTech (and RegTech), emerging and growing risks, cyber, the Internet of Things (IoT), natural catastrophes, longevity and growing protectionism. The way forward requires consideration of the primary goals of insurance regulation and raises critical questions regarding how regulators prioritize their work and how they interact with one another, with the global industry and with consumers.

We offer below some thoughts and suggestions on these important questions and on how regulation might best move forward over the next ten years.

Establish a Reasonable Construct for Regulatory Relationships.

Relationships matter, and it is imperative for there to be careful consideration of how regulators organize their interactions and reliance on each other. As noted above, we have some examples in the form of the Solvency II equivalence assessment process, the NAIC’s Qualified Jurisdiction assessment process (under the US credit for reinsurance laws), the NAIC’s Accreditation process – for the states of the United States, the US-EU Covered Agreement, ComFrame, the IAIS and NAIC’s Memorandum of Understanding and the IMF financial sector assessment program (FSAP).

Each of these provide varying degrees of assessment and regulatory cooperation/reliance.

These processes and protocols, however, have largely emerged on an ad hoc, unilateral basis and in some cases have had a whiff of imperial judgment about them, that may not be justified—and certainly is off-putting to counter-parties. We would urge regulators to give careful consideration to the goals, guiding principles and the process for achieving greater levels of cooperation and reliance among global regulators.

We hope these efforts would include an appreciation that different approaches/systems can achieve similar results that no jurisdiction has a monopoly on good solvency regulation. There must also be respect for and recognition of local laws and a

recognition that regulatory cooperation and accommodation will benefit regulators, the industry and consumers. Most importantly, regulators need to work together to develop confidence and trust in one another.

The IAIS first coined the phrase “supervisory recognition” in 2009. In March of that year, the IAIS released an “Issues paper on group-wide solvency assessment and supervision.”

That paper stated that: “To the extent there is not convergence of supervisory standards and practices, supervisors can pursue processes of ‘supervisory recognition’ in an effort to enhance the effectiveness and efficiency of supervision. Supervisory recognition refers to supervisors choosing to recognize and rely on the work of other supervisors, based on as assessment of the counterpart jurisdiction’s regulatory regime.” (emphasis added).

The paper noted the tremendous benefits that can flow from choosing such a path: “An effective system of supervisory recognition could reduce duplication of effort by the supervisors involved, thereby reducing compliance costs for the insurance industry and enhancing market efficiency. It would also facilitate information sharing and cooperation among those supervisors.”

This is powerful. We urge global insurance regulators to take a step back and consider how they can enhance regulatory effectiveness and efficiency by taking reasonable and prudential steps to recognize effective regulatory regimens − even where these systems are based on different (perhaps significantly different) rules and principles, but which have a demonstrated track record of effectiveness.

As noted above, we have seen some efforts at supervisory recognition.

These include Solvency II’s equivalence assessment process, the NAIC’s accreditation process for other US States, the NAIC “Qualified Jurisdictions” provisions for identifying jurisdictions which US regulators will rely on for purposes of lowering collateral requirements on foreign reinsurers, the EU-US Covered Agreement and the IAIS’s Memorandum on Mutual Understanding. Some of these pro-

“The way forward requires consideration of the primary goals of insurance regulation and raises critical questions regarding how regulators prioritize their work and how they interact with one another, with the global industry and with consumers.” cesses are more prescriptive than others and have the danger of demanding that regulatory standards be virtually identical to be recognized. This should be avoided.

One Size For All is Not the Way to Go. The alternative approach to recognition of different, but equally effective systems, is the pursuit of a harmonized, single set of regulatory standards for global insurers. This approach is much in vogue among some regulators, who assert the “need for a common language,” or for “a level playing field” or to avoid “regulatory arbitrage.” Some regulators also argue that common standards will lead to regulatory nirvana, where one set of rules will apply to all global insurers who will then be able to trade seamlessly throughout all markets.

There are, however, a variety of solvency and capital systems that have proven their effectiveness. These systems are not identical, and indeed they have some profoundly different regulatory structures, accounting rules and other standards such as the systems deployed in the EU (even pre-Solvency II), the US, Canada, Japan, Bermuda, Australia, Switzerland and others. Attempting to assert a signal system or standard ignores commercial, regulatory, legal, cultural and political realities.

Moreover, we question some of the rationale for pursuing uniform standards, including the need for a common language. We suggest that what is really needed is for regulators to continue to work together, to discuss their respective regulatory regimes and to develop a deep, sophisti-

cated knowledge of how their regimes work. From this, trust will develop and from that a more effective and efficient system of regulation is possible. The engagement and trust building can happen within supervisory colleges.

We have seen it emerge in the context of the EU-US regulatory dialogue.

We saw it in the context of the EU-US Covered Agreement. No one, however, has made a compelling case for why one regulatory language is necessary to establish a close, effective working relationship among regulators.

Similarly, the call for a level playing field sounds good, but it is an amorphous, ambiguous term that is rarely, if ever, defined. Does the “playing field” include just regulatory capital requirements? If so, how about tax, employment rules, social charges? How about 50 subnational regulators versus one national regulator? Guarantee funds?

Seeking a level playing field can also be code for, “My system of regulation is heavier, more expensive than yours, so I need to put a regulatory thumb on the scales to make sure you have equally burdensome regulations.” This argument was made for decades in the debate surrounding the US reinsurance collateral rules. We hear it now regarding the burdens of Solvency II. It must be asked, however, whether it is the responsibility of prudential regulators to be leveling playing fields, or should their focus be solely on prudent regulatory standards for their markets.

Finally, the dark specter regulatory arbitrage is often asserted as a reason to pursue a single regulatory standard, such as the development of the CONTINUED ON PAGE 22 INSURANCE ADVOCATE / October 29, 2018 21

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ICS by the IAIS. But, one must ask if there is really a danger of regulatory arbitrage today among global, internationally active insures? Yes, a vigilant eye needs to kept for a weak link in the regulatory system, something the IMF FSAP system has sought to do, supervisory colleges can do and the IAIS is well equipped to do. But using regulatory arbitrage as an argument to drive the establishment of the same standards for all insurers, does not seem compelling.

Proportionality is Required.

Often regulators roll out new regulatory initiatives with the phrase that the new rules will be “proportionate” to the targeted insurers. Too often its seems there is just lip service to this principle. Rarely is it defined – but it is tossed out in an attempt to say, “do not worry, the new rules will not be excessive.” Greater debate and greater commitment to this principle is needed. Clearly a key component of it must be a careful cost/benefit analysis of any prosed new standard. With a clear articulation of the perceived danger to be addressed – including the likelihoods and severity of impact and then a credible calculation of the attendant costs – economic and otherwise to industry and to regulators. In October 2017, the UK Treasury Select Committee published a report criticizing the PRA for its excessively strict interpretation of Solvency II and its negative effect on the competitiveness of UK insurers. The report concluded that the PRA had enhanced policyholder protection at the expense of increasing the cost of capital for UK insurers which adversely affected the ability of UK insurers to provide long-term investments and annuities.

Although the PRA emphasized its mandate of prudential regulation and policy holder protection, the Treasury Committee reiterated its concern with how the PRA interpreted the principle of proportionality.

“There is a danger, however, that increasingly complex regulatory tools can create their own regulatory blind spots and that overly complex regulations can create a regulatory ‘fog of war.’”

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“An effective system of supervisory recognition could reduce duplication of effort by the supervisors involved, thereby reducing compliance costs for the insurance industry and enhancing market efficiency. It would also facilitate information sharing and cooperation among those supervisors.”

Simplicity Rather Than Complexity.

Over the past ten years, there has been a staggering increase in proposed and enacted regulatory requirements, many of which are catalogued above. There is a danger, however, that increasingly complex regulatory tools can create their own regulatory blind spots and that overly complex regulations can create a regulatory “fog of war.”

A n d r e w H a l d a n e , E xe c u t i v e Director at the Bank of England, in August 2012, delivered a paper at a Federal Reserve Bank of Kansas City’s economic policy symposium, entitled “The Dog and the Frisbee.” He graphically laid out when less is really more by talking about two ways of catching a Frisbee: one can “weigh a complex array of physical and atmospheric factors, among them wind speed and Frisbee rotation” − or one can simply catch the Frisbee, the way a dog does. Complex rules, Haldane said, may cause people to manage to the rules for fear of falling in conflict with them. The complexity of the rules may induce people to act defensively and focus on the small print at the expense of the bigger picture.

Focusing on the complexity of the banking world, Haldane compared the 20 pages of the Glass-Steagall Act to the 848 pages of Dodd-Frank together with its 30,000 pages of rule-making, and compared the 18 pages of Basel 1 to the over 1,000 pages of Basel III. The fundamental question is whether that additional detail and complexity really adds greater safety to the financial system or has just the opposite effect

and significantly increases the cost.

Haldane’s analysis provides compelling evidence that increasing the complexity of financial regulation is a recipe for continuing crisis. Accordingly, Haldane calls for a different direction for supervisors with “…fewer (perhaps far fewer), and more (ideally much more) experienced supervisors, operating to a smaller, less detailed rule book.”

Although Haldane’s analysis and discussion focuses on the banking system, his assessment and recommendations should be considered carefully by global insurance regulators. The sheer volume and complexity of rules, models and reports that flood into regulatory bodies raise the real question of who reviews this information, who really understands it and, worst of all, does a mountain of detailed information create a false confidence that regulators have good visibility into the risks – particular the emerging risks – that insurers are facing. A real danger exists of not seeing the forest for the trees.

Regulation Should Promote Competitiveness Rather than Protectionism.

At a time when competition has been growing not only from within the established companies but also more importantly from outside the traditional companies, protectionism will only inhibit growth and stifle better understanding of risk in a rapidly changing business environment.

The goal must be to make the industry more competitive and to courage transfer of innovation and create

better ways to address risk, distribution of products and climate changes.

Protectionism will only limit the potential of growth of the industry and is both shortsighted and self-defeating.

Recognition of the Importance of Positive Disruption Through InsurTech, FinTech and Innovation.

The general consensus is that the insurance industry is ripe for disruption because it has been slow (but is now working hard) to modernize in view of an array of innovative and technological advancements. Equally, regulators are trying to catch up with the rapid changes and are trying to understand the impacts through sandbox experiments and running separate regulatory models. The pace is fast and presents challenges for the regulators.

Solvency and policyholder protection remain paramount, but cybersecurity, data protection, artificial intelligence and the digital revolution make advancements every day. Where this will lead is not clear. But changes are happening and regulators must work to understand the impact and need to calibrate regulatory rules to keep up with the industry and encourage innovation.

Regulation Must Be Transparent.

Too often, regulation is drafted in times of crisis or behind closed doors by regulators believing they know better how to protect policy holders and how to prevent abuse of the system.

As we have said, getting it right, matters. A strong and healthy industry is the best way to protect consumers and policy holders. Industry engagement is essential and acknowledging and actually incorporating industry’s views is critical. This is particularly true given the dramatic changes in the insurance sector, discussed above, and the need to adopt regulation to new economics, business practices and consumer needs and expectations.

CONCLUSION

The last decade has been a remarkable and important epoch for the insurance industry and its regulators.

The financial crisis, increased globalization, use of data, technology ad-

“There is a danger, however, that increasingly complex regulatory tools can create their own regulatory blind spots and that overly complex regulations can create a regulatory ‘fog of war.’” vancements and emerging new risks have all driven the regulatory agenda.

Without doubt, the financial crisis has been the dominant force throughout this period and the regulatory reaction to it is what we have largely focused on in this paper.

As we look ahead, many of these issues will continue to advance and challenge regulators and the industry.

In light of this, we have sought to illuminate some of the macro regulatory trends of the past ten years and to consider how these developments might guide the regulatory agenda over the next ten years. We hope that this review will stimulate, even provoke, additional conversations about regulatory priorities and the principles that might usefully guide the development of further regulatory standards. Most importantly, we urge regulators to: • Incorporate lessons learned from the last decade and build regulatory institutions and protocols that accommodate • different, but effective, regulatory regimes.

• A dvance mechanics for cooperation, including Memoranda of Understanding, bilateral or multi-lateral agreements (such as the EU-US Covered Agreement) and other statutory or regulatory regimes for the recognition of other supervisors. These various forms of “supervisory recognition” will drive efficiencies for both regulators and the industry – to the ultimate benefit of consumers.

This approach will also lead naturally to convergence and sharing of best practices.

• Consider the legal, political and commercial realties of trying to force a single standard on global

businesses with profound differences in accounting, capital, risk management and policyholder protections systems.

• Apply proportionality in fact, not just in theory – and think through what that really means.

• Focus forward, concentrating on priority issues that are emerging.

There is always a tendency to fight the last war. The next crisis will most likely not be the same as the last one, but the tools being developed must be flexible and adaptable to withstand the next major challenge.

• C onfront the growing threat of protectionism.

• Continue to engage the industry on critical issues and recognize that a healthy and successful industry is one of the best protections for policyholders.

• Recognize the importance of the insurance industry to the global economy, with all of its capabilities and resources and to help bring these capabilities to those who need them most.

• A cknowledge the benefits and challenges provided by emerging technologies. The role of the regulators must be to understand, validate and embrace those changes as appropriate. This will require substantial regulatory resources and attention.

Finally, we urge regulators to reflect on their considerable regulatory successes – including their performance during the financial crisis. It is a track record of which to be proud.

And then, it is time to turn back to the regulatory agenda for 2018-2028. [IA] INSURANCE ADVOCATE / October 29, 2018 23

[ ON MY RADAR ]

BARRY Z ALMA

Forge a Certificate of Insurance – Guilty of Crime Certificate of Insurance Has Legal Efficacy Evidence is sufficient to support a conviction if, viewed in the light most favorable to the prosecution, it permits a rational trier of fact to find the essential elements of the crime beyond a reasonable doubt.

u Although issued by insurance agents with alacrity, Certificates of Insurance (COA) are important documents relied upon by those who receive them to provide comfort that the person they are dealing with is appropriately insured. When someone fails to obtain an accurate COA or alters a legitimate COA and forges the document to make it state the coverages falsely that person is subject to criminal prosecution.

In State of Washington v. Stacy Ann Bradshaw, No. 75853-5-I, Court of Appeals of the State of Washington Division One (April 9, 2018) the Court of Appeals was asked to determine if there was sufficient evidence to support a charge under the current forgery statute. To support the charge the State needed to prove that the allegedly altered written instrument had “legal efficacy.” Stacy Ann Bradshaw (Bradshaw), an escrow agent was convicted of forgery for altering a certificate of insurance to make it appear she had enough liability insurance to cover a transaction she had been hired to handle.

Prentice showing her limits of $1 million. She gave Umpqua a copy of the certificate that was altered to represent that Bradshaw had coverage limits of $2 million. Umpqua noticed the alterations and contacted both Kibble & Prentice and the Department of Financial Institutions, the agency that regulates escrow agents. This led to the prosecution of Bradshaw on one count of forgery who was convicted and sentenced her to 40 hours of community service, $3,600 in financial restitution, and six months of community supervision.

Bradshaw appealed.

FACTS

ANALYSIS

In 2014, Bradshaw was a licensed escrow agent and the owner of North Sound Escrow. By law, an escrow agent must maintain several types of liability insurance. Bradshaw had coverage for crime as well as for errors and omissions through the insurance firm USI Kibble & Prentice. The limits were $1 million per claim.

In February 2014, Bradshaw was retained as the escrow agent for the sale of commercial property for the price of approximately $1.4 million.

Umpqua Bank was the lender for one of the parties. Umpqua asked Bradshaw for a copy of her insurance information. Bradshaw obtained a “Certificate of Liability Insurance” from Kibble & 24 October 29, 2018 / INSURANCE ADVOCATE

Evidence is sufficient to support a conviction if, viewed in the light most favorable to the prosecution, it permits a rational trier of fact to find the essential elements of the crime beyond a reasonable doubt. At common law, forgery was the act of falsely making or materially altering, with intent to defraud, a writing which, if genuine, might apparently be of efficacy or the foundation of legal liability.

Legislation revising the forgery statute in 1975 removed the particularized list of categories of items susceptible to forgery. The current forgery statute simply prohibits the forgery of a “written instrument.”

At Bradshaw’s trial, the only issue

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/ZalmaLi brary.

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/ProductDetails.aspx?produc tId=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.

[ ON MY RADAR ] was whether the certificate of insurance was a “written instrument.” A written instrument is broadly defined in the current statute as (a) Any paper, document, or other instrument containing written or printed matter or its equivalent; or (b) any access device, token, stamp, seal, badge, trademark, or other evidence or symbol of value, right, privilege, or identification. [RCW 9A.60.010 (7).] This definition was intended to continue the common law requirement that the instrument be something which, if genuine, may have legal effect.

PUBLIC RECORD

The certificate holder named on Bradshaw’s certificate of liability insurance is the Washington State Department of Financial Institutions.

The certificate was filed with the department as evidence that Bradshaw was in compliance with coverage requirements.

The trial court had no problem determining that the certificate has legal efficacy as a public record.

The former statute explicitly recognized that any “paper on file in any public office” is a writing susceptible to forgery. [Former RCW 9.44.020 (1909).]

Bradshaw claimed, however, that to meet the requirement of legal efficacy as a public record, the written instrument must be issued by a government agency.

Forgery covers virtually every kind of instrument which has an effect on private or public rights.

This is not a case where an altered document found its way into an agency file accidentally. The certificate had material significance to the department. As part of the licensing process, an escrow agent must submit proof of financial responsibility to the department, including a fidelity bond providing coverage in the aggregate amount of one million dollars. To demonstrate compliance with the requirement for a fidelity bond, the applicant is required by regulation to provide the department with a certificate of insurance that includes the aggregate amount of coverage.

Maintaining such insurance is a condition precedent to the escrow agent’s authority to transact escrow business in this state.

In short, the record shows that Bradshaw’s certificate of insurance was

To demonstrate compliance with the requirement for a fidelity bond, the applicant is required by regulation to provide the department with a certificate of insurance that includes the aggregate amount of coverage. a type of document required by law to be filed and necessary or convenient to the discharge of the duties of the department. In view of the regulatory scheme, the trial court reasonably found that a certificate of insurance coverage for an escrow agent is a written instrument, the alteration of which supports a forgery charge because it is a public record with legal efficacy.

Bradshaw’s certificate of insurance, before alteration, was genuine. It was a representation of the limits of her coverage. The trial court correctly reasoned that if Umpqua had suffered damages as a result of the alteration and had sued Bradshaw for fraudulent misrepresentation, the original unaltered document would be a foundational piece of evidence of Bradshaw’s liability. And this is true even though the certificate states on its face that it “is issued as a matter of information only and confers no rights upon the certificate holder.”

The court heard testimony that insurance certificates are typically used by insureds as evidence of their current policies and limits and that Bradshaw’s certificate provided such evidence to the department.

The Court of Appeals concluded that sufficient evidence supported the trial court’s determination that Bradshaw’s certificate of insurance had legal efficacy as a foundation for legal liability.

RULE OF LENITY

Finally, Bradshaw invokes the rule of lenity to argue for reversal of her conviction. The rule of lenity operates to resolve statutory ambiguities in favor of a criminal defendant. The forgery statute provides a fair warning that it applies to Bradshaw’s conduct. She falsely altered a written instrument with intent to injure or defraud.

The requirement that the written instrument have legal efficacy is a limitation on the statutory definition of forgery, not an expansion of it. Because Bradshaw’s conduct is clearly covered by the statute, the rule of lenity is not applicable.

ZALMA OPINION

Bradshaw, to save some premium by increasing her limits of liability, became a felon and destroyed her ability to practice as an escrow officer. Although the criminal punishment is minimal with no jail time the effect on Brandshaw’s career explains why she tried to change the conviction on appeal. The COA is an important document and insurance professionals should be ready to report anyone who tries to modify it for purposes outside the true reason for the COA.[IA]

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INSURANCE ADVOCATE / October 29, 2018 27

[ COURTSIDE ]

LAWRENCE RO GAK

Claims File Content Subject to Discovery, Even Those Parts Created During Litigation Rickard v New York Cent. Mut. Fire Ins. Co. Edited by Lawrence N. Rogak Breaking with precedent, the Appellate Division holds here that an insurer’s SUM claims file is subject to discovery by plaintiff—even those portions created after litigation was commenced—limited only by a court’s in-camera inspection of those portions claimed to be privileged.­—LNR uFollowing a motor vehicle accident in which plaintiff allegedly sustained serious physical injuries, plaintiff commenced this action to recover supplementary underinsured motorist (SUM) benefits pursuant to an automobile liability insurance policy issued by defendant. During discovery, plaintiff served upon defendant a notice to produce its entire SUM claim file. Defendant, relying upon Lalka v ACA Ins. Co. (128 AD3d 1508 [4th Dept 2015]), responded by providing plaintiff with the contents

“any and all documents in the claim file pertaining to the payment or rejection of the subject claim including those prepared after the filing of this lawsuit up to the time the settlement offer was made . . . including reports prepared by Defendant’s attorney(s).” of the claim file up until the date of commencement of this action. During a pretrial conference, defendant made an offer to resolve the matter. In a follow-up letter, plaintiff demanded that defendant provide the entire claim file, including those parts generated after commencement of this action.

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”

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.

Defendant moved for a protective order and alternative relief, including an in camera review, plaintiff cross-moved to compel disclosure of the entire claim file. Supreme Court denied defendant’s motion for a protective order and granted plaintiff ’s cross motion in part by directing defendant to provide plaintiff with “any and all documents in the claim file pertaining to the payment or rejection of the subject claim including those prepared after the filing of this lawsuit up to the time the settlement offer was made . . . including reports prepared by Defendant’s attorney(s).”

Defendant appeals.

We note at the outset that defendant did not challenge plaintiff ’s notice to produce, which requested the entire claim file without designating any documents or categories of documents therein, on the ground that such request was palpably improper because it was over-broad or sought matter not “material and necessary” for the prosecution of plaintiff ’s action, and that defendant’s motion for a protective order was based upon the assertion that any documents CONTINUED ON PAGE 30

28 October 29, 2018 / INSURANCE ADVOCATE

SARI GABAY

What Happens When a Life Insurance Policy Designates an Ex-Spouse as the Beneficiary uWhile married couples may create Last Will & Testaments and forget to change them following a divorce, numerous states have “revocation on divorce” statutes that typically treat a divorce as voiding a testamentary bequest to a former spouse. These revocation on divorce statutes were initially aimed at Last Wills & Testaments and rest on an assumption that the deceased presumably would not wish for an ex-spouse to inherit his or her assets and personal effects. Thus, if no action to change a Will is taken post-divorce, an ex-spouse generally will not inherit under the Will by operation of statute, at least in those states with such laws. But what if an ex-spouse is the designated beneficiary under a life insurance policy? Should a life insurance policy be treated the same as a Will with benefits automatically revoked on divorce?

At least 26 states, including New York, have adopted “revocation-on-divorce” laws so that beneficiary designations to former spouses are revoked upon divorce. Before considering New York law, it is relevant to understand a recent United States Supreme Court decision, Sveen v. Melin, 138 S.Ct. 1815 (2018), which involved an ex-wife’s claim under Minnesota law to the death benefits under her ex-husband’s life insurance policy.

Although Minnesota has a revocation on divorce law that provides that “the dissolution or annulment of a marriage revokes any revocable beneficiary designation made by an individual to the individual’s former spouse,” Minn.

Stat.. 524.2804 subd. 1 (2016), the exwife in Sveen argued that the Minnesota law violated the Contracts Clause of the U.S. Constitution because the life insurance policy was purchased before the law was enacted. The Contracts Clause

“… the law before us cannot survive an encounter with even the breeziest of Contracts Clause tests.

It substantially impairs life insurance contracts by retroactively revising their key term.” bars states from passing laws “impairing the obligation of contracts.” The lower court ruled in favor of the children but the Court of Appeals for the Eighth Circuit reversed and found in favor of the ex-spouse.

On appeal to the U.S. Supreme Court, the question presented was whether Minnesota’s revocation law could apply to a beneficiary designation that pre-existed the enactment of the statute, without violating the Contracts Clause of the Constitution. The Court reasoned that the law is designed to reflect a policyholder’s intent and it supplies a default rule that a policyholder can override. Specifically, the Court stated: “[t]he intent of most individuals after a divorce would be to disinherit their ex-spouse.” As such, “the insured’s failure to change the beneficiary after a divorce is more likely the result of neglect than choice.” The Court went on to explain that “the law is unlikely to disturb any policyholder’s expectations at the time the contract was signed” because it is unlikely that people are contemplating divorce when they purchase a life insurance policy. Interestingly, the Court pointed out that “the statute merely provides a default rule. It only applies if a policyholder does not update the beneficiary form. If the policyholder did update the form, nothing in the law would stop him from going

[ LEGAL UPDATE ]

Sari Gabay is a go-to insurance regulatory lawyer representing insurance agents, brokers and public adjusters in Department of Financial Services’ investigations, complaints, and hearings and in relicensing applications.

She represents sellers and purchasers of insurance agencies and other businesses. Sari also reviews and interprets insurance policies and advises homeowners, venues, and other policyholders in insurance coverage disputes, in addition to her general law practice. Sari is a frequent speaker and author on issues in the insurance industry, and most recently spoke on October 3, 2018 on DFS’ Regulation 208 and the ensuing Article 78 proceeding. Sari is also among PIA’s Circle of Consultants.

ahead and renaming an ex-spouse after a divorce.” (Emphasis added).

Although the majority ruled that the beneficiary to the ex-spouse was revoked upon divorce by operation of the statute, Justice Gorsuch, issued a powerful dissenting opinion, in which he challenged the majority’s reasoning. “… the law before us cannot survive an encounter with even the breeziest of Contracts Clause tests. It substantially impairs life insurance contracts by retroactively revising their key term.”

What does this mean for New York insureds and beneficiaries? Well, New York Estates Powers & Trusts Law §51.4 (“E.P.T.L.”) provides for the revocatory effect of divorce on disposition to a former spouse, unless a written agreement provides otherwise. The statute, which was enacted in 2008, explicitly refers to revocation of the “beneficiary designation in a life insurance policy.”

Several New York cases have applied the E.P.T.L. to hold that a testamentary bequest to an ex-spouse are revoked by CONTINUED ON PAGE 30

FOREWORD

COURTSIDE

LEGAL UPDATE

CONTINUED FROM PAGE 4

CONTINUED FROM PAGE 28

CONTINUED FROM PAGE 29

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Applied is the world’s largest provider of agency and brokerage management systems, serving customers throughout the U.S., Canada, Ireland, and the U.K.… Speaking of awards, congrats to PIANY Management Services Inc. on receiving two Gold Awards for excellence in its flagship member publication, PIA magazine. This first award is in the “print media/association/magazine” category. The second award is in the “print media/print creativity/illustration/graphic design/infographic” category for its March 2018 issue of its PIA magazine infographic on the changing workforce in our industry. “To have PIA magazine recognized yet again by this international award competition is a huge accomplishment for our association,” said PIA Management Services Inc. CEO Mark J. LaLonde, CPIA, CIC, AAI. “We’re always trying to make our publications more interesting and fun for our readers; we have recently introduced infographics to our magazine, and we’re thrilled that it’s being recognized already.” PIA magazine is a monthly, state-specific publication for professional independent insurance agents in New York, New Jersey, Connecticut, New Hampshire, Vermont and Tennessee, which issues its publication on a quarterly basis. It has the most active, qualified readership of any trade magazine serving the insurance community, reaching more than 4,500 member agencies with a pass-along readership of 20,000 industry professionals. More than 6,000 entries were submitted to the MarCom Creative Awards, which is an international awards competition recognizing the outstanding achievements by marketing and communication practitioners. Nice work, Glenmont.[IA]

contained in the claim file after the date of commencement were materials protected from discovery. Thus, the sole issue on appeal is whether defendant met its burden of establishing that those parts of the claim file withheld from discovery contain material that is protected from discovery. We conclude that defendant did not meet that burden.

To the extent that Lalka (128 AD3d at 1508) holds that any documents in a claim file created after commencement of an action in a SUM case in which there has been no denial or disclaimer of coverage are per se protected from discovery, it should not be followed.

Rather, a party seeking a protective order under any of the categories of protected materials in CPLR 3101 bears the burden of establishing any right to protection. A court is not required to accept a party’s characterization of material as privileged or confidential.

Ultimately, “resolution of the issue whether a particular document is . . . protected is necessarily a fact-specific determination . . . , most often requiring in camera review.

Here, we conclude that defendant failed to meet its burden inasmuch as it relied solely upon the conclusory characterizations of its counsel that those parts of the claim file withheld from discovery contain protected material.

We nonetheless further conclude that, under the circumstances of this case, the court abused its discretion by ordering the production of allegedly protected documents and instead should have granted the alternative relief requested by defendant, i.e., allowing it to create a privilege log pursuant to CPLR 3122 (b) followed by an in camera review of the subject documents by the court. We therefore reverse the order insofar as appealed from, vacate the first and second ordering paragraphs, grant the motion for a protective order insofar as it seeks an in camera review, and remit the matter to Supreme Court to determine the motion and the cross motion following an in camera review of the allegedly protected documents.[IA]

divorce. Presumably if a similar issue arises in New York as in Sveen, where the Will was written prior to the statute’s effective date, it is likely that an ex-spouse may have no claim to the benefits of his or her deceased ex.

30 October 29, 2018 / INSURANCE ADVOCATE

2018 NY Slip Op 06333 Decided on September 28, 2018 Appellate Division, Fourth Department

As a precaution, insurance brokers and agents in New York should be mindful of life events, such as divorce, and inform clients of New York’s default rule of automatic revocation of an ex-spouse as a beneficiary on divorce.

As a precaution, insurance brokers and agents in New York should be mindful of life events, such as divorce, and inform clients of New York’s default rule of automatic revocation of an ex-spouse as a beneficiary on divorce.

While this can be changed by written agreement or by completing an updated beneficiary form, it is best to advise clients to revisit their beneficiary designations upon divorce. It may be that as part of a divorce agreement an exspouse remains the beneficiary under a life insurance policy, which should override the statue’s automatic revocation provision, but if the form is updated post-divorce, costly estate litigation may be avoided. [IA] *This article is for informational purposes only. For insurance regulatory or other legal advice, please contact Sari Gabay at gabay@gabaybowler.com or (212)941-5025. Thank you to Julia Rachiele of Brooklyn Law School for her research assistance.

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