Main Street America: Insuring America's Small Businesses & Their Owners by Insurance Journal

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FEBRUARY 6, 2012 | VOL. 90, NO. 3

Hartwig: Insurersâ&#x20AC;&#x2122; Underwriting Profits Intellectual Property Risk Management Public Entity Insurance Google Captive in Hawaii on Track

N8 On The Cover

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Inside This Issue

Special Report: 5 Startup Businesses Agents Should Watch

February 6, 2012 • Vol. 90, No. 3 • West Region

NATIONAL COVERAGE

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N6 Special Report: When Main Street Meets the Cloud

8 San Francisco City Worker Charged With Data Theft

N24

IDEA EXCHANGE N2 How to Maximize Producer Talent N24 Closing Quote: Hartwig

N8 Special Report: 5 Startup Businesses Agents Should Watch N12 Closer Look: Nonprofit Job Growth in a Decade of Turmoil N14 Closer Look: Evaluating Public Entity Insurance Programs

8 USDA Giving Arizona $5.2 Million in Disaster Funds 8 Muslim Guard Gets $465,000 in California Harassment Suit 14 Google Captive in Hawaii on Track

N16 Closer Look: Public Entity Self-Insured Retention Programs N17 Spotlight: Intellectual Property Risk Management N20 E&O Insights: Moving From a Claims-Made to an Occurrence Form N22 Employment Bias Complaints Against Private Sector at All-Time High N22

Conning: P/C Premiums to Grow 3%-4% in 2012

N23

Tough U.S. Commercial Market Conditions in 2012, Marsh Says

4 | INSURANCE JOURNAL-WEST REGION February 6, 2012

DEPARTMENTS 6 9 9 10 12 N1

Opening Note Declarations Figures People Business Moves MyNewMarkets

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Opening Note PR People

f the last guy out the door in Rome was a public relations professional, he might have met any and all media queries with a calm, but curt, “Why don’t you jot your questions down on a scroll, and I’ll see if I can get them answered.” Of course, now there’s email. Not all PR people are created equally, but the decline of another empire, the nation’s fourth estate, seems to have changed aspects of the profession — and not necessarily for the better. As journalism continues to be hammered by a sour economy and changing consumer habits, the exodus of skilled reporters seems to have altered how PR people respond to calls and emails from reporters. As the journalism profession withers, so has the respect some PR people hold for reporters. When I started in journalism 15 years ago, PR people tended to respond immediately, or at least the same day. They were often helpful and friendly. While arguments, and even ‘Email me your questions heated debates with a few cuss words flying, were not and I’ll see if I can get unheard of, the reporter-PR them answered.’ person relationship was typically positive and productive. This is no longer generally the case. Many PR people today are incredibly suspicious — sometimes justifiably so — and it’s rare to get a PR person to answer a phone call, or to respond in any form in one, two or even three days. It’s not just PR people in the insurance industry. It’s across all industries, and it’s especially prevalent with PR people who work in the public sector. For example, it’s a common PR practice nowadays to respond to a request from a reporter on deadline about a story via email something to the effect of: “Email me your questions and I’ll see if I can get them answered.” Reporter: “Well, can you at least tell me if anyone in your organization will respond?” PR person: “Email me your questions and I’ll see if I can get them answered.” Reporter: “Ok. Can you answer my questions today?” PR person: “I’m not sure I can get them answered today. I can’t make you any promises.” I’ve heard similar complaints from a growing number of reporters. In defense of the truly good PR people left, there are a few who set the standard as excellent communicators. They are a credit to the organizations whose message they strive to deliver, and they return calls immediately, with answers — even if it’s a “no comment.” Those of you who are left, if you are out there and you’re reading, email me, or call me, with your questions and responses. I will definitely get them Don Jergler West Editor answered.

EDITORIAL Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Curtis Pearsall Contributing Writers Robert Fletcher, Herb Greenberg, Robert Hartwig, Mark McCrary, Jeffrey Norton, Jeff Richardson

SALES V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified Advertising (800) 897-9965 x125 classifieds@insurancejournal.com

MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com

DESIGN/WEB Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Art Director Jamie Bethell | jbethell@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com

IJ ACADEMY OF INSURANCE Director of Education Christopher J. Boggs | cboggs@ijacademy.com Online Training Coordinator Barbara Dooley | bdooley@ijacademy.com

ADMINISTRATION Publisher Mark Wells Chief Executive Officer Mitch Dunford Accounting Manager Megan Sinclair | msinclair@insurancejournal.com

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insurancejournal.com/subscribe Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semimonthly by Wells Publishing, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2012 Wells Publishing, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Publishing, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 9049, Maple Shade, NJ 08052

6 | INSURANCE JOURNAL-WEST REGION February 6, 2012

ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rhondab@fosterprinting.com. Visit insurancejournal. com/reprints for more information.

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News & Markets San Francisco City Worker Charged With Data Theft

USDA Giving Arizona $5.2 Million in Disaster Funds

former San Francisco city employee is facing charges that she stole Social Security and other confidential information from more than 3,000 people who applied for Medi-Cal benefits. Shawn Williams pleaded not guilty in late January to four felony counts of withholding and concealing stolen property and two misdemeanor counts of possessing confidential information. The alleged theft began in 2006 while Williams worked for the city’s Human Services Agency. Prosecutors say she gathered the names and Social Security numbers of the applicants in part by forwarding email from her work account to her personal account. She is not accused of using or selling the data. Prosecutors instead say she was trying to demonstrate her productivity, as she built a case that she was being discriminated against at work. Williams was fired in 2009. She has sued the city over her dismissal.

rizona is set to get $5.2 million in disaster aid from the Department of Agriculture. USDA Secretary Tom Vilsack announced the award as part of more than $300 million in emergency assistance to 33 states and Puerto Rico. Utah and Missouri will receive the most money, together taking in $109 million. Arizona’s cut of the Department of Agriculture watershed and conservation emergency funds will be used to pay for projects to alleviate flooding in northern Arizona’s Coconino County. The area was hit in June 2010 by the Schultz fire, which burned about 15,000 acres. A spokesman with the Arizona office of the Natural Resources Conservation Service said Arizona requested the funds early last year but was put on a national waiting list.

Muslim Guard Gets $465,000 in California Harassment Suit

Group to Push Idaho Liquor Vote, Grocers Back Off

San Francisco, Calif., jury has awarded $465,000 to a Muslim security guard who says his co-workers and supervisors called him a terrorist and an al-Qaida member. The San Francisco Chronicle reported jurors added $400,000 in punitive damages to their earlier $65,000 verdict in favor of Abas Idris for lost wages and emotional distress. The 27-year-old says he quit his job as a security guard for Los Angeles-based Andrews International in February 2010 after the company failed to take his complaints about harassment seriously. He had served as a guard at the Letterman Digital Arts Center in the Presidio. An attorney for Andrews says the company had promoted Idris to a supervisory position and plans to appeal the verdict.

grocery lobbying organization won’t advance a liquor privatization ballot measure in 2012, but a second group announced it will seek to get an initiative before voters next November. The Idaho Federation of Reagan Republicans submitted a citizen’s initiative to privatize liquor sales in Idaho and eliminate the state Liquor Division. Meanwhile, the Northwest Grocery Association said it would hold off until at least the 2013 Legislature, in hopes of convincing lawmakers to back a bill to privatize liquor sales in Idaho. Sales are now conducted through state-run or contract stores. The group decided it didn’t have enough time to get a ballot measure ready before an April 30 deadline, and also didn’t want to bypass lawmakers eager to weigh in.

8 | INSURANCE JOURNAL-WEST REGION February 6, 2012

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Declarations Cornerstone

Dave Jones

Cal/OSHA

“You have to be smart about your marketing, and I think it’s all about relationships. Without the relationship I think this business goes nowhere. I am not GEICO. I am not Progressive. I am Cornerstone Insurance.” — Phil Hakopian, CEO of Rancho Cucamonga, Calif.-based Conerstone Insurance Services, speaking about insurance exchnages at the Insurance Industry Roundtable run by the WIAA Education & Research Foundation in Irvine, Calif.

“I think he’s relatively been working behind the scenes. Certainly more than any other commissioner, he has not been out in the insurance public for any events that normally we would be able to see the commissioner and be able to have a dialog.” — Bob Hogeboom, a regulatory lawyer with the Los Angeles office of Barger & Wolen, comparing California Insurance Commissioner Dave Jones with other commissioners following the completion of Jones’ first year in office.

“California law requires all employers to identify and mitigate safety risks in the workplace.” — California Department of Industrial Relations Director Christine Baker said following an announcement that Cal/OSHA issued $256,445 in fines to two companies in Chino, Calif., for over 60 safety violations discovered during warehouse inspections that found unsafe working conditions.

Risk “Every ERM strategy has a different level of maturity and is influenced by regulation, industry, company size and countless unique business characteristics.” — Mark Stephens, Milliman Inc.’s director of risk advisory services and executive director of the newly formed Milliman Risk Institute.

Figures 15&11

Those are the ages of two girls who brought a lawsuit in January against Oregon Gov. John Kitzhaber, accusing him of failing to protect the state’s resources against climate change.

2,884

Statistics from the Boulder County Clerk and Recorder’s Office show 4.8 percent of the 59,718 vehicles registered in Boulder, Colo. are hybrids. The city’s percentage of hybrids far outpaces the national average, which is below 1 percent.

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145 That’s the number of vehicles the Oregon State Motor Pool says were damaged when floodwaters inundated its parking lot last month in Salem. The Department of Administrative Services says the motor pool lot manager arrived about 8 a.m. and started moving vehicles, but parts of the lot were under 2 feet of water within an hour.

504,760 That’s the magic number of signatures for the 2012 Automobile Insurance Discount Act, which California’s Secretary of State has now verified will qualify for the November ballot. The initiative is sponsored by the American Agents Alliance, which says the goal is “to get every Californian insured at a competitive price.” February 6, 2012 INSURANCE JOURNAL-WEST REGION | 9

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People Lucas Bills

Morgan West

Juliene Conway

Centennial, Colo.–based Colorado Casualty has named Lucas J. Bills as president and chief executive officer of the commercial lines company, which operates in Arizona, Colorado, Nevada, New Mexico, Utah and Wyoming. Bills joined Colorado Casualty in 2009 as regional vice president for the Denver region, where he was responsible for growth of commercial lines business and maintaining partnerships with Colorado Casualty appointed agents. Prior to Colorado Casualty, Bills was assistant vice president of sales and marketing for America First Insurance. Colorado Casualty offers commercial property and casualty products and coverages distributed through appointed independent agents. The company is part of Liberty Mutual Agency Corp., a business unit of Liberty Mutual Insurance. Dealey, Renton & Associates has named Morgan West senior vice president. West will be based in DRA’s Oakland, Calif., office and will report to President Al Chinn. West’s role will include working with key accounts and assisting in certain management responsibilities. West comes to DRA from Kibble & Prentice, a USI company, in Seattle, where he was president of property/casualty. He merged into K&P along with 42 employees of USI’s Seattle office (formerly Hurley, Atkins & Stewart) when USI purchased K&P in 2006. West began as a life agent, migrating to personal lines and eventually into commercial property/casualty, then he took the helm of the lawyers professional liability insurance program at Hurley, Atkins & Stewart. DRA, which has offices in Oakland, Pasadena and Santa Ana, is an employee-owned company specializing in professional liability for architects, engineers and other design professionals.

Karen Albanese

Fireman’s Fund Insurance Co. has named Juliene Conway its chief marketing officer. Conway will lead the market management team and be responsible for agent and policyholder intelligence, innovation, marketing and communications. Conway will succeed Eleanor Barnard, current chief distribution, sales and marketing officer, who will be retiring from Novato, Calif.-based Fireman’s Fund but will continue to work on special projects. Previously, Conway held senior marketing positions at Wells Fargo Funds Management, Wachovia Evergreen Investments, Ameriprise Financial, Fidelity Investments and HSBC. Fireman’s Fund is a property and casualty insurance company providing personal and commercial insurance products backed by claims and risk management solutions. Fireman’s 10 | INSURANCE JOURNAL-WEST REGION February 6, 2012

Fund is a member of the Allianz Group. Heffernan Insurance Brokers has hired Karen Albanese office as senior vice president in its Orange County, Calif. office, focusing on benefits strategy and administration. Albanese will work out of Walnut Creek, Calif.-based Heffernan’s Los Angeles branch, expanding Heffernan’s reach in Southern California. Albanese brings nearly 20 years of insurance experience to Heffernan, specializing in employee benefit risk management and population health improvement solutions. Her career began at a large health insurance company, where she developed products and networks. For the last 15 years, Albanese has worked at two large insurance brokerages managing benefit programs for employers of all sizes. Employee-owned, Heffernan has California offices in San Francisco, Petaluma, Palo Alto, Los Angeles and Orange County, and offices in Portland, Ore.; St. Louis, Mo., and New York, N.Y. Stephanie Zambrana has been named assistant vice president and controller of Atlas General Insurance Services, a workers’ compensation specialty general agency in San Diego, Calif. Zambrana has more than 13 years’ insurance experience in various financial positions within wholesalers and MGAs. Zambrana’s insurance career started at Arrowhead General Insurance Agency as a staff accountant responsible for multiple lines of insurance programs. In 2005, Arrowhead acquired Cypress Point Insurance Services and Zambrana was named assistant controller for Cypress Point. Cypress Point was eventually transitioned into Arrowhead General and Zambrana was mad vice president of premium accounting at Arrowhead General. Atlas General Insurance Services is a general insurance agency focused on workers’ compensation. The Buckner Co. has hired Russell Trujillo in its employee benefits department. Trujillo will work with employers to help them find benefits packages for their employees. The Buckner Co. has placed much emphasis on expanding the employee benefits division in recent years. Trujillo spent more than a decade working for two of the largest Utah health insurance carriers. Ogden, Utah-based The Buckner Co. also offers specialty niche market services, personal insurance, employee benefits and surety bonding. www.insurancejournal.com

2012

PHLYAgentSummit

GO TO WWW.PHLY.COM/SUMMITS TO REGISTER FOR A SUMMIT NEAR YOU.

A++ (Superior) on our 50th Year!

Thank You. Thank you to our producers and employees for helping Philadelphia Insurance Companies earn an “A++” rating from the A.M. Best Company. Only about 3% of all U.S. insurance companies, have this rating. PHLY’s commitment to underwriting discipline and our partnership with the Tokio Marine Group, one of the strongest and most reputable global insurance groups, allows us to celebrate this achievement during our 50th anniversary. Thank you to more than 13,000 agents and brokers who work with PHLY to insure responsible and profitable risks. Your partnership allows us to be there for our customers when they need us the most. All of the 1,548 PHLY employees and everyone who’s worked at PHLY over the last four decades deserve a special thank you and congratulations. Your commitment and service is an invaluable part of our success and I’m proud to share this accomplishment with you. I would like to personally invite you to join us at one of our 13 agent summits in 2012 to learn the advantages of working with PHLY. Go to www.phly.com/summits to register for a summit near you. Continuing Education credits will be offered at some locations.

James J. Maguire, Jr. Chairman & CEO, Philadelphia Insurance Companies

800.873.4552 PHLY.com

Philadelphia Insurance Companies is the marketing name for the insurance company subsidiaries of the Philadelphia Consolidated Holding Corp., a Member of the Tokio Marine Group. Coverage(s) described may not be available in all states and are subject to Underwriting and certain coverage(s) may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. | © 2011-2012 Philadelphia Insurance Companies, All Rights Reserved.

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Business Moves disclosed. Barlocker Insurance Services was formally affiliated with the Leavitt Group. The new insurance brokerage is named Coastal States Insurance Services, and has offices in Ventura and Paso Robles, offering property/casualty and employee benefits, as well as personal lines to their customers.

Networked, LexisNexis Exchange Grass Valley, Calif.-based Networked Insurance Agents has signed on with LexisNexis Risk Solutions Insurance Exchange, a significant step for LexisNexis into the West, the collaborative insurance placement platform said. Networked Insurance Agents has roughly 1,200 small- to mid-sized independent member agencies. Networked joined the LexisNexis to help the organization manage and maximize its midmarket commercial business submissions to its carrier partners, according to the companies. The LexisNexis Insurance Exchange is a business and renewal submission placement platform that enhances the flow of application data between insurance carriers, agents and brokers. This exchange is the result of an alliance formed through LexisNexis Risk Solutions, The Council of Insurance Agents & Brokers and Marketcore Inc. LexisNexis’ Insurance Exchange, based on cost per user, operates in a cloud. LexisNexis Risk Solutions is part of Reed Elsevier, a publisher and information provider. Ventura Partners, Barlocker Ventura Partners BHR LP has acquired the assets from Barlocker Insurance Services of Ventura, Calif. Terms of the acquisition were not 12 | INSURANCE JOURNAL-WEST REGION February 6, 2012

Milliman Risk Institute Seattle, Wash.-based consulting and actuarial firm Milliman Inc. has formed Milliman Risk Institute, designed to provide scientific-based thought leadership to executive management on all facets of enterprise risk. The new risk institute has an advisory board of eight senior risk managers. It convened its first meeting on Nov. 3, 2011. The Milliman Risk Institute will publish market research, case studies, best practices and perspectives from chief risk officers and other risk management experts. The Institute expects to publish its initial research in advance of the 2012 ERM Symposium in Washington D.C. in April The advisory board pairs four Milliman employees and four risk officers with experience in large enterprises. Advisory board members include: Dr. Stephen D’Arcy, professor emeritus of finance, University of Illinois; Brian Brown, Milliman principal and consulting actuary; Neil Cantle, Milliman principal and consulting actuary; Michael Eshoo, ERM director, General Electric Aviation; John C. Kline, director of risk and insurance management, Discover Financial Services; James Lam, president, James Lam & Associates; Sam Nandi, actuarial group leader, Milliman’s financial risk management practice and Michael Schmitz, Milliman principal and consulting actuary.

Milliman has consulting practices in healthcare, property and casualty insurance, life insurance and financial services, and employee benefits. Western Insurance, On Point Risk Solutions San Diego, Calif.-based Western Insurance Holdings Inc., a property/ casualty holding company, has formed On Point Risk Solutions. On Point Risk Solutions, also in San Diego, provides an array of property/ casualty services to commercial property and liability insurance carriers, managing general agents, reinsurers and self insureds, including public entities. A surety and construction division has been set up, with surety services including underwriting assistance, surety claims, staffing, start-up support, surety program run-off assistance, audits and due diligence reviews. Privately held Western Insurance Holdings Inc. is the parent of ICW Group Insurance Cos., a group of property/casualty carriers that includes: ICW Group Insurance Cos.; Risk Insurance Brokers of the West; and On Point Risk Solutions Inc. Wellpoint, RLJ Wellpoint and RLJ Insurance Services have developed a strategic alliance that designed to enhance and expand Wellpoint’s supplier diversity offerings. The companies will offer medical stop loss products and services to group customers looking to increase their Minority Business Enterprise (MBE) participation allocation. The coverage will provide protection against catastrophic or unpredictable costs. Indianapolis-based WellPoint is the nation’s largest health benefits company by medical membership. RLJ Insurance Services is a part of the Bethesda, Md.-based RLJ Cos. www.insurancejournal.com

2012-02-06 WEST.indd 13 PACGATE14557.indd 1

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News & Markets Google Captive in Hawaii on Track Hewitt in Somerset, eb search giant Google Inc. has been N.J. granted tentative approval from the O’Donnell Department of Labor to form a captive insurhas filed ance company in Hawaii to cover employee similar probenefits for thousands of the Mountain posals for a host View, Calif.-based web giant’s U.S. workof high-tech companies lately, including a force. successful request on behalf of Microsoft The tentative approval puts the firm one Corp. step closer to forming the captive under its O’Donnell’s role is evaluating the feasibilwholly owned captive insurance company, ity of such transactions, then designing and Imi Assurance Inc. structuring the captive, as well as its preGoogle made the request in November miums, and working out a fronting arrangeand the department gave tentative approval ment with the carriers. Finally O’Donnell on Jan. 14. works on behalf of the firms to obtain According to ‘There’s no question DOL approval when needed. DOL, Google’s While O’Donnell has worked on it’s picking up. High request is now a range of captive deals in various costs of healthcare industries, there’s been a great deal contingent on insurance are driving of interest as of late expressed by the departinterest in captives.’ large high-tech firms, he said, adding, ment’s approval of Google’s “recently high-tech and IT companies plan to notify employees of the exemption. seem to have surfaced as some of the big Final authorization is set for March 15. players.” The application was filed by George O’Donnell declined to state which comO’Donnell, senior vice president with Aon panies Aon is working with to form capBy Don Jergler

tives. So far, DOL has approved nearly 30 such transactions, O’Donnell said. “And there are a lot more in the pipeline,” he added. Aon has dealt with clients in food processing, manufacturing, high-tech and transportation and, according to O’Donnell, when one big player in an industry forms a captive, its competitors tend to follow. “It does seem to run in clusters,” he said. Adding employee benefits adds advantages to captives, helping diversify risk, and improving a captive’s financial status. And for a company that has its own captive, it’s a way to “possibly capture underwriting gains,” O’Donnell said. “These savings over time can be very, very significant.” Captives can also be a productive way for a company to use cash, he added. Aside from the recent surge in captive interest from the high-tech sector, O’Donnell said he’s seen captive business pick up on the heels of sweeping change in the healthcare industry and rising costs in that sector. “There’s no question it’s picking up,” he said. “High costs of healthcare insurance are driving interest in captives.” Hawaii Captives George W. Sumner III, Hawaii’s deputy commissioner and captive insurance administrator, said that while Google’s captive domiciled in Hawaii has been in the limelight lately, “we have had several others that have either applied or are working on writing employee benefits in their captive, so there will be other well-known companies in the limelight around the corner.” Sumner wouldn’t name names. Since the state got its first captive in 1987, the number of captives in Hawaii has grown to 172 active continued on page 16

14 | INSURANCE JOURNAL-WEST REGION February 6, 2012

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Bring it On! With one swift move Randy will supply the quote, bind the policy and leave you feeling content. He wants your business. He wants it now. s !RTISAN 'ENERAL #ONTRACTORS s #OMMERCIAL 0ACKAGES s ,ESSOR S 2ISK s 2ESTAURANTS s $ISTRIBUTORS s /FlCES s /, 4 s -ONOLINE 'ENERAL ,IABILITY s %XCESS ,IABILITY s -ANUFACTURERS s -ONOLINE 0ROPERTY s 6ACANT "UILDINGS s "ARS 4AVERNS s 3ECURITY 0ATROLS

One Who Serves Randy Scott Commercial Lines Underwriter La Crescenta OfďŹ ce x226 randys@monarchexcess.com

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News & Markets Google, continued from page 14

captives, topping $9 billion in assets as of 2010, according to the Hawaii Department of Commerce & Consumer Affairs. More than 246 captives have been licensed in the state since the 1987, according to the department. “We pride ourselves in prudent common sense regulation and that has attracted many

other great names that I would absolutely love to, but cannot talk about,” Sumner said. Sumner credited Hawaii’s strong captive environment to existing captive friendly legislation in place for decades. The state has an initial incorporation fee of $50, an annual business registration fee of

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$15 and a captive application fee of $1,000. Captive annual license fees range from $300 to $1,000, and taxes on captives’ premiums starts at .25 percent for premiums up to $25 million and drop to .15 percent for premiums $25 million to $50 million, .05 percent for premiums $50 million to $250 million and 0 percent on premiums above $250 million. While there’s no minimum premium tax, the maximum is $200,000. Existing captives with recognizable names in Hawaii include: Buena Vista

‘We have had several others that have either applied or are working on writing employee benefits in their captive, so there will be other well-known companies in the limelight around the corner.’

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Insurance Co., Edison Insurance Services Inc., FUJIFILM Insurance (Hawaii) Inc., Nissan Motor Insurance Corp. and SANYO Global Insurance Inc. Aside from Aon, other big name captive managers in the state are Chartis Insurance Management Services Inc., Beecher Carlson Insurance Services LLC, Marsh Management Services Inc. and Willis Management (Hawaii) Ltd. Most of the state’s captives are owned by companies headquartered in the Western United States, with a few from the rest of the country and there are 10 non-U.S. captives. Many of Hawaii’s captives are from the construction/real estate industry (55), with a large number in telecommunications and manufacturing (30), health care (28), retail and other services (23), financial services (18) and transportation/energy (18).

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Enhanced Benefits The request from Google for its captive is that DOL grant an exemption under Section 408(a) of the Employee Retirement Income Security Act of 1974. If granted, the exempcontinued on page 18 www.insurancejournal.com

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WEST COVERAGE

News & Markets Google, continued from page 16

tion would permit the captive to engage in certain transactions involving reinsurance to the captive of the life, accidental death and dismemberment and long-term disability insurance benefits policy issued by The Prudential Insurance Co. of America, according to Google’s request letter. The insurance program includes roughly 15,000 of Google’s U.S. employees, which the company covers under an employee welfare benefit plan, according to the letter. “This exemption for the Proposed Transactions would enable the Plan to provide enhanced benefits, in a costeffective manner, to those employees whose Life, AD&D, and LTD benefits would be reinsured to the Captive pursuant to the Proposed Transactions,” the letter states. The captive would enable Google to provide “enhanced benefits to participants” in the plan, according to the letter. Google spokespersons did not return several calls or emails for comment.

Classifieds

Google released its quarterly earnings in mid-January. Analysts were expecting higher profits for Google. The company’s EPS beat estimates by nearly a dollar in the third quarter, coming in at $9.72. However, Google’s fourthquarter earnings gain of 6 percent fell below Wall Street expectations. Analysts were expecting earnings of $10.51 per share on net revenue of $8.43 billion. Google delivered $2.71 billion, or $8.22 per share. According to the request-for-exemption letter to DOL, the captive Imi was granted

a certificate of authority from the Insurance Division of Hawaii on Dec. 15, 2010, and as of Dec. 31, 2010, it had assets of over $30 million. Google has also retained consulting an actuary firm Milliman Inc. as the captive’s the independent fiduciary.

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18 | INSURANCE JOURNAL-WEST REGION February 6, 2012

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NATIONAL COVERAGE

MyNewMarkets Contractors/Construction Market Detail: All Risks Ltd. (www.allrisks.com) has binding authority and brokerage markets for general contractors, artisans, and owners for general liability, property, inland marine, excess, OCP’s, and pollution. Residential, project specific policies and wrap ups are eligible. Can cover multi-family exposures for general contractors and subcontractors. Also included: discontinued products/completed operations, builders risk, EIFS coverage, wrap gap coverage/DIC, foreclosed and abandoned projects, roofers, construction managers, railroad protective, owners and contractors protective liability, pollution, and programs for fire

liability and umbrella program for pool and spa contractors, including blanket additional insured, blanket wavier of subrogation, unlimited per project aggregate, pool pop-up coverage, diving boards and slides available, direct bill option, 20 percent minimum and earned. No multi-residential exclusions. Available Limits: Minimum limit $1 million Carrier: Unable to disclose, non-admitted States: All states except Colo., Dela., D.C., and Hawaii Contact: Roger Herron at 214-220-0884 or e-mail: herron@ gorisc.com

Agricultural Trucking

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www.mynewmarkets.com suppression contractors and architects and engineers. Available Limits: As needed Carrier: Unable to disclose, admitted and non-admitted available States: All states Contact: Ryan Grimes at 800-366-5810 or e-mail: ryan. grimes@allrisks.com

Market Detail: Insurance Marketing Corp. of Oregon (IMCO) (www.imcoinsurance.com) is a market for agricultural haulers in the Northwest. IMCO has binding and quoting authority with a number of A+ rated admitted and nonadmitted carriers, including Lloyd’s. Available limits: As needed Carrier: Various States: Ore. and Wash. Contact: Customer service at 800-944-3128

Food Manufacturers/Producers Market Detail: James River Insurance Co. (www.james riverins.com) offers an occurrence or claims made and reported (up to $1 million/$2 million/$2 million) to food manufacturers and producers. Prior acts coverage available. Unsupported OCP in all states except N.Y. ($4,000 minimum premium).Minimum premium: $7,500 for most classes; target risk size: over $500,000 annual revenue. Available Limits: As needed Carrier: James River States: All states Contact: Customer service at 804-289-2700

Crane & Rigging Contractors Primary Commercial General Liability Market Detail: LifeScienceRisk (www.lsrisk.com) offers primary commercial general liability or monoline products liability for generic pharmaceuticals, medical devices or nutritional supplements. ISO based claims made forms with excess of deductibles or SIR’s. Multi-year ERP’s available. Available Limits: Minimum $1 million, max $5 million Carrier: Catlin Specialty Insurance Co. States: All states except Dela., and R.I. Contact: Chuck Seymour at 312-878-8957 or e-mail: cseymour@lsrisk.com

Pool and Spa Program Market Detail: RISC. Inc. (www.gorisc.com) has a general www.insurancejournal.com

Market Detail: Apollo General Insurance Agency Inc. (www.apgen.com) has markets for crane and rigging contractors, large accounts and smaller accounts. To obtain a quote: 1. Complete Apollo supplemental application; 2. Complete Acord commercial and general liability applications; 3. Five years of currently valued loss runs. Details on any claims of $10,000 or greater; 4. Five years insurer history with premiums and limits; 5. Current balance sheet and most recent year end financials; 6. List of last 10 projects, including estimated value of lift; 7. Workers’ compensation experience mod. Available limits: As needed Carrier: Unable to disclose, non-admitted States: All states except D.C. and N.Y. Contact: Customer service at 800-624-5829 February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N1

IDEA EXCHANGE

Agency Management How to Maximize Producer Talent By Herb Greenberg

ith many challenges facing the insurance industry — such as competition from banks and other brokerages, as well as direct marketing to consumers — it takes a flexible and engaged producer to adapt and understand what today’s customer requires in order to be successful. As an insurance leader, it is up to you to ensure that you preserve your most valuable asset — and that is your top producers. Because at the end of the day, your producers are ultimately what distinguish your firm. Another insurance company can easily replicate your offerings and even slash prices to pirate customers. Today, more than ever, insurance leaders have to differentiate themselves through quality customer service, client intimacy, relationship building and overall stellar serCoaching vice. A customized, in-depth coaching process Hiring and selecting a top producer is and developmental plan from an objective, only one phase of the success equation. It third-party coach helps pinpoint abilities, takes continued growth and development to motivations and growth opportunities at ensure that you don’t lose top producers. So your company. the first step is to engage them. There are many reasons that an organizaWith people being asked to do more tion or individual might choose to work and more with fewer with a coach. These can Insurance leaders resources, development include factors as widemust preserve their ranging as working to programs are essential to most value asset — the future of your orgadevelop an employee’s that is top producers. leadership ability as part nization. Development programs are entirely of a succession managecustomizable based on the needs of the orgament program, to seasoned managers being nization. given stretch assignments as a way to keep Below are some examples of what some them challenged and motivated. programs might look like. The process of coaching is a cycle that Your company may use a combination includes an assessment of the situation, of the ideas or might seek out an approach planning a course of action, feedback, coachentirely specialized to suit your company’s ing sessions and the measurement of proggoals. ress. N2 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

Action Learning Action learning involves an employee development program where organizations solve critical and complex organizational problems in real-time, while simultaneously building strong leaders. This form of “learning by doing” helps leadership teams become more willing to learn from one another, more flexible and better able to shoulder difficult tasks. Action learning is an excellent way to discover true leaders — before moving people into positions they may not be suited for. With the intensity of this process, the group is basically brought to the edge of chaos, where each individual discovers in himself or herself whether they have the makings of a true leader — the ability to ask the right questions and lead their peers. Three Sixty This is the process that sheds light on areas where employees can improve, especially related to how co-workers feel about their performance. Three sixties also provide guidance for tapping into strengths and taking the steps necessary to make real change. The process is not meant as a way to formally review an individual for compensation or advancement. Rather, it is an approach for enhancing performance. When colleagues understand they are being asked for feedback solely to help an individual better himself or herself, rather than impacting that person’s potential raise or promotion, for example, they tend to be much more open, offering solid suggestions for improving performance. Management System This is the program that helps tie perforcontinued on page N4 www.insurancejournal.com

IDEA EXCHANGE

Agency Management Producer Talent, continued from page N2

mance to overall strategy. A performance management system enables the company to measure and monitor performance, and it also helps integrate an understanding of individual motivations with clear expectations and open lines of communication.

Top Talent Retention This is the program where a consultant works one-on-one with top performers to help them assess their talents, identify hidden potential and clarify their goals, while linking their abilities and interests with the

We Know What Insurance Agencies Need “It’s very comforting for an independent agent to be able to talk with a banker about the specialized banking needs of the insurance business. Few bankers can understand, even conceptually, the terminology and business practices of independent agencies. By working with InsurBanc, the agent does not have to explain the insurance business. It was critical for us to get to know the people at InsurBanc and understand what InsurBanc’s philosophy was with personal service. What convinced us to move our banking relationship to InsurBanc was the bank’s commitment from the top down to assist us.” — J. Bruce Cochrane, President, Renaissance Group A IInsurBanc, At B our only l ffocus iis the h success off your agency. Our strength and unmatched expertise make us the most reliable source for your banking and financing needs. s !GENCY !CQUISITION Perpetuation Loans s %QUIPMENT ,EASING s ,INES OF #REDIT

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needs of the organization. Increasing top employees’ feelings of value increases loyalty and tenure. Validation Study This is the process that helps a company get a clear sense of their top performers and their strengths, what distinguishes them, and how to both hire people similar to existing top talent and develop those who are currently on board who have high potential. Validation studies provide a clear illustration of the tasks and the personality traits that are most closely related to high performance. Armed with this information, your firm can customize training and development that focus specifically on closing the gaps between potential and performance. Although these areas just provide a snapshot of what each of these programs entail, there is no one-size-fits-all approach. The main premise of such programs is customization and collaboration. Understanding your firm’s underlying goals and plans to move into the future are paramount in determining which route to take when it comes to employee development and retention. Moreover, the process has to involve a strong commitment by leaders to implement such projects. When leaders feel invested in such programs, the enthusiasm becomes contagious. Communicating development programs as growth opportunities allow employees to feel more valued and engaged in the process. Just as the development of more complex insurance products, such as those with investment features, requires continuing education of agents, so does internal employee development. Training on products is no longer the only area in which insurance leaders should be investing their time. Employee development initiatives will ensure that your top producers will not only be engaged with your firm today, but that they will also be motivated to move into the future with your firm long-term. The last thing an insurance leader wants to experience is losing his top producer to a competing firm. Greenberg, PhD., is the founder and CEO at Caliper. Website: www.calipercorp.com

N4 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

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SPECIAL REPORT

Main Street America: Insuring Small Businesses

When Main Street Meets the Cloud Small Business Risks to Consider When Accessing Technology for Growth By Jeffrey Norton

t’s a familiar small-business success story: A company extends its storefront from Main Street to the Internet. It uses social media to spread the word. Payment card processing is now outsourced to the cloud. The company staffs up with employees working remotely nationwide. All of these steps add up to good news for the company’s bottom line. But there is another part of the story not often heard: As the company’s outreach and profits grow, so do the risks. When small businesses tap the efficiencies and capabilities of technology, they infuse new exposures into their day-to-day operations. In the Cloud Use of the “cloud” gives growing businesses economies of scale, cost-savings and capaness owner is still left to pick up the pieces, bilities they could not build efficiently inpotentially handling a costly, multi-tiered house. Entire back office functions are being response. outsourced to the cloud — including server In 2010, those response costs helped drive hosting, payment card processing and sales the average annual cost of cyber attacks for management. But what if the small business’ small- and mid-sized businesses to nearly technology service-provider suddenly goes $200,000. Given the cost, it’s no surprise that offline and clients can’t access its site — or its customers’ credit card transactions cannot roughly 60 percent of small businesses shut down within six months of a cyber attack. be processed? Customer satisfaction plummets and repuOn The Road tational damage grows by Mobile computing — via the minute. Network busiRoughly 60% of laptops, tablets and handhelds ness interruption losses — small businesses — enables business to be conincluding lost sales revenue shut down within ducted anytime, anywhere. and extra expenses to get six months of a However, the downside is the back up and running — are cyber attack. real potential of a lost, stolen significant. or otherwise compromised There is also the omnimobile device. present threat of a data breach by malicious Just a single lost laptop loaded with hackers or by employee accident. And what potentially sensitive information costs a busiif the cloud provider holding data on the ness an average of $50,000, according to the small business or its customers suffers a netPonemon Institute — including forensics, work security breach? notification costs, lost intellectual property, Never mind that the cloud provider is the and legal, consulting and regulatory expensone that suffers the breach, the small busiN6 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

es required to appropriately manage the incident. Among Friends The widespread use of social networking websites such as Facebook and Twitter add to a business’ vulnerability. In the world of social media, lines between work and personal lives are easily blurred. Content posted on company-related sites or elsewhere by company employees may expose a business to claims of libel, slander, invasion of privacy, as well as a vast array of embarrassing public relations issues. Tightening digital regulations impacts small businesses. For example, if a small business accepts credit cards, a thief may slip through the network security net and steal cardholder data. PCI Security Standards’ regulations say the merchant could potentially face fines, penalties and even termination of the right to accept payment cards. Leveraging Technology, Mitigating Risks Small businesses must manage technolwww.insurancejournal.com

ogy’s risks as actively as they seize its benefits. Brokers can help steer small businesses down the path to proper risk management by raising four simple questions. 1. Do day-to-day business operations rely on outside entities or vendors, such as IT or internet providers, Web-based software providers, and systems or other cloud providers? If so, IT policies and procedures must contemplate not only your own systems and operations within your control, but those of these and other third parties 2. Does the business have disaster recovery, business continuity or incident response plans and procedures to respond if the business’ systems or those of its vendors are intruded, compromised or disrupted? The time to think through how the business will respond — and keep running — if a major vendor’s operations or systems are interrupted is before an incident occurs. Lay out specific contacts needed in a crisis after an incident — from forensic experts to help a business determine the cause and extent of a breach, to legal experts to navigate the maze of regulatory issues, including state notification requirements. View specific state notification requirements at: www.beazley. com/databreachmap. 3. Does the company have written policies and procedures for employees? Policies should encompass not only in-house systems, but all mobile devices and laptops used by employees. Make encrypting these devices mandatory. That way if a device is lost or stolen, the likelihood of data being accessed is small. In many states, if data on a lost device is encrypted, costly notification requirements may not even apply. Social media policies must also be established, well communicated and enforced. The Federal Communications Commission has developed a Small Biz Cyber Planner to help businesses develop their own policies: www.fcc.gov/ cyberplanner. 4. Has the small business considered what risks it can transfer with the appropriate insurance coverage? Often the liability associated with a data breach is the least worry. The time and money required to respond to the breach — whether it emanates from the business itself, a cloud prowww.insurancejournal.com

vider, or an employee working on the road — can be substantial. Fortunately, insurance products today contemplate the costs and complexity of data breach incidents and their response. Even costs that result from technology issues with a third-party cloud provider can be covered with the appropriate network business interruption coverage. Leveraging technology and services from

cloud providers may certainly be critical to a small business’ success, but so are sound risk management practices. Norton is a specialty lines underwriter focusing on technology and miscellaneous professional liability with the Private Enterprise/Small Business team of the Beazley Group. He is located in Philadelphia. Email: jeffrey. norton@beazley.com

U.S. Offers Small Businesses Free Cyber Security Tool

he U.S. government is making it easier for small businesses to beef up defenses against cyber criminals through a free, online tool. The Small Biz Cyber Planner allows business owners to create customized cyber security plans by answering basic questions about their company and its online presence. “Forty percent of all targeted attacks today are directed at companies with less than 500 employees,” said Cheri McGuire, vice president of global government affairs and cyber security policy at Symantec Corp. The Obama administration has pushed for initiatives to protect businesses and consumers from data breaches, as lawmakers remain at odds over comprehensive cyber security legislation. The administration’s latest effort — a collaboration of government experts and private information technology and security companies, including the Federal Communications Commission (FCC), the Department of Homeland Security, the U.S. Chamber of Commerce, Symantec, Visa Inc , Automatic Data Processing Inc , Bank of America Corp. and others — became available last November. “Small businesses that don’t take protective measures are particularly vulnerable targets for cyber criminals,” the Federal Communications Commission Chairman Julius Genachowski said. A new survey by Symantec and the National Cyber Security Alliance (NCSA) found that only 52 percent of small businesses had a basic cyber security strategy or plan. The survey revealed a false sense of security among small business owners. Eighty-five percent of owners said their companies were safe from cyber threats; yet 77 percent had no formal written Internet security policy, and of those, 49 percent did not even have an informal policy. “With larger companies increasing their protections, small businesses are now the lowhanging fruit for cyber criminals,” Genachowski said. The average annual cost of cyber attacks last year was $188,242 for small- and mediumsized businesses, with down-time costing some small firms $12,500 per day. Former Homeland Security Secretary Michael Chertoff commended the partnership between federal agencies and industry, which included his risk management and security consulting firm Chertoff Group. He said the collaboration would more quickly bring cyber security tools and resources to small business. “Not to consider cyber security is a little bit like leaving your money lying around on the table and thinking that that’s not going to be a problem,” he said. Of particular concern for small business was the potential for theft of intellectual property, which Chertoff said is not only damaging to the business itself but to the United States’ national competitiveness. The joint Symantec-NCSA survey found that a quarter of small businesses have their own intellectual property like patents and design documents. One-in-five handle the intellectual property of other companies. — Reuters 2012. February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N7

SPECIAL REPORT

By Andrea Ortega-Wells

N8 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

www.insurancejournal.com

t hasn’t been the best of times for America’s Main Street businesses. Often facing overwhelming competition from big box stores, many small businesses Retail sector face an uphill battle from the outset and more than a few don’t survive beyond a few Tire dealers years. But as economic conditions seem to be improving, more entrepreneurs are expected Handbag, luggage and accessory to launch startup businesses. Art dealers There are several niches that show the greatest promise for small business startups Furniture stores today, according to IBISWorld research, Specialty food stores which recently ranked the top five small Source: www.ibisworld.com business retail sectors based on startup costs, barriers to entry and estimated revenue growth in 2012. it. “And it doesn’t even matter if it comes in “The economy has definitely turned a more expensive because people will be willcorner,” says Eben Jose of IBISWorld, a Los ing to pay for it if they think that it’s worth Angeles-based organization that researches it,” he says. economic, demographic Based on IBISWorld and government data for Small businesses research, a handful of retail U.S.-based industries and can make it if they sectors are poised for growth, worldwide organizations. find a niche and offering promise for interDespite improving ecoreally stand out. ested entrepreneurs and the nomic conditions, small insurance agents who advise businesses should be cauthem, including: tire dealers, specialty tiously optimistic, Jose advises. food stores, luggage, handbag and acces“Small businesses still face many chalsory stores, art dealers and furniture stores. lenges,” he says. The prevalence of big box These industries boast easy entry and rising stores, like Wal-Mart, Target and Home revenue opportunities, Jose says. Depot, and a lack of available credit for Agents and brokers might want to take small business ventures remain tough hura closer look at these promising businesses. dles for most of America’s Main Street. Insurance Journal spoke with some who are “But if small businesses can find a niche already targeting these markets. market and really stand out, they can definitely make it,” Jose predicts. To do that, small businesses need to stay current with mobile platforms and when appropriate Tire Dealers small business owners should tune-in to the popular trend toward local. 9,604 businesses “A lot of small businesses are finding suc142,901 employment cess if they try to stay local,” Jose notes. A $28 billion in revenue good example: Restaurants that get all their (Source: IBISWorld) produce and meats from local farmers and Opening a tire dealership probably isn’t ranchers. “People seem to be really into that on the top of anyone’s to-do list for 2012, right now.” but based on numbers alone, it’s one of the Jose offers small businesses another word most promising small business retail sectors of advice post-recession — reinvent the busi- for starting a business, the IBISWorld report ness model. says. “Small businesses need to redefine where Changes in consumer preferences toward they are; they need to get into more of a more fuel-efficient tires and pent-up replaceniche market,” he says. In Jose’s opinion, ment tire demand from people who postwhile the big box stores may offer general poned purchases during the recession are retail products and services, small businessexpected to fuel industry profit in 2012. es have to offer something different to make IBISWorld expects revenue to grow at an www.insurancejournal.com

5 Hot Retail Sectors for Startups

stores

Estimated 2012 revenue growth (%) 10.0% 5.5% 4.0% 3.4% 2.3%

average rate of 3.1 percent per year in the five years to 2016, and 10.0 percent in 2012 alone. From an insurance standpoint, the tire dealers market remains stable, says Mike East of Zurich North America. As far as coverages go, East says tire dealers will need property insurance and inventory of stock coverage. Other coverages include workers’ compensation, garage keeper’s, garage liability, pollution and umbrella coverage. Most of the coverages are typical for auto related businesses, East says. But he advises agents targeting this segment to understand the market well. “You have to know what their business is,” East says. “The tire business is different than anybody else selling parts. Most parts places don’t install. A tire dealer market will install their own product but a parts distributor typically doesn’t install their own parts. So it’s a little unique in that manner.” Tire dealers also deliver so vehicle accidents are prevalent, according to East. Another common claim involves tire installation. “There are some instances where a wheel will come off.” Although people tend to keep their vehicles longer in a tough economy, East says there are also fewer miles being driven therefore there’s less wear and tear on the tires. Even so, the tire dealer market continues to perform about the same for Zurich North America. Competition remains pretty stable, and pricing is stable as well now, he notes. But like with any niche business, agents continued on page N10

February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N9

SPECIAL REPORT

Insuring America’s Small Businesses Main Street Shopping, continued from page N9

interested in writing tire dealers have a lot to learn. East says: “Learn the market, learn the market and learn the market. Then go work hard.”

Art Dealers 22,181 businesses 35,442 employment $8 billion in revenue (Source: IBISWorld) Similar to most luxury goods retailers, art dealers experienced a surge in demand while the economy was booming, with wealthy consumers splurging on original art. Although that demand slowed during the recession, it is expected to return as fine art’s investment and aesthetic appeal increases, according to IBISWorld. Requiring only the ability to source and value artwork, the low levels of labor and capital needed to get started in this sector make it an appealing one for startups. IBISWorld estimates revenue for art dealers to grow 4.0 percent in 2012 and at an average annual rate of 4.3 percent through 2016. Risa Schiff, vice president at Riemer Insurance Group Inc., an independent insurance agency headquartered in South Florida, is a veteran in the art and jewelry insurance world. She began her specialty insurance career about 15 years ago insuring only people in the diamond industry in New York. Schiff agrees that the economy forced a downturn in the art market. “Galleries weren’t doing the volume that they used to do, so they had to cut their expenses somewhere, and they cut them on insurance,” she says. The good news: in Schiff’s view, the art dealer market has made a turnaround. And the insurance opportunities have changed to some degree, she says. Now more than ever, artists are realizing the value of their art and looking to insure their collection, she says. “What has changed, many galleries take items in on consignment in order to sell directly for the artist. If an artist is going to give a gallery their collection, they want to make sure that that gallery has insurance

protection in order to pay them for their collection,” according to Schiff. Artists seem to be taking more of an interest in protection. “If you’re an individual artist and you’re putting your work in a gallery, that gallery should name you, Mr. Artist, as a loss payee, so that if something happens to your work when it’s in that gallery, you get paid,” Schiff says. Artists must ensure that there is coverage for their artwork when it’s in the gallery and negotiate who’s responsible for the piece while it’s in transit. Schiff receives many insurance inquiries for new galleries opening, especially in the West and around San Francisco. “I think rents have dropped, so people are more apt to go into business,” she says. The lower rents may even have opened doors for artists who lost their day jobs due to the economy and decided to take the bold step into entrepreneurship by opening their own gallery, she adds. Schiff cautions that the art insurance business is a specialty. “There’s nothing typical about the art industry or the insurance for the artist,” she says. “Insurance in itself is a relationship business. Insuring someone’s fine art is a huge relationship because this is like their children. They get really connected to it.” It’s not just a building. It’s much more, she says. It’s sentimental. And, “You can’t insure sentimental.”

Specialty Food Stores 38,008 businesses 93,892 employment $8 billion in revenue (Source: IBISWorld) Another promising market segment for insurance agents and brokers is specialty food stores. While supermarkets continue to serve the majority of food buyers, a growing number of consumers want a finer, and sometimes even more exotic, eating experience. There’s no doubt that spending on highend food took a hit during the recession

N10 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

as Americans tightened their wallets and became more price conscious. But with disposable income increasing, people are once again seeking out their favorite foods, according to the IBISWorld research. With low initial start-up costs and revenue expected to increase 2.3 percent in 2012, specialty food storeowners can expect business to heat up in the coming years. USG’s Fornof says the grocers insurance market had been very soft up until recently. The markets that were fairly big in the grocers segment just can’t absorb the losses, he says. “It was true soft market pricing and it’s just kind of caught up,” Fornof says. “Grocery stores make sense because it’s a big slip and fall exposure. At some point those are going to catch up with you if your rates can’t absorb even a standard loss history.” Chris Hald, vice president, direct sales for Grocers Insurance, a division of ARGO Insurance Group, says typical coverages for most grocers includes: building coverage, stock and equipment, general liability, liquor liability, crime, food spoilage, utility services coverage (covers loss of power), auto coverage for their owned vehicles and umbrella to provide more liability limits. Hald agrees that the majority of losses for this segment come from trips and falls/slip and falls. “This stems from the many hazards found in a typical grocery store (produce department, live seafood tanks, coffee grinders, garden centers, soda fountains, etc.),” he told Insurance Journal. “The next major loss is typically food spoilage from a power failure or equipment failure.” While Hald says he has yet to see much growth in the grocers sector, Fornof says his offices have reported a significant uptick. “Canvassing our offices around the country, almost in its entirety every branch is saying they are seeing an uptick in grocery stores, in both submission counts as well as rates,” Fornof says. “A number of standard markets are pulling out or are increasing their rates enough to the point where these folks are shopping.” Fornof says the trend seems to be widespread — from Minnesota, to Texas to www.insurancejournal.com

& Their Owners Pennsylvania, even in Michigan. “So it’s not as if it’s territorial. It’s all over.” The trend in growth for specialty food store startups could mean more business for agents. “In most communities grocers tend to be a small town business, so your local agent tends to do very well,” Fornof says.

Handbag, Luggage and Accessory Stores 26,246 businesses 67,049 employees $9 billion in revenue (Source: IBISWorld) With the recession in the rear-view mirror, people are slowly loosening their purse strings, IBISWorld says, and their discretionary purchases are trending towards certain accessories including, fittingly, purses. Aside from small hiccups during the recession, handbag, luggage and accessory stores have fared rather well, IBISWorld says. The dips in consumer confidence and disposable income didn’t significantly discourage shoppers, and now that both of these factors are on the rise, sales are also forecast to increase. “In tough economies that’s what people are going to splurge on,” says Robert Motta, president and CEO of Insurexchange, a Fort Lauderdale, Fla.-based professional insurance services firm. “It makes sense that that segment would be a hot segment.” With revenue expected to grow at an average annual rate of 5.1 percent through 2016, this retail sector offers appealing opportunities for startups and agents looking to insure them.

able income expected to increase in 2012, furniture insurance market rates are holding IBISWorld expects consumers will finally steady or in some cases going down in propupgrade their furniture. erty/casualty. IBISWorld reports that 2012 offers great There’s no question that furniture stores opportunities for furniture store entreprewere hit hard by the economy, and that neurs, especially with revenue projected to reduction in sales may be one reason why increase 3.4 percent in 2012 and at an average this market has remained in standard lines, annual rate of 3.0 percent through 2016. he adds. This could mean opportunities for some “I think that part of the reason that has insurance professionals as well, but Troy kept it out of the E&S arena is because the Fornof, director of branch operations for USG standard market exposure isn’t nearly as Insurance Services Inc., hasn’t seen opporhigh,” he says. “Small furniture sales have tunities in the furniture been good but large purmarket come to fruition The trend in growth chases have been tough.” just yet. Furniture store insurance for specialty food “We are still not seeing programs should include store startups could the basics, including gena fairly large increase” in mean more business eral liability, property, and furniture stores, he says. “As a matter of fact, we workers’ compensation. for agents. don’t see very many furAlso, hired and nonowned niture stores at all.” for any delivery services as well as employFornof says at least in the excess and surment practices liability should be offered, he plus lines market, the typical retail furniture says. store isn’t on his radar. But custom stores, “Depending on whether they are manufacsuch as baby furniture and children’s furturing their own furniture or not, you could niture, have always been a traditional E&S have a separate products exposure come into business. play; for custom furniture makers that might For the most part, Fornof says, in the be an issue.”

Insuring those who improve our communities.

Furniture Stores 33,528 businesses 272,051 employment $61 billion in revenue (Source: IBISWorld) Furniture stores experienced a harsh drop in demand when the economy tumbled and Americans reduced their spending. But with homeownership and per capita disposwww.insurancejournal.com

Specialized Insurance for Non-Profit and For-Profit Social Service Organizations: Animal Shelters, Arts & Cultural, Day Care, Head Start & Private Schools, Family Services & Counseling, Grant Making, Health Clubs, Homeless Shelters & Housing, Religious, Youth Clubs.

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February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N11

CLOSER LOOK

Nonprofits, Social Services & Public Entities Nonprofits Show Job Growth Despite Decade of Turmoil

efying two recessions, the nonprofit sector posted a remarkable 10-year record of job growth, achieving an average annual growth rate of 2.1 percent from 2000 to 2010, while for-profit jobs declined by an average of minus 0.6 percent per year, according to a new Johns Hopkins University report. Even during the recession from 2007 to 2009, nonprofit jobs increased by an average of 1.9 percent per year. At the same time, businesses averaged jobs losses of 3.7 percent per year. “Nonprofit organizations have been holding the fort for much of the rest of the economy over the past decade, creating jobs right through the recent recession and jobs crisis while other components of the economy have been shedding jobs at accelerating rates,” noted Lester M. Salamon, study author and director of the Johns Hopkins Center for Civil Society Studies. “Ironically,

with signs of recovery beginning to appear, there are serious questions about whether nonprofits will be able to sustain this resilient performance in the wake of the impending sharp cuts in government spending,” Salamon added. At 10.7 million workers as of 2010, nonprofit organizations employ the third-largest workforce among U.S. industries, behind only retail trade and manufacturing. While overall nonprofit employment grew faster than overall business employment during the 2000-2010 decade, in three key fields — social assistance, education, and nursing home care — for-profit employment

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growth actually outpaced nonprofits. As a result, nonprofit organizations operating in those fields lost significant market share to for-profits. “The continued loss of nonprofit market share is a cause for real concern, particularly

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N12 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

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because it results from the unequal playing field nonprofits confront in accessing capital and their resistance to slashing employee benefits or skimping on the quality of services,” noted Larry Minnix, CEO of Leading Age, an association of nonprofit organizations serving the elderly. “We need to be careful that human needs don’t simply become commodities,” Minnix added. Other Findings Other findings from the report include: • The U.S. nonprofit sector employs 15 times more workers than the nation’s mining industry, nearly 10 times more workers than the agriculture industry, and about twice as many workers as the construction industry. • The vast majority of nonprofit jobs are in three service fields — health care (57 percent), education (15 percent) and social assistance (13 percent). • During the 2007-2009 recession, nonprofit employment grew in 45 of the 46 states on which state-specific data were available, while for-profit employment declined in 45. • Nonprofit employment also grew in all regions of the country from 2000 to 2010, with an average annual growth rate that ranged from 1.5 percent in the East South Central region to 3.4 percent in the Mountain region. During this same time span, forprofit employment registered annual average declines in all but two of the regions, and the growth rate in those two was no more than one-seventh as robust as the nonprofit one. • While nonprofit employment in social assistance grew at an average annual rate of 2.2 percent between 2000 and 2010, forprofit employment in this field grew by an average of 5.4 percent per year. As a result, the nonprofit market share in this field fell from 62 percent in 2000 to 54 percent in 2010. Similarly, for-profit growth outpaced nonprofit growth in education (4.4 percent versus 2.6 percent) and nursing home care (2.3 percent versus 1.3 percent). The findings come from a report presenting previously unavailable data on yearto-year changes in employment in private, nonprofit establishments in the United States from January 2000 through June 2010. The data were drawn from the Quarterly Census of Employment and Wages (QCEW), www.insurancejournal.com

a data collection program carried out regularly by state governments throughout the country in cooperation with the U.S. Bureau of Labor Statistics (BLS) as part of the U.S. Unemployment Insurance Program. The report, “Holding the Fort: Nonprofit Employment during a Decade of Turmoil,”

which includes charts with state by state data, is available at http://ccss.jhu.edu. The Center is part of the Johns Hopkins Institute for Policy Studies, within the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health.

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February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N13

CLOSER LOOK

Nonprofits, Social Services & Public Entities Public Entity Insurance Isn’t Road Salt Or Fill Dirt What to Consider When Evaluating Public Entity Insurance Programs

uring the winter I was traveling in the snowy Northeast calling on agents. Between appointments, I passed a local hardware store that prominently displayed on outdoor signage “Road Salt” and a price per pound. I know there are individuals living in warmer climates where By Mark R. McCrary road salt isn’t sold, so let me provide you with a different point of reference. On another business trip in the Southwest, I passed a similar sign on the side of the road that read, “Fill Dirt - $12.” Regardless of which example you gravitate toward, the point is we often see both as “one size fits all” or “commodity” products without much distinction of difference among choices. All road salt melts the ice and snow, and fill dirt is fill dirt — most is pretty similar. Unfortunately, too often many buyers of public entity insurance approach the buying of their insurance like they do the buying of road salt, fill dirt and other commoditytype products for their municipality entity. Selectmen, boards of trustees and directors, school boards, superintendents and other public entity decision-makers mean well and want to do what is in the best interest of their constituents. What they lack is clarity, explanation, and education or information from their agent or broker because public entity insurance isn’t road salt or fill dirt. If you, as the agent, are not drawing these distinctions and properly informing your clients and prospects, then your errors and omissions (E&O) insurance policy is potentially at risk. If there is an issue later, will the public entity say you did not fully explain the coverage differences relative to any pricing? Will they make a claim against your E&O policy? When reviewing public entity insurance, it is important to consider coverage, deductibles and security.

Special Coverage Not all coverage is the same. As the producer, if you are not conducting a full review and pointing out the differences, are you providing the best possible service to your client or prospect? Specialty programs designed for their particular niche, whether public entity or otherwise, generally have special coverages, specifically designed for the exposures those insureds face. Consider a public entity specialty program for a public entity risk and weigh that program’s position in the public entity marketplace as a factor in its evaluation. From a coverage perspective, public entities face unique situations. For instance, municipal insureds with embedded water entities or stand-alone (nonembedded) water entities need coverage for “Failure to Supply.” Yet this is not always understood or consistent from one policy offering to another. Many insurance companies and programs use ISO forms. Standard ISO general liability forms have an exclusion for failure to supply unless the failure is “sudden and accidental.” If a water company or municipality intentionally shuts off the water (in an effort to repair a line break), the claim might be questioned because it is “purposeful and intended” rather than “sudden and accidental.” It is usually best to choose a general liability policy without standard ISO forms/wording for public entities with water exposures because then the policy typically will not be as limiting.

N14 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

Valuation Another coverage area to review is the valuation on emergency service vehicles (fire trucks, ambulances, rescue vehicles, etc.). Look for programs that provide valuation at either agreed value or guaranteed replacement cost, thus assuring equipment that may be worth hundreds of thousands of dollars can be replaced. Often, standard carriers and even some specialty programs value these vehicles at actual cash value (ACV) — applying depreciation to the claim resolution. Keep this in mind when reviewing proposals because

valuation differences can more than eclipse savings that public entities are receiving on the front-end pricing. All too often insureds buy on price with little or no consideration of the impact that aspects like valuation will have on the ultimate cost of their insurance. In addition to emergency service vehicles, consider the valuation of emergency services equipment that can be sub-limited on a standard inland marine policy. A program with “guaranteed replacement cost” literally replaces the damaged equipment and saves the insured depreciation on “jaws of life,” infrared heat detection equipment and other critical equipment. A www.insurancejournal.com

ible differences, especially on property, public officials’ management liability and law enforcement liability policies from program to program. The difference between a $1,000 deductible and a $5,000 deductible can Water Exposures quickly add up with just a few claims. Water testing E&O is yet another area of Look at the insureds’ loss history and focus for those entities with water-related calculate the average number of claims mulexposures. Whether the entity in question tiplied by the deductible handles water and/or wastewater, the typical Public entity insurance difference. This calculation can be a great selling general liability policy is not all the same. tool when presenting excludes, by design, an insurance proposal professional liability. against a lower priced, higher deductible proLook for coverage for acts and/or omisgram. sions related to both water and wastewater Some public entity programs offer a zero activities (as appropriate) for the prospect or deductible option on law enforcement liabilinsured. This should cover bodily injury as ity and public officials’ management liability well as property damage. Interestingly, most policies, subject to underwriting and losses. offerings do not afford coverage for both. If there is a testing error, ask what the cost Security would be for an uncovered claim? We all know the rating scales of A.M. Best and other agencies, but how are we commuDeductibles nicating the financial size category informaIn addition to coverage, consider deductpotential small savings up front on pricing may pale if an expensive piece of equipment is replaced at a depreciated value.

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tion to the insured? Weigh the importance of financial stability when analyzing the insureds’ options. If selling against one of many public entity pools across the country, the insured may be assuming joint and several liability, and the pool may not be backed by the state guarantee fund in the event of insolvency. It is important to show the account that they may be liable for unknown and unpredictable losses from the pool. Public entity insurance is not all the same. Considering, reviewing and communicating coverage, deductibles and security will help insulate your E&O policy — and demonstrate to your prospect or insured the value you bring as their agent or broker. McCrary is president of Glatfelter Public Practice, which is focused on public entity business (municipalities, miscellaneous public entities, educational institutions and waterrelated entities) and is a division of program administrator Glatfelter Insurance Group. Web site: www.glatfelter publicpractice.com.

February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N15

CLOSER LOOK

Nonprofits, Social Services & Public Entities What to Know About Public Entity Self-Insured Retention Programs By Jeff Richardson

ublic entities across the nation must professionally manage the numerous required services that communities demand. Such services are expensive to operate and, in recent tight budget years, entities are

often forced to make difficult decisions on how to maintain essential services while cutting back on operational expenses. One option that public entities frequently consider is to lower insurance costs by assuming more risk. This can be accomplished by moving insurance contracts from a deductible program to a seemingly more attractive self-insured retention program (SIR), which lowers an entity’s up-front insurance premiums. But before jumping into an SIR, there are some issues and long-term expenses that entities should first consider. Administration of Claims Under a standard first-dollar or deductible program, the insurance carrier is responsible for the administration of all claims, including the denial of claims to constituents. Under an SIR program, the entity is responsible for all claims administration. Public entities can choose to either self-administer claims or hire a qualified third-party administrator (TPA). Self-Administered Model In a self-administration model, entities

must handle all claims needs. This means employing internal claims management standards and expectations, including oversight of external vendors, experts and services, and providing system support, such as a claims management system. Similarly, qualified personnel must be available to work the claims within an SIR. Before switching, a thorough analysis of an entity’s typical claim counts in the proposed self-insured retention layer will help determine staffing needs. Moving directly from a deductible program to selfadministration can be difficult. While it allows an entity more control, it is advised that only experienced claims management departments consider it.

road. This means an excess carrier would need to be involved in the claim. Thoroughly understanding the reporting requirements of an excess insurance company can be complex, as not all companies have standard wording. What may constitute the need to notify the excess carrier of a claim or knowledge of an event, which may result in a claim, will vary widely. By failing to report an incident or claim, an excess carrier could deny coverage. Therefore when an entity moves to an SIR, the process it adopts regarding reporting of claims and incidents to carriers should be very aggressive, as it can save the entity a lot of money down the road.

Third-Party Administrator Model Electing to hire a qualified TPA may be a better alternative. This choice allows an entity to attain the efficiencies of claims management processes, systems and personnel with little effort. However, there are additional considerations. Entities must determine the roles and responsibilities of the TPA. Will the TPA be responsible for claims until closed, which is typically more costly, or will the TPA only be responsible for claims while under contract with the entity? While the latter scenario may be more affordable up front, when you dissolve the contract with that TPA, it is no longer responsible for handling claims, even those in progress. Transferring claims files and bringing new handlers up to speed can be a setback, prove costly and lead to the mishandling of open claims.

Funding SIR Losses Once the claim-handling hurdles are cleared, an additional consideration entities should acknowledge before moving to an SIR program is the funding of losses within the SIR level. An entity must have adequate reserve funds to pay all claims during the first year and a plan for paying future claims. Analysis of the entity’s claims frequency and severity will help determine the proper funding level. An unexpected increase in claims frequency will adversely affect the entity’s reserve fund and could prove even more costly than paying the higher deductible premiums. In addition, there must be a level of commitment and discipline to grow the reserve fund over time, which garners even more financial flexibility for higher SIR levels in the future. Using the reserve fund for other services in tight financial years will undermine the entity’s ability to pay claims. By thoroughly understanding the claims management, reporting requirements and funding requirements associated with moving to an SIR from a deductible program, public entities can effectively evaluate the true cost and benefit of making this structural change to their insurance programs.

Escalation of Claims to Excess Carriers Claims handled below the SIR attachment can turn into much larger claims down the

Richardson is president of OneBeacon Government Risks, a member of the OneBeacon Insurance Group, dedicated to helping public entities manage their risk.

N16 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

www.insurancejournal.com

SPOTLIGHT

Intellectual Property Proactive Risk Management of Intellectual Property: Crucial to the Insurance Professional’s E&O By Robert Fletcher

ow more than ever, the insurance professional’s ability to create a proactive risk management plan for clients is crucial to success. Insurance professionals handle many types of insurance policies. In fact, checklists are often used to not only ensure that each exposure relevant or important to the company is carefully vetted; such lists are also quite simply used to protect the professional’s own, as well as the company’s, errors and omissions (E&O) exposure. Yet insurance professionals are routinely missing the opportunity (and the responsibility) to ensure that their clients are fully protected when it comes to intellectual property (IP) risks. Many times they are unaware that IP exposure can be one of the biggest threats to a company’s survival. On average, it is more probable that a company will be involved in patent litigation than in a shareholder dispute, which triggers a director’s and officer’s (D&O) claim (See table on page 18). Despite the fact that IP insurance may seem complex, there is an obligation to talk to companies about this important risk. Having expert knowledge in IP insurance is not required; however, ensuring clients are adequately covered for IP risk definitely is required. Failure to accurately grasp a basic understanding of a company’s IP risk and offer a real solution to allay this extraordinary exposure can be detrimental to a company, and potentially expose the insurance professionals’ E&O.

problem for them and they won’t be sued.” (See “What to Do if You Are Sued for Patent Infringement,” June 2, 2011, Gene Quinn, http://www. ipwatch dog.com.) No longer can insurance professionals allow companies to bury their heads in the sand when it comes to identifying and managing their IP exposure, especially because the number of patent lawsuits filed in the United States has trended upward over the past 20 years, from 914 patent cases filed in 1990 to 3,531 filed in 2010. Not only are patent lawsuits frequent, they are also time consuming, many times taking up to five years to settle or be decid-

ed. Patent lawsuits can also be incredibly expensive. According to most recent American Intellectual Property Law Association survey, the average cost to litigate a patent lawsuit in a U.S. court when the amount being disputed is between $1 million and $25 million dollars is $2.8 million dollars. Damages over and above attorney fees average close to $9 million, as reported in a recent patent litigation study, “The Continued Evolution of Patent Damages Law,” (PriceWaterhouseCoopers, 2010). As insurance advisors, you cannot assume that your clients are aware of the potentially continued on page N18

Matter of Time Gene Quinn, president and founder of IPWatchdog Inc. email that, “It is only a matter of time before technology-based businesses, regardless of size, will find themselves facing a patent infringement issue.” He went on to say that, “some businesses would prefer to pretend that patent infringement is not a www.insurancejournal.com

February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N17

SPOTLIGHT

Intellectual Property Intellectual Property Insurance Products

Proactive Risk Management, continued from page N17

catastrophic consequences should they become involved in patent litigation. Most companies do not have millions of dollars set aside, nor do they have access to such amounts, in the unfortunate event they are sued for patent litigation. Most companies are not readily able to secure a loan through a bank, collateral-free and interest-free, to fund their IP litigation. And forget about an attorney taking a patent case on contingency. Unless the potential damages are at least in the tens of millions of dollars, a company would have a tough time finding an attorney to take on representation. IP Infringement Coverage Intellectual property infringement insurance is the most logical and economic choice that a company can make to ensure that the means are available to take on an IP infringement case. IP insurance enables companies to get through the lawsuit based solely on the merits, not the depth of their pockets. IP insurance is just as valuable, and in many instances more valuable, than general liability, errors and omissions, and director’s and officer’s insurance policies. Although IP policies are routinely offered and placed by insurance professionals, IP insurance is many times altogether inadvertently overlooked or purposefully avoided during risk management consultations. Jim Francis, an experienced IP litigator in

Lexington, Ky., champions IP insurance as follows: “No matter how valid a client’s position or how skilled the attorney, the success of any disputed matter is necessarily dependent on the client’s willingness and ability to pay for the cost of adequately preparing and positioning their case for a favorable resolution. When a case is built on a strong foundation, risk is minimized and the matter becomes more likely to be resolved early, favorably and in a manner that is less adversarial. Given the current economic climate, companies are understandably more reluctant than ever to litigate and more willing to accept infringement as simply part of the cost of doing business. “When companies are forced into litigation, their very survival is often at stake. Their lack of a war chest for funding litigation can force them to minimize litigation costs to the point that they undermine preparation and are forced to negotiate from a point of weakness rather than strength.” Francis added: “Specific intellectual property coverage can even the playing field and afford the smaller litigant the opportunity to defend their intellectual property rights and force a more favorable resolution than would otherwise be possible against a larger adversary. “It can also provide an economic advantage to the litigant of equal or larger size relative to its adversary and allow it to more easily

Number of U.S. Patent Lawsuits Filed

litigate from a position of strength. “Without insurance coverage, efforts to minimize litigation costs can become a higher priority than adequately preparing the matter for an early and/or favorable resolution,” he added. As an insurance professional, it is your responsibility to have at least the knowledge of and an elementary understanding of IP risk and the availability of insurance products designed to fund the high cost and consequences of IP litigation. It is also important to talk to an IP insurance expert about this most valuable coverage. Fletcher is the founder and president of Intellectual Property Insurance Services Corp., a provider of IP insurance in the United States and worldwide. Email: bfletcher@patentinsurance.com.

Pricing Intangibles, Insuring Intellectual Property: RIMS 2009 1600

4000

1440

3500

1280

3000

1120

2500

960

2000

800

1500

640

1000

480

500

N18 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

Patent Claims

2008

2007

2006

2005

2004

2003

2002

Source: PACER Case Locater, 2011

0.0

2001

Number of Patent Lawsuits Filed

160 2000

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

320 1990

0.0

• Enforcement insurance is a unique plaintiff’s policy that reimburses litigation expenses to enforce IP rights. • Defense insurance reimburses litigation expenses to defend against allegations of infringing another’s IP rights. • Multi-peril provides first-party coverage due to the loss of insured IP litigation. • Unauthorized disclosure offers protection for trade secrets and the unintentional disclosure of personal identifier information.

Shareholder Claims

www.insurancejournal.com

SPOTLIGHT

Errors and Omissions

E&O Insights: Use Caution When Moving a Customer From a Claims-Made to an Occurrence Form

rom time to time, an account is moved from one form of insurance to another. The scenario could involve moving from a claims-made form to an occurrence form, or vice versa. Other By Curtis M. Pearsall scenarios could involve moving from a claims-made form with full prior acts to one with a retro date, or from a claimsmade form to a claims-made and reported form. It’s imperative to know the differences and the issues this type of policy movement can cause. Bringing these issues to your customer’s attention is key, and could play a huge role in avoiding errors and omissions (E&O) trouble for your agency if an uninsured loss occurs.

Of the scenarios mentioned, perhaps the biggest potential issue involves moving from a claims-made to an occurrence form. Let’s take a look. Moving From Claims-Made to Occurrence With a claims-made form, the policy in effect when the claim is brought is responsible for responding to the claim. Claimsmade policies either contain a retro date or provide full prior acts coverage. For coverage to apply if the policy contains a retro date, the injury (error or omission, etc.), must occur after the retro date. Thus, with a claims-made policy, the trigger is when the claim is made, not when the injury/error or omission occurred. With an occurrence form, the policy in effect when the injury or damage occurs will respond to the claim. Provided the injury

N20 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

or damage occurred during the policy period, an occurrence form will respond regardless of when the claim is brought, subject to any applicable statute of limitations. There is tremendous potential for a gap in liability coverage to occur when the insured’s policy coverage goes from a claims-made to an occurrence form. Let’s assume policy dates of 2011 for the claims-made policy and 2012 for the occurrence form. A common scenario is where the injury occurs during the claims-made policy period (2011), but the claim for the damages is made during the occurrence policy period (2012). In this case, neither policy provides coverage. Why? As previously stated, the occurrence form only pays if the injury occurs during the occurrence form’s policy period. The injury/error or omission occurred in 2011, before

the occurrence form went into effect. Because a claims-made form only responds to claims made during the policy period, neither policy’s condition is met. The injury/error or omission occurred before the occurrence form existed — and the claim came after the claims-made form expired. If this happened to one of your customers, you could very well face an E&O claim. Does Your Client Need a Tail? What is the remedy or suggested course of action to avoid a gap in coverage? When an account is moved from a claims-made form to an occurrence form, the insured has the availability under the claims-made policy to purchase an Extended Reporting Period, commonly referred to as a “tail.” It is critical that customers/agents realize this tail option must be exercised within a set time period (typically 60 days, www.insurancejournal.com

is the same on both policies (or both provide but other time periods might exist). The tail full prior acts), there is minimal chance for a provides an additional time period to report coverage gap. Typically, moving an account a claim for any injury/error or omission that from one claims-made form to another does occurred during the claims-made policy not necessitate the need for period and after any applicable retro date. There is tremendous this tail option to be exercised. One situation recently potential for a gap Thus, when Agent A brought to my attention in liability coverage. loses the account, there is involved this scenario, a good chance (unless the but with the added issue insured advised otherwise) Agent A would that it involved two different agents. Under not be aware of what policy form Agent B my example above, Agent A insured the cusused. tomer under a claims-made form during 2011, Does Agent B know that the prior coverbut lost the account to Agent B, who insured age was written on a claims-made basis? If he the same customer now under an occurrence was aware of this, it would be prudent for form for 2012. Who is liable if a loss occurs Agent B to advise the customer that to avoid and neither policy responds? This is not an a coverage gap, he should exercise the tail easy question to answer without more facts. options in the claims-made policy. If Agent A lost the account to Agent Should Agent B be aware of the previous B, does Agent A have any further duties? Insureds frequently move their coverage from policy form? Probably, but it might not be possible if the customer does not allow a one claims-made form to another claimsreview of previous policies. Effort should be made form. While there is the potential for coverage differences, as long as the retro date made to ascertain this vital information.

www.insurancejournal.com

A Serious Issue It would appear that Agent B has a greater degree of liability in this case; Agent B is the new agent and owes more responsibilities to the customer. If your insurance agency is the only agent involved (there is no Agent B), it is clearly your responsibility to advise your customer of the coverage differences. If customers choose the occurrence form, bring to their attention the need for them to secure tail coverage. Moving an account from a claims-made to an occurrence form is a serious matter. Understanding the issues that can result and educating your customers about them is essential to avoiding an E&O issue down the road. Pearsall, CPCU, ARM, is president of Pearsall Associates Inc., a risk management consulting firm specializing helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. Email: curtis@pearsallassociates.com.

February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N21

NATIONAL COVERAGE

News & Markets Employment Bias Complaints Against Private Sector at All-Time High: EEOC By Andrew Simpson

mployment discrimination complaints against private sector employers reached an all-time high in the most recent fiscal year, federal regulators said late last month. The U.S. Equal Employment Opportunity Commission (EEOC) said it received a record 99,947 charges of employment discrimination and obtained $455.6 million in relief through its administrative program and litigation in fiscal year 2011. The commission said it resolved more charges than it took in with 112,499 resolutions (7,500 more resolutions than FY 2010 — an increase of 7 percent) — leaving 78,136 pending charges, a 10 percent decrease in its inventory, the first year the agency has seen a reduction since 2002. EEOC said its FY 2011 data also show: • In both the private and federal sectors, 5.4 million individuals benefited from changes in employment policies or practices in their workplace in FY 2011. • The EEOC obtained a record $455.6 million in relief for private sector, state, and local employees and applicants, a more than

$51 million increase from the past fiscal year and continuing the upward trend of the past three fiscal years. • The mediation program reached record resolution levels — 9,831 (5 percent more than FY 2010’s 9,362), and benefits — $170 million ($28 million more than FY 2010). • The EEOC filed 300 lawsuits and its litigation efforts resulted in $91 million of relief, representing the third year in a row that the relief obtained was greater than in the preceding year. Twenty-three of the lawsuits filed involved systemic allegations involving large numbers of people and an additional 67 had multiple victims (less than 20). “For the second year in a row, the EEOC received a record number of new charges of discrimination,” EEOC Chair Jacqueline Berrien said. The total number of charges received was up slightly from last fiscal year’s record total. Charges alleging retaliation under all the statutes the EEOC enforces were the most numerous at 37,334 charges received, or 37.4 percent of all charges, closely followed by charges involving claims of race discrimination at 35,395 charges or 35.4 percent. While charges with race and sex discrimination allegations declined from the previous year, charges with the two other most frequently-cited allegations increased: disability discrimination (25,742) and age discrimination (23,465). The EEOC is responsible for enforcing Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Equal Pay Act, the Americans with Disabilities Act, and the Genetic Information Nondiscrimination Act.

Conning: P/C Premiums to Grow 3% to 4% in 2012

roperty/casualty insurers are facing a difficult environment in 2012, according to a forecast from analysts at a Hartford, Conn., insurance consulting firm. The difficult environment will include volatility in the economy, the underwriting cycle, and catastrophe management, combined with low investment yields, said the quarterly Property/Casualty Forecast & Analysis from Conning Research & Consulting. Conning said it sees premium growth at between 3 percent to 4 percent. Clint Harris, analyst at Conning, said the expected industry combined ratio of 104 percent for 2012 should improve slightly in 2013 “as the commercial lines rate environment improves and overall inflation remains modest.” N22 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

But the overall environment is uncertain and challenging. “The weak and changing economic recovery and the industry’s response in terms of pricing and reserving will combine to create an uncertain operating environment for management,” said Stephan Christiansen, director of research at Conning. “We forecast modest increase in both exposure and premium rate growth for both 2012 and 2013, but rate firming still falls short of what should be interpreted as a broad turn in the underwriting cycle.” However, Christansen said, the decline in expected investment yields for the next couple of years is becoming an even more significant factor, and ROE performance is forecast in the low 5 percent range, similar to levels that preceded the last hard market. www.insurancejournal.com

Tougher U.S. Commercial Market Conditions in 2012: Marsh

.S. commercial insurance rates are expected to climb across many lines of business in 2012, continuing a trend that began in the second half of 2011, according to a report by insurance broker Marsh. Substantial catastrophe losses and reduced investment returns prompted many U.S. insurers to seek rate increases in 2011, most notably in the property market, Marsh said in its report, “Navigating the Risk and Insurance Landscape: U.S. Insurance Market Report 2012.” Property insurance rate increases are expected to accelerate in 2012, especially for insureds with significant catastrophe exposures or loss histories, the report said. Marsh said there are also signs of rates firming in the primary and excess casualty insurance market. This is especially true for lead umbrella coverage, where insurers have been seeking mid- to high-single-digit rate increases across a range of industry groups due to unprecedented losses.

Financial and professional rates, including for directors and officers (D&O) liability, are expected to firm modestly in 2012, although rate decreases are still achievable. Key findings in the Marsh report include: • Insureds with large catastrophe exposures and those with significant losses in 2011 typically saw rate increases of 10 percent or more during the fourth quarter. Those conditions are expected to persist in 2012. • Primary casualty insurance pricing decreases moderated in 2011, with general liability rates ranging between 5 percent increases and 5 percent decreases in the fourth quarter; insureds can expect to be flat to up 5 percent in 2012, depending on exposure. • For excess casualty, lead umbrella rates generally were flat to up 10 percent in the fourth quarter of 2011 and excess layers typically were flat to up 5 percent. Market capacity is expected to shrink in 2012 for certain risks.

• Workers’ compensation rates tended to be flat to up 5 percent in the fourth quarter of 2011. Continued firming of the market is expected in 2012, driven by higher underlying claims and medical cost inflation. • D&O liability rates were generally flat to down 5 percent for most companies in the fourth quarter of 2011. Larger companies were able to secure rate decreases of as much as 10 percent. However, the market is expected to firm modestly in 2012 as a lack of profitability may pressure insurers to seek flat renewals or small increases.

Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: http://www.insurancejournal.com/adshowcase/ E: East, M: Midwest, N: National, SC: South Central, SE: Southest, W: West Agency Ideas www.agencyideas.com N17 Applied Underwriters www.applieduw.com W44, SC40, SE40, E40, M40 Astonish Results www.astonishresults.com N19 Builders & Tradesmen’s Insurance www.btisinc.com W43, SC39, M39 Catlin US www.catlinus.com W7, SC7, SE7, E7, M7 Charity First Insurance Services, Inc. www.charityfirst.com W17, SC13, SE39, E2, M2 Demotech www.demotech.com N3 Gateway Specialty Insurance www.gatewayspecialty.com W14, SC10, SE12, E12, M10 Great American - Specialty Human Services Division www.specialtyhumanservices.com N11

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Insurbanc www.insurbanc.com ISU Group www.joinisu.com

W16, SC12, SE13, E13, M13 Monarch E & S Insurance Services www.monarchexcess.com W15 Negley Associates www.jjnegley.com N12 Nonprofits’ Insurance Alliance Group www.niac.org N15 Oak Street Funding www.oakstreetfunding.com N5 Pacific Gateway Insurance Services www.pgiainsurance.com W13 PersonalUmbrella.com www.personalumbrella.com W5, SC5, SE5, E5, M5 Philadelphia Insurance Companies www.phly.com W11, SC11, SE11, M11 RiskMeter.com www.riskmeter.com N13

Universal North America www.uihna.com W2, SC2, SE2 Victor O. Schinnerer & Company www.schinnerer.com W3, SC39, SE3, E3

February 6, 2012 INSURANCE JOURNAL-NATIONAL REGION | N23

IDEA EXCHANGE

Closing Quote

Have Insurers Lost the Capacity to Run an Underwriting Profit?

By Robert Hartwig

e frequently hear people ask, “When is the next hard market going to come?” And by that they typically mean double-digit increases in premium growth for a sustained period of time. Of course, no one knows. But perhaps more importantly, we think what they’re really asking is, when will premium volume grow faster than losses and expenses, helping to deliver an underwriting profit? Underwriting profits were common before the 1980s. In fact, 40 of the 60 years before 1980 the property/casualty industry had a combined ratio below 100. In the decade of the 1930s, although the country was caught in the midst of the Great Depression, there were seven years with underwriting profits. And in the 1940s, including the war years, all 10 years were profitable from an underwriting perspective. Eight of the 10 years of the 1950s, and nine of the 20 years of the 1960s and 1970s also recorded underwriting profits. But then underwriting profits vanished. Not a single underwriting profit was recorded in the 25 years from 1979 through 2003. Even though that streak ended in 2004, underwriting profits are anything but the norm they were in the ‘30s, ‘40s, and ‘50s. In the eight years from 2004 through 2011, only three tallied underwriting profits. What’s going on here? A Look at the Past In order to understand the present and have reasonable expectations about the near-term future, we need to look at the past — especially the 1930s through 1950s. Some things are quite similar. For example, back then, insurers had never

N24 | INSURANCE JOURNAL-NATIONAL REGION February 6, 2012

seen high investment income last for a prolonged period of time, so they never expected investments to subsidize underwriting losses. Because of the fact they had low investment income, insurers during those years knew they had to rely on underwriting if they wanted to be successful. What’s different? Today there’s more insured value in harm’s way. As a result, insured catastrophe loss experience is a higher proportion of loss payments than before. Also, inflation in the late 1970s and early 1980s boosted bond interest yields, and in the 1980s and 1990s, we had a roaring stock market. We relied heavily — perhaps too heavily — on investment. The soft commercial market since 2004 was perpetuated by the 2007-2009 Great Recession. Demand for insurance dropped, exacerbating an overall decline in pricing. The Great Recession was officially declared over in June 2009, but unemployment remains uncomfortably high at 8.5 percent in December 2011 and the economy continues to expand at a fairly sluggish pace. Ongoing weak economic conditions are clearly making it more difficult for insurers to move rates where they ought to be, even if they are actuarially justified — it’s simply a matter of supply and demand. It’s also true that some insurance commissioners may be fearful of getting caught in a political and media quagmire if they approve rate increases, however actuarially justified they may be. Rate Changes in 2012 As we move through 2012, various insurance lines will be moving at different paces in terms of price firming. Leading the way is workers’ compensation due to very poor underwriting performance, where the combined ratio in 2011 was in the 118 percent to 119 percent range. Increases in commercial property (including business interruption) follow due to high catastrophe losses and somewhat higher reinsurance prices. Most of the casualty lines, whether we’re talking about general liability, directors and officers, etc., are lagging behind. If we’re pinning our hopes on a hard market rescuing us, thinking that we don’t have to do anything differently, we’re on the wrong track. The world doesn’t stay the same, it does change and we need to adapt. Investment earnings today simply cannot offset large scale underwriting losses. In the years ahead, customers need to be smarter about applying the full range of risk management strategies so that when they do buy insurance, the policies are structured closer to the optimum insurance configuration of losses that are low frequency and high severity in nature. With the bottom line under pressure, insurers are likely to walk away from unprofitable business. When insurers behave in this economically rational manner, they won’t have to worry about whether a hard market is on its way. They’ll already be way ahead of the game. Hartwig, Ph.D., CPCU, is president of the Insurance Information Institute. Since joining the I.I.I. in 1998 as an economist and becoming chief economist in 1999, Dr. Hartwig has focused his work on improving understanding of key insurance issues across all industry stakeholders. Follow him on Twitter. www.insurancejournal.com

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