Focus on Professional Liability / PLUS; Habitational / Dwellings; Agents' E&O Survey; Bonus by Insurance Journal

november 5, 2012 | Vol. 90, No. 21

WEst REGION

Remark ab

Scottsdale Insurance Company’s first corporate ad, 1982

Scottsdale Insurance Co mpany is he well into the re for you tod future. Our ay and leadership are solid. Th and financia e result: 30 l foundatio years of loy strength to n al partnership succeed in s and the all market cy And that’s cles. remarkable. A.M. Best Rating of A+XV (Sup erior) To learn mo re visit us at ww or find a Scottsdale In surance agen w.scottsdalei ns.com t,

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It’s been said that the more things change, the more they remain the same. When we set out with our first ad in 1982, Scottsdale Insurance Company and design is a federally registered service mark of Scottsdale Insurance Company.

we were a hungry young startup ready to create strong and lasting partnerships. Things may have changed considerably in the market since then, but the commitment to our customers has remained steadfast. Our loyal partnerships have helped us reach our 30th anniversary, and will carry us far into the future. And

that’s pretty remarkable.

A.M. Best Rating of A+ XV (Superior)

www.scottsdaleins.com a Nationwide Insurance® company

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N10 On The Cover

WEST

Inside This Issue

Special Report: What’s Ahead in Agency E&O

November 5, 2012 • Vol. 90, No. 21 • West Region

N16

N32

NATIONAL COVERAGE

WEst COVERAGE

Idea exchange

N10 Special Report: What’s Ahead in Agency E&O

8 Alaska Setting for Japanese Documentary on Tsunami

16 Surplus Matters: Regulators Vetting of Alien Nonadmitted Insurers

N14 4 Tips for Agency E&O

8 Lawsuit Over Fatal Washington Goat Attack Dismissed

20 Fraud Focus: What’s New in Staged Auto Accident Scams

N16 Special Report: Fiduciary Liability Gap N20 Hospital, Physician Liability Undergoing Change: Aon Study N22 Top 10 Workplace Harassment Settlements N24 Closer Look: The Risk Landscape of Cyberspace N26 New Program Offers Tenant Protection for Rental Property Owners N28 Second Quarter Premium Up 5% for Top 25 Insurers

14 Report: FDA Needs New Authority Over Compounding Pharmacies 24 ‘Big One’ Looms in Minds of Experts Before California ShakeOut 36 41 Percent of Intentionally Set Residential Fires Occur in Vacant Buildings 40 Rebounding Economy Spurs Growth in Cargo, Supply Chain Risks

32 Captive Matters: Will Regulatory Reform Trigger Doomsday for Captives? N1 Minding Your Business: Family Run Businesses N4 International Insider: Trade Sanctions N32 Closing Quote: Arbitration Trap

DEPARTMENTS 6 Opening Note 10 People 12 Declarations 12 Figures N27 MyNewMarkets

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WeST COVERAGE

Opening Note Trends

t’s interesting to see what’s on people’s minds as potential catastrophes develop. Google’s top search on Oct. 29 as Hurricane Sandy approached the East Coast were for the “Weather Channel,” with more than half-a-million such searches recorded by midday Pacific time. The day before Sandy was again one of the biggest trends, with 500,000plus searches, thanks to headlines like “Hurricane Sandy barrels toward Northeast,” “Get out before you can’t,” and “Hurricane Sandy Damage: ‘Frakenstorm’ Pummels East Coast.” Professional football and Daylight Savings were other top searches over that weekend before the storm began bearing down. A day before that, “earthquake” and “tsunami” were among the top subjects, with more than 500,000 searches no doubt generated by the 7.7 magnitude earthquake off of the west coast of Canada that prompted tsunami warnings on the island of Hawaii, which fortunately turned out to be much smaller than first feared. Among the items trending on CNN.com the day Sandy approached the East Coast was a poll that asked “Are you prepared for a weather emergency?” By one point in the day just as the hurricane bore down on Eastern U.S. citizens, nearly 60 percent who had taken the poll answered “yes.” The poll is non-scientific, but it’s still hard to swallow if you know any of the folks I know, few of whom have flashlights they can easily locate, or excess water supplies, or canned food. Most of them don’t even have batteries for their flashlights, they certainly haven’t gone as far as having evacuation routes mapped out, nor are they likely to have any plans for what to do during an emergency. Hopefully it’s the CNN.com poll that’s accurate, and my non-scientific assessment that’s not. If any encouragement is to be had, it’s from the Great ShakeOut earthquake drills this year on Oct. 18 at 10:18 a.m., which drew more than 15 million participants around the world — a record 9.4 million in California alone, according to organizers of the annual event. A day prior to the ShakeOut U.S. Geological Survey seismologist Lucy Jones spent a portion of her morning at the Los Angeles Risk and Insurance Management Society’s forum in North Hollywood, Calif. talking about the possibility of the “big one” striking Southern California. For full coverage, see “‘Big One’ Looms in Minds of Experts Before California ShakeOut” on page 24. Jones described a grim scenario following a large earthquake on the San Andreas Fault, which she said “is the most likely catastrophic disaster to hit the United States at this point.” She laid out the toll of such a quake: More than 100 landslides, 150,000-plus people displaced, in excess of 53,000 emergency room visits, Don Jergler West Editor more than 1,800 deaths and 1,600 or more fires.

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 Chris Burand, Kathleen Ellis, Catherine Oak, Steven Plitt, Douglas Powell Contributing Writers Richard A. Brown, Daniel McNeel Lane Jr., David Morgan, Nolan Taylor, John Trefry, Sydney Williams

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 Classifieds, Jobs, Agencies Wanted/For Sale (800) 897-9965 x125 Ly Nguyen | lnguyen@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 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 Whiffen | bwhiffen@ijacademy.com

A DM I N I ST R A T I O N

Chairman 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 November 5, 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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weST COVERAGE

News & Markets Alaska Setting for Japanese Documentary on Tsunami

Hamster Corralled

Three police officers in the Portland, Ore. suburb of Beaverton went the extra mile for a hamster found riding in the lap of a driver who was arrested for investigation of DUI. Officer Mike Rowe says 27-year-old Nicole Huey of Beaverton left the tiny animal loose on the dashboard when she got out of her vehicle. Rowe says the woman told police she didn’t have anyone who could come get the hamster, so they “should just kill it.” Police told her they would take the pet to a safe location. Rowe wrote on the department’s Facebook page that “It took three officers to capture the furry little passenger” but it was finally carried in an evidence tube to an emergency veterinary clinic. Rowe says Huey later claimed her pet. @2012 Associated Press. All Rights Reserved.

Japanese broadcasting group has been filming a documentary about tsunami debris in Kodiak, Alaska. NHK, Japan’s national public broadcasting station, is filming a documentary about tsunami debris in Alaska to raise awareness about the amount of debris the United States is receiving. “Most of this is about awareness,” said Noboru Nakashima, NHK’s Los Angeles bureau chief. “The tsunami debris is a big trouble to the North American people. It not only affects the Japanese people, but the world.” Producer Jun Matsuda, from Tokyo, said the debris in Alaska

is more extensive, which is why a reporting crew came to Kodiak. “The amount of debris in Alaska is much more here than the rest of the West Coast,” Matsuda said. “It’s also it’s difficult to reach the beaches here. Alaska is so large and sparsely populated. It looks like it’s more difficult to gather the debris and process.”

The purpose of the documentary is to highlight how difficult it is to deal with the tsunami debris that has been collected. The documentary will air in Japan this month. @2012 Associated Press. All Rights Reserved.

Lawsuit Over Fatal Washington Goat Attack Dismissed

judge has dismissed a widow’s lawsuit against the federal government over her husband’s death in a mountain goat attack at Olympic National Park in Washington two years ago. U.S. District Judge Robert Bryan had earlier dismissed most of Susan Chadd’s claims over the summer, then in late October he declined to reconsider. Robert Boardman was trying to

protect Chadd and a friend when the 370-pound billy goat gored him, severing arteries in his thigh. The goat is believed to have been one that harassed park visitors for years. Chadd accused the government of negligence in its management of the goat. She also alleged that the park botched the rescue effort. The judge said the government’s actions are immune from lawsuits

Survey: 4th of Nevada Drivers Use Hand-Held Phones

statewide survey shows 27 percent of Nevadans still use hand-held

8 | INSURANCE JOURNAL-WEST REGION November 5, 2012

telephones while driving, despite a state law banning the practice that took effect Jan. 1. University of Nevada, Reno, researchers say the third annual survey of Nevadans’ driving behavior and attitudes released also found 48 percent use hands-free phones while driving. About 13 percent send text messages or emails while driving. Fifty-six percent said their phone call

usage while driving has stayed about the same, while 26 percent said it declined and 17 percent answered they had never used a phone while driving. UNR’s Center for Research Design and Analysis conducted the telephone survey of 851 Nevadans in July – 38 percent of those on cellphones and the rest on traditional land lines. @2012 Associated Press. All Rights Reserved. www.insurancejournal.com

Who insures you doesn’t matter. Until it does.

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Chubb Group of Insurance Companies (“Chubb”) is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation. For a list of these subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued. Chubb, Box 1615, Warren, NJ 07061-1615. ©2012 Chubb & Son, a divisionJOURNAL-WEST of Federal Insurance Company. November 5, 2012 INSURANCE REGION |9

weST COVERAGE

People Bill Bergan

Trisha Milazzo

Joe Dunn

The Leavitt Group promoted Mark Niebuhr to senior vice president over the Captive and Alternative Risk Consulting Group and Bill Bergan vice president over the Construction & Surety Practice Group. Both posts are in The Leavitt Group’s Sacramento office. The Leavitt Group’s Bay Area office named Trisha Milazzo as a consultant in the employee benefits division. Niebuhr, who joined the Leavitt Group in 1994, currently handles the risk management and insurance needs for large businesses with an emphasis in manufacturing, technology, engineering and financial services. Bergan joined the Leavitt Group in 1998 and has responsibility for the agency’s surety operations and represents a range of clients for their property casualty requirements. His clients include commercial and residential contractors, developers and homebuilders. Bergan has a range of experience in the surety and insurance industry, including a CPA background. Milazzo has more than 10 years’ experience in the employee benefits field, with expertise in human resources. The Leavitt Group’s Bay Area, Sacramento and San Jose offices are part of the Jenkins Insurance Services agency. Edgewood Partners Insurance Center named Joe Dunn vice president of workers’ compensation claims in its Fresno, Calif. office. Dunn will be responsible for workers’ comp claims advocacy, and he will work with EPIC’s Central Valley clients to manage and reduce claims expense. He will also coordinate and oversee insurance carrier services. Dunn has 11 years of experience in workers’ compensation, settlement negotiation and Medicare. Prior to joining EPIC, Dunn worked as a senior workers’ compensation claims adjuster for State Compensation Insurance Fund. EPIC has a staff of 300 employees working from eight offices across California: Los Angeles, Irvine, Fresno, Folsom, San Francisco, San Mateo, Petaluma and San Ramon.

10 |ASTISH14873.indd INSURANCE JOURNAL-WEST REGION November 5, 2012 ASTISH15197.indd ASTISH5333.indd 11

George Biancardi, previously president of Strongwood Distribution, has been named president and chief executive officer of Monterey, Calif.-based Strongwood Insurance Holdings. Biancardi will be responsible for leading Sequoia Insurance Company, Networked Insurance Agents, Northeast Agencies and AmCom Insurance Services. Strongwood is the parent company of these four entities. Biancardi joined Strongwood in 2011 after serving in a variety of insurance leadership roles. Most recently he was as chief executive officer NFP Property and Casualty. Prior to NFP, he was managing director and industry practices leader at Marsh. SullivanCurtisMonroe named Christopher Warren as a property casualty consultant in its Irvine, Calif. office. Warren joins SCM from Georgetown Insurance Service Inc., where he was a business development associate. He has experience as an advisor/consultant to contractors, and will work with SCM’s construction division. SCM offers commercial property & casualty, employee benefits and personal lines coverage, and has nearly 200 employees in its offices in Irvine, Pasadena and Corona. Novato, Calif.-based Fireman’s Fund Insurance Co. named Travis Bethune vice president of distribution management and services leader. Bethune will provide strategic and operational direction for the distribution and agency management team, which is responsible for enhancing agent and broker relationships. Bethune is based in Fireman’s Fund’s corporate office in Novato. Bethune came to Fireman’s Fund as a national broker. Prior to that he held leadership roles in underwriting, sales, marketing and distribution at Chubb and in operations and customer service at Travelers. Fireman’s Fund is a member of the Allianz Group.

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weST COVERAGE

Declarations Healthcare Challenge

Independent Dynamic

Grapes of Wrath

“This challenging environment increases the pressure on health care providers to seek the most appropriate and cost-effective insurance programs.” – Dominic Colaizzo, chairman of Aon Risk Solutions’ Health Care Practice, commenting on an annual industry study by Aon Risk Solutions that shows among other challenges, hospital risk managers are grappling with greater physician integration and changes in state legislation that influence professional liability costs.

“This is great news for the independent agency system and reflects a stable and growing distribution system that remained resilient during the recent economy challenges.” – Robert Rusbuldt, Big “I” president and CEO, commenting on a 2012 Agency Universe Study that shows the number of independent insurance agencies has increased, newer agencies are growing and the system as a whole is dynamic.

“These workers picked lettuce and worked in grape fields over 10 hours a day without receiving overtime pay.” – Said California Labor Commissioner Julie A. Su, who filed a $1.6 million lawsuit against a Greenfield farm labor contractor Zavala Farms for multiple violations, including failure to provide minimum wage and overtime to roughly 150 workers covering more than 10 work locations.

Monster Buzz

Figures

“There is no legal or commercial business requirement to do so. And because our products are completely safe, and the actual numbers are not meaningful to most consumers.” – Were reasons a Monster Beverage official gave to Consumer Reports for why some beverage labels do not reveal exact caffeine levels, aside from not wanting to give away secret recipes. According to a study by the magazine, 11 of the 27 top-selling energy drinks in the U.S. do not specify the amount of caffeine in their beverages.

40 Million

Is what actor Tom Cruise is seeking in a lawsuit filed in late October in a California court against the publisher of Life & Style magazine over a story that suggested he abandoned his daughter, Suri.

25-$30 Million

Is how much AIG Insurance Co. will pay to California beneficiaries of life insurance policies, according to California Controller John Chiang who began auditing AIG’s practices in 2008, revealing what Chiang called an “industry-wide practice of companies failing to pay death benefits to the beneficiaries,” this despite having access to federal records indicating policyholders died, or direct confirmation from relatives. 12 | INSURANCE JOURNAL-WEST REGION November 5, 2012

$450,000

Is how much a Hollywood visual effects specialist who was fired for reporting on-the-job cocaine is getting as a jury award for wrongful termination. Andrew McDonald was in the men’s bathroom when he saw an executive use cocaine. MacDonald, who sued Ascent Media Group Inc. in 2009, reported the incident to a supervisor and was fired.

$500,000

Is how much Washington Insurance Commissioner Mike Kreidler is fining Ohio-based BCS Insurance Co. for issuing hundreds of thousands of policies using unapproved rates and policy language. An investigation found that between 2007 and 2009, BCS issued over 500,000 travel insurance policies that were different from the policy language filed with the state, according to Kriedler. www.insurancejournal.com

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November 5, 2012 INSURANCE JOURNAL-WEST REGION | 13

weST COVERAGE

News & Markets Report: FDA Needs New Authority Over Compounding Pharmacies By David Morgan

Health and Human Services to investigate the agency on grounds that it failed to exercise its existing authority to prehe U.S. Food and Drug Administration’s vent the meningitis outbreak. power to regulate compounded drugs The FDA issued a warning letsimilar to those linked to a deadly meningitis ter to NECC in 2006 describing outbreak is legally nonbinding and lacks the potential health risks including authority of stringent standards imposed on microbial contamination. But drug manufacturers, according to a congresthere has been little evisional report released in late October. dence of a follow-up. The report, compiled by the staff of Congressional invesU.S. Representative Edward Markey, a tigators also say Massachusetts Democrat, drew an immediate there is evidence response from FDA Commissioner Margaret that the FDA and Hamburg, who said the agency is commitstate regulators ted to working with Congress and others to garner “the authority we need to help prevent knew of potential problems at NECC in tragedies like this from happening again.” 2002. “Over the years, there has been substantial debate within Congress about the appropriate Hamburg has had little to say publicly about the regulatory issue. amount of FDA oversight and regulation of “FDA’s primary focus right now is containcompounding pharmacies. But unfortunately, ing the immediate crisis, protecting patients there has been a lack of consensus and many and their families from any further harm and challenges from industry,” Hamburg said in a completing our investigation,” she said. statement emailed to Reuters. Compound “As pointed out in the report from ing is a traditional pharmacy practice in which Congressman Markey, FDA’s authority over a pharmacist alters, mixes ‘Absent clear new authority, FDA’s efforts or recombines will ultimately be constrained by gaps in reg- ingredients to make a drug ulatory authority and thwarted by an industhat meets the try that has historically resisted a federal special needs of role for the oversight of its activities.’ a patient with a physician’s prescription. But in recent decades, officials compounding pharmacies is more limited by say some compounding operations have grown statute than with drug manufacturers,” she to resemble full-scale manufacturing without added. meeting FDA standards. The Markey report and Hamburg’s comments surfaced as Congress has begun preliminary discussions that could give the FDA Dozens of Warning Letters new powers to oversee compounding phar The congressman’s report, based partly on macies like the New England Compounding documents gathered by investigators in the Center, which is at the heart of a fungal menHouse of Representatives, says state governingitis outbreak that has sickened 337 people, ments that are now the chief regulators of including 25 who have died, in 18 states. pharmacy compounding cannot perform the But the public health crisis has also stirred kind of safety oversight necessary to prevent debate about how much authority the FDA more drug-related outbreaks from occurring. actually needs. Recently, the advocacy group The FDA has issued dozens of warning letPublic Citizen called on the Department of ters against compounding pharmacies since

14 | INSURANCE JOURNAL-WEST REGION November 5, 2012

2001. But the report said the agency has based its enforcement actions on relatively weak, nonbinding guidance documents since a 1997 law granting it oversight of “new drugs” was struck down in U.S. courts more than a decade ago in cases brought by compounders. “Guidance documents do not establish legally enforceable rights or responsibilities and do not legally bind the public or the FDA,” said a Congressional Research Services report cited by Markey’s staff. That gives the agency far less power over compounding operations than it has over conventional drug manufacturers, which must submit to stringent safety and efficacy standards. “Absent clear new authority, FDA’s efforts will ultimately be constrained by gaps in regulatory authority and thwarted by an industry that has historically resisted a federal role for the oversight of its activities,” said Markey. Markey has said he will propose legislation to enhance FDA oversight when Congress returns after the Nov. 6 election. The report cites FDA documents as saying that compounded drugs may have been responsible for at least 23 deaths and 86 other cases of disease or injury before the current outbreak. FDA records described by the report also show that 10 of 29 compounded products tested by the FDA in 2003 failed at least one of the regulatory agency’s safety or efficacy tests. Three years later, in 2006, one-third of 36 compounded drug samples failed FDA analytical testing. “The risks of allowing the safety of compounding pharmacies to go largely unregulated have been recognized for years, and the devastating tragedies of this outbreak will be felt well beyond it,” Markey said. Copyright 2012 Reuters. www.insurancejournal.com

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IDEA EXCHANGE

Surplus Matters Surplus Lines: Regulators Vetting of Alien Nonadmitted Insurers

he National Association of Insurance Commissioners (NAIC) is a nonprofit entity that acts as the trade association for state insurance commissioners. Although the NAIC may play a central role in regulation of the insurance industry, it By Richard Brown nonetheless is a private organization that has no apparent governmental or other legal immunity from suit or liability for negligent acts or omissions associated with performance of regulatory functions. Pursuant to Section 524(2) of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA), the Congress delegated to the NAIC responsibility for

keeper to protect the nation’s consuming determining whether an alien insurer public from the risk of insolvency — or (i.e., an insurer domiciled outside the outright fraud — by insurers domiciled United States) qualifies to accept risks outside the United States. from a licensed surplus lines broker. Infamous frauds not so long ago by A State may not — the likes of Alan Teal and Carlos Miros, prohibit a surplus lines broker from placamong others, as well as gross mismaning nonadmitted insurance with, or procuring agement in yet other cases, led to mulnonadmitted insurance from, a nonadmitted tiple insurer insolinsurer domivencies of nonadciled outside the ‘Without guaranty association mitted insurers United States during the 1970s that is listed on coverage, untold millions of and 1980s. Transit, the Quarterly dollars of policyholder claims Mission, and Listing of Alien went unpaid.’ Mutual Fire are Insurers maina few that come tained by the to mind. Without International guaranty association coverage, untold Insurers Department of the NAIC. millions of dollars of policyholder claims As a matter of federal law, the NAIC went unpaid. therefore is vested with the role of gateWhat happens if the NAIC fails to detect obvious patterns of failures to pay claims, disregards red flags signaling material financial deterioration, or overlooks outright fraud? Is the NAIC effectively a financial guarantor for having vetted alien insurers? Surplus lines brokers ultimately are responsible for the security of alien insurers with whom they place business. Nothing in the NRRA provides any immunity for failure to discharge that obligation simply because an alien insurer appears on the NAIC’s approved list. Nonetheless, in assessing the quality of security, surplus lines brokers, risk managers, and the public rely heavily on any approval that carries indicia of regulatory imprimatur, in this case the NAIC Quarterly Listing of Alien Insurers. But is the NAIC up to the task to protecting the consuming public from the risk of dealing with unscrupulous insurers beyond the reach of U.S. regulatory jurisdiction? Prior to the NRRA, state regulators could take or leave the NAIC’s approval of alien insurers. Now that the NAIC is continued on page 18

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Surplus Matters Surplus Lines, continued from page 16

the gatekeeper, how is it going to accomplish this critical task? For more than two decades active cooperation and market surveillance by and among state regulators, surplus lines stamping offices, and industry groups has kept the bad guys out. Although the NRRA changed the rules for taxation and regulation of surplus lines transactions, Congress never contemplated that fraudsters posing as insurers domiciled on some atoll in the middle of the Pacific would be quick to exploit NRRA transitional cracks. Under the NRRA, the NAIC is charged with making sure that does not happen. There is no lack of financial data. The NAIC already receives ample annual and quarterly data to evaluate the financial bona fides of alien insurers. Necessary but not sufficient. To effectively protect the public, two

By enacting the NRRA, Congress did not intend to mothball the market surveillance resources that have been so effective in protecting the consuming public from fraudulent offshore insurance operations. key pieces are missing. The first is the seasoned expertise of senior insurance regulatory personnel who have dealt with problems involving nonadmitted insurers on a day-to-day basis. Over the years, regulatory staff at the larger insurance departments developed their own informal network for information exchange whenever apparent bad actors came to their attention. They did not simply await quarterly or annual financial reports. Equally if not more important is the second missing piece. Surplus lines stamping offices, indus-

try trade organizations such as the National Association of Professional Surplus Lines Offices (NAPSLO) and the American Association of Managing General Agencies (AAMGA), and wellregarded industry leaders have served as an informal market surveillance network to regulators for decades. The latter in particular know the alien insurer players throughout the world and are wellinformed about what is happening in the market on a real-time basis. That is their business. By enacting the NRRA, Congress did not intend to mothball the market surveillance resources that have been so effective in protecting the consuming public from fraudulent offshore insurance operations. The state insurance commissioners control the NAIC. They have a duty to ensure that their trade organization draws fully on the resources and expertise of state insurance departments, stamping offices, and industry. Congress took it as a given that they would. Simple regulatory prudence should dictate that the resources and expertise represented by seasoned insurance regulatory personnel and the industry network be deployed sooner rather than later. No one wants a replay of the era that ushered even Lloydâ&#x20AC;&#x2122;s to the brink ofextinction only 20 years ago. Brown is an insurance regulatory attorney who has authored previous articles about the NRRA and its implementation, and made presentations on the topic to industry groups. He regularly represents surplus lines brokers, insurers, and industry organizations in a variety of surplus lines and other regulatory matters. Brown can be contacted at RAB@ InsuRegulatory.com. Copies of his NRRA articles can be found on his website: www.InsuRegulatory.com.

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Fraud Focus What’s New in Staged Auto Accident Scams

woop and squat, drive-down and panic stop are examples of staged auto accidents, according to Frank Scafidi, director of public affairs for the National Insurance Crime Bureau (NICB). Scafidi recently sat down with Claims Journal Editor Denise Johnson to describe the most common types of staged auto accident schemes. Here, he outlines why it’s important to verify key aspects of an investigation involving a potentially fraudulent accident scam. Claims Journal: What are staged auto accident schemes? Scafidi: They are a significant cost-driver in a lot of areas, and particularly in states that have no-fault insurance systems. What they generally do is involve one or more people, one or more vehicles that the bad guys operate … where the innocent driver, because of the way the accident is carried out, usually will hit somebody in the rear or will be hit by one of the bad guys so that a responding law enforcement officer will find that innocent victim at fault. or other trail cars, might then just disappear. CJ: What are the most common types of So [what] you’ve got left at the scene are auto accident schemes? the innocent victim and the person that they Scafidi: One is called the “swoop and squat.” ran into. When the cops show up, of course, There are different variations, but essentially it’s a pretty clear cut case of following too that scheme is where you have two or three closely. vehicles that are operated by criminals, by In many cases, you’ll find witnesses that co-conspirators. They will identify a target, are all part of the criminal conspiracy. … and they’ll maneuver their vehicles in such So,when a claim a way that one vecomes in, it’s very hicle will pass the Sometimes staged accidents difficult to distarget victim, the are the first step in a multi- prove. When you innocent victim, hit somebody in the and then get back fraudulent situation. rear, you’re typically in front of that car, at fault. When you’ve and then they’ll got witnesses to continue on for a ways, and then another back up the bad guy’s story — that’s a pretty vehicle will come up alongside the target incredible set of facts to overcome. vehicle to block that person’s potential escape Then, there’s a “sideswipe,” a “drive-down.” from an impending accident. Another one is a “panic stop.” A panic stop Then the first vehicle will just stop sudis essentially the same … it’s where an indidenly, causing the victim’s vehicle to run into vidual driving the car, the bad guy [is] with the back of the bad guy’s car. Meanwhile, the two or three other people in the car. Then other players in the side car, the blocking car 20 | INSURANCE JOURNAL-WEST REGION November 5, 2012

they just move it along at a slow rate of speed and they find somebody that looks like a good target. They’ll maneuver in front of that car, hit the brakes quickly, and then cause the innocent person to run into their rear. Again, now you’ve just got one vehicle that’s operated by the bad guys, but you may have two or more passengers in there … They’re going to get out, and they’re going to complain of injuries. When someone asks them, “Why did you stop?” Well, it could’ve been that somebody stepped off the curb or there was some reason for them to stop that’s going to sound legitimate. So, it’s not the person that stopped that’s going to be at fault. It’s the one that hit them in the rear. In the sideswipe, typically the bad guy will position his vehicle in an outer lane, and then as soon as the victim’s vehicle comes into that outer turning lane, the criminal will sideswipe it. This is usually done where continued on page 22 www.insurancejournal.com

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Fraud Focus Accident Scams, continued from page 20

you’ve got dual turning lanes. There’s just a way to maneuver the vehicle to make it look like the bad guy was innocent and the victim vehicle performed some sort of a traffic maneuver and hit the bad guy, to make it seem like the innocent party is at fault.

CJ: Are there any other new trends in staged auto accidents? Scafidi: Not really. There are some variants of all these things, but the key ingredients to these phony accident schemes is to have an innocent vehicle that is maneuvered in such a way that driver either hits a car or is hit by one of the bad guys.

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The actual crash might be more intense than anyone was planning. There’s one famous case from New York years ago where a woman was killed when she was part of staged accident scam. So, there are risks to drivers and pedestrians, in many cases. It’s important for adjusters, claims handlers and investigators to understand that when you get what looks like a clear-cut case of, “Gee, well our insured was at fault here making a left turn,” there could be other elements. If you’ve got some indicators of these things — several people in the car that was hit are claiming injuries — these are things that send up the red flags for us. We have to be aware that what appears to be a clear-cut accident could very well have been a staged or setup accident. CJ: Are there a few common factors involved in staged accidents? Scafidi: Perhaps, when you run your claims history on some of these things and you see the same vehicle is involved in other claims, even in other parts of the state or the country, that’s a clue. I would defer to the SIU and the claims experts and professionals. When you see something like this, give it a little extra review. It never hurts to refer something to us if you think it’s questionable. As an investigator, if you see something or you’re referred a claim and it doesn’t add up, then do a little more digging. Everyone is under time constraints, and you’ve got to process claims quickly. It just pays to take a little extra time and verify some of the names that might be on that claim, the injuries, the places that these people are seeking medical assistance or where they’re referred for medical treatment. Sometimes staged accidents are really the first step in a multi-fraudulent situation, where you’ve got people referring injured parties to certain clinics, to certain doctors, for treatments that are never even performed or are unnecessary. When you start probing around and you see a lot of these referrals to specific clinics in certain areas … you get into, really, the granular detail of what goes on behind a claim. When you see that activity, that’s another indication that there could be something there that’s very wrong. www.insurancejournal.com

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News & Markets ‘Big One’ Looms in Minds of Experts Before California ShakeOut By Don Jergler

day before more than 9 million people in California took part in a massive nationwide earthquake drill in mid-October, U.S. Geological Survey seismologist Lucy Jones stood in a room full of risk professionals in the San Fernando Valley and passed on some grim predictions about the “big one.” Jones and Robert Hartwig, president and economist of the Insurance Information Institute, were at the Los Angeles Risk and Insurance Management Society’s forum, “Rethinking Catastrophic Risk in Risk Management: EarthquakeRelated Challenges.” The forum, which was supported by Cal State University Fullerton’s Center for Insurance Studies, a part of the Mihaylo College of Business & Economics, was in North Hollywood — a half-an-hour drive from the notorious San Andreas Fault that runs north and south in California the length of more than 800 miles. The following day, the USGS and its partners, including the California Earthquake Authority and the Federal Emergency Management Agency, held the annual Great California ShakeOut, which

state aired a drill broadcast at 10:18 a.m. In addition to California, other states and countries held ShakeOut drills, for a total of more than 13.6 million participants worldwide. ‘The San Andreas earthquake Such disaster preparedness is the most likely catastrophic may come in handy if one heard disaster to hit the United States Jones’ speak at the L.A. RIMS forum a day earlier. at this point.’ “The San Andreas earthquake is the most likely catastrophic disaster to hit the United States at this they say is the “world’s largest earthquake point,” she told the crowd. preparedness drill.” The Southern portion of the San The drill was scheduled 10:18 a.m. on Andreas Fault stretches from Monterey Oct. 18, and more than 9.3 million people County to the Salton Sea. The southern participated at schools, colleges, businesspart of the fault is capable of earthquakes es, community organizations, government over 8 in magnitude on the Richter Scale, agencies and households. The number of and the average time between major participants far exceeded 2011’s 8.6 million quakes is 150 years, Jones said. figure, organizers said. However the southern portion of the Several radio stations throughout the 24 | INSURANCE JOURNAL-WEST REGION November 5, 2012

fault has not experienced a large rupture of 7.0 or greater, which many would consider the “big one,” in more than 300 years, according to Jones, who added, “So we’re overdue.” San Andreas is the state’s fastest known moving fault, and it’s among hundreds of faults spread throughout the region to a point that those who live in Southern California are usually within 10 miles of a fault, Jones said, adding that the region’s soft soil areas can actually amplify shaking as seismic waves roll outward from an epicenter. Sitting well inland of Southern California’s coveted oceanfront communities, areas around the fault are proving more attractive for homeowners seeking more affordable housing. Southern California’s last major earthcontinued on page 26 www.insurancejournal.com

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one of Anthony’s clients lost a major supplier to a fire, sparking concerns about cash flows, inventory levels and the short-term health of his client’s business. Fortunately, with the help of CnA, Anthony had already prepared his client for potential supply chain risks, outlining a plan that would ultimately reduce the haze of his client’s uncertainty. Way to think ahead, Anthony.

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News & Markets 9.4 M Drop, Cover And Hold On More than 9.4 million Californians reportedly practiced the “Drop, Cover, and Hold On” drill in mid-October in preparation for a major earthquake. The 2012 Great California ShakeOut involved record numbers of people from businesses, institutions and in their homes — many following specific drill broadcast instructions on more than 70 California radio and television stations — participating in the annual earthquake drill at 10:18 a.m. on Oct. 18, according to the event organizers An additional 4.9 million people in Alaska, Arizona, Georgia, Idaho, Maryland, Nevada, North Carolina, Oregon, South Carolina, Virginia, Washington, Washington, D.C., Guam, Puerto Rico, British Columbia and Southern Italy participated in their own ShakeOut drills, making an Oct. 18 total of 14.3 million people, an increase from 9.5 million on ShakeOut day in 2011, organizers said. “We carefully review registrations to maintain accurate counting of who is participating,” said Earthquake Country Alliance Executive Director Mark Benthien, who has coordinated the Great ShakeOut effort since its beginning in 2008, when 5.4 million registered to participate. ShakeOut is organized by the Earthquake Country Alliance, a partnership of federal, state, local and community organizations. Members include California Emergency Management Agency, U.S. Geological Survey, California Earthquake Authority, American Red Cross, and the Southern continued on page 28

Citing what she called the “ShakeOut equation,” Jones said that more than 300,000 quakes were the 7.2M quake in Landers in buildings may experience some form of 1992 and the 6.7M Northridge in 1994, which damage — that’s one-in-16 buildings in the likely released energy from the region’s fault region. More than 300 structures could be system, Jones said. completely collapsed, many of which are However it may be building up some unreinforced masonry structures that local energy, Jones said, pointing to an “earthgovernments have been slowly vacating and quake swarm” that culminated with a 5.5M tearing down over the years. earthquake on Aug. 26 preceded by nearly Roughly one-tenth of non-ductile con200 1.4-5.3M range quakes that occurred in crete buildings popular in the 1950s and an area known as the Brawley Seismic Zone, 1960s may collapse in the areas of highest which extends from the northern end of the shaking, and if it’s the type of long-period Imperial fault to the southern end of the San shaking that may occur from a fault the size Andreas Fault. of San Andreas, “the collapse of a pre ’94 steel “It’s looking like it’s picking back up,” she frame building is conceivable,” she said. said. Jones said USGS assumes roughly five high rises may collapse following a large event on The Big One the San Andreas Fault in Southern California. Loss of power and water, long response A San Andreas earthquake can leave more times for emergency services, lack of cell than 150,000 people displaced, and generate phone service, massive business interruption 53,000 visits to emergency rooms and cause and packed emergency rooms are among 1,800 or more deaths. the horrors Southern California residents Adding to the mayhem and damage are and businesses can expect following the big the 1,600 fires feared possible after a large one, Jones and other scale earthquake experts at the forum on the fault, par‘We expect up to 100 land- ticularly in East Los said. “We expect up to slides to be generated by a Angeles and North 100 landslides to be Orange County, San Andreas earthquake.’ generated by a San where there are a Andreas earthquake,” large number of Jones said. wood-frame buildings. By comparison the Southern Californians also face dangers Northridge quake generated 100 fires. from liquefaction, or as Jones said, the “tem Fires following an earthquake in Southern porary creation of quicksand,” which she California could be amplified if they come said does a “really poor job of holding up during a period when the region is expericontinued on page 28 buildings.” Big One, continued from on page 24

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News & Markets 9.4M Drop, continued from page 26

California Earthquake Center, which administers the ECA. “More than half the territory of the United States is subject to major earthquakes, and more and more people are recognizing the importance of being prepared to survive and recover when — not if — they happen,” Benthien said. Related events were held in San Francisco’s Union Square on Oct. 17, the anniversary of the 1989 Loma Prieta “World Series” earthquake, at San Diego’s Amtrak Station and at Los Angeles’ Union Station. At a press conference in L.A. just prior to the Oct. 18 drill, speakers stressed safety. Los Angeles Mayor Antonio Villaraigosa stated: “hope does not save lives — preparation does. Mother Nature does not give notice. We need to be one step ahead. Today’s drill is a vital practice for the real thing. ” U.S. Geological Survey seismologist Lucy Jones urged people to “think of how you can make your house safer. Consider what you will do if the earthquake happens when you are commuting. I carry comfortable walking shoes and water in my car at all times.” Chris Nance, chief communications officer for the California Earthquake Authority, cautioned that “only one in ten homes California have earthquake insurance,” and advised that “Being prepared involves knowing your earthquake risk.” The www.ShakeOut.org website, managed by the Southern California Earthquake Center at the University of Southern California, is the global location for registering to participate in any of 16 Official ShakeOut Regions, as well as any other state or country. The site also includes planning and safety information.

Big One, continued from on page 26

encing the annual a high-wind conditions known as the “Santa Annas,” which tend to fan flames and exacerbate the region’s wildfire season that typically comes in September and October. “We just have to hope they don’t come together,” Jones said. Jones also fretted over duration, as the size of a fault can determine how long a quake lasts. The duration of a “big one” on the San Andreas Fault could last 100 seconds, far longer than the damaging Northridge Earthquake’s seven seconds, she said. Transportation systems after a large earthquake would be problematic to say the least. Rail lines from the ports of Los Angeles and Long Beach — the twin port complex is con-

Coping I.I.I.’s Hartwig posed the question likely on the minds of many at the event: Can the insurance industry handle such a fallout? “Yes,” Hartwig offered as an answer to his own question. “The industry can cope.” Thanks to Jones’ speech, the Great ShakeOut event, as well as the 4.6M earthquake in Maine, which occurred just days earlier and was referenced several times during the forum, earthquakes were fresh on Hartwig’s mind as he went through catastrophic losses worldwide for 2011 and so far this year. There have not been a great deal of cat losses in California in the last few years, but last year yielded the largest global cat

‘The industry has really been put to the test over the last two-three years in a way that it has never been put to the test before.’ sidered the third largest in the world – could be disrupted. Roughly 40 percent of the nation’s goods are delivered from those ports. Jones said to expect $123 billion in economic losses. Direct losses are expected to generate one-fourth of the losses, with business interruption losses accounting for at least $100 billion. The energy supply won’t only be a problem for Southern Californians following the “big one,” but according to Jones, the power supply to Western North American could be cut off for as long as 80 seconds because the grid will shut down to protect itself. And don’t expect to depend on your cell. Cells could go out as people scramble to phone friends and relatives taxes broadband capacity, and as cell relays attached to destroyed structures go out and poke holes in cell networks. It’s likely that even the most basic human necessity could be hard to get after the “big one.” It could take six months to get water back to Southern California, according to Jones, who added that “a small business cannot operate without water.”

28 | INSURANCE JOURNAL-WEST REGION November 5, 2012

loss on record, with nearly $400 billion in economic losses. That was largely due to the impact the earthquake and tsunami in Japan on March 11, 2011, had on the world’s gross domestic product, Hartwig said. “From my calculations that shed about a half-a-point off the global GDP,” Hartwig added. The event caused $35 to $40 billion in insured losses, according to I.I.I. Those losses added to losses generated by the continued drought — if viewed as a single event the U.S. drought would represent a multibillion insured cat loss, according to Hartwig — as well as a plague of thunderstorms that generated tornadoes, lighting and hail in the U.S. interior, have put a great deal of pressure on the insurance industry. “The industry has really been put to the test over the last two-three years in a way that it has never been put to the test before,” Hartwig said. But, he noted, most valid claims got paid, there were minimal insurance company failures over the last two years and few market dislocations. continued on page 30 www.insurancejournal.com

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Big One, continued from on page 28

Insurer Financials While Hartwig said insurers were prepared for disaster — insurers maintained a $567.8 billion surplus as of June 30 — he did note it’s been a few tough years in terms of finances. “Insurers this year are on a path to generate 20 percent less on their interest portfolio than they did prior to the (financial) crisis,” Hartwig said. Speakers at the event following Hartwig stayed focused on earthquakes, particularly the San Andreas scenario.

Stephen D’Arcy, a professor at CSFU’s insurance rising following a major event. Mihaylo College of Business & Economics, Following the earthquake in Japan, the talked about enterprise risk management, number of people purchasing earthquake and focused on earthquake preparedness. insurance rose 18 percent, greatly impacting Earthquake preparedness was a nothat market, he said. brainer topic for Danny Marshall, general “We know there’s going to be a capacity counsel for CEA. crunch,” Eilers said. “In Southern California Marshall, who the same thing faulted people for is going to hap‘It’s really hard to put that sparing themselves pen.” the expense of toothpaste back into the tube Jerry Sullivan, earthquake insurpresident of the – very expensive.’ ance and leaving it Sullivan Group, up to the governfocused on ment to come in and help them during predictive modeling, and talked about how disasters, emphasized the need to be prethat has improved since he started in the pared. business. “It’s really hard to put that toothpaste “Models are so much better than what back into the tube — very expensive,” he they used to be,” Sullivan said. said. To help forecast and prepare for losses More than one speaker noted that before that would come from a large event on the Northridge Earthquake, roughly onethe San Andreas, Sullivan and others on a third of homeowners had earthquake insurbrokers panel discussed the need for modance. Currently between 10 and 12 percent eling to be made easier to understand for have earthquake insurance, according to brokers, agents and their clients, as well I.I.I. estimates. as a need for better data to be provided to Anthony Joseph, regional director of modelers. the Western U.S. for Lloyd’s America Inc., The event was kicked off by Ross asked a panel of insurers and reinsurers Pebley, LA RIMS chapter president, and to tackle to topic of business interruption, Anil Puri, dean of CSUF’s Mihaylo College which he put near the top of the list of con- of Business & Economics. cerns following an earthquake. Other speakers included: Kate Stillwell, Comparing recent disasters in insured product manager for EQECAT; George and largely uninsured areas, Joseph said he Yen, rating bureau chief of the California sees these figures growing each year. Department of Insurance; Scott Ritto, “It’s going to be interesting to see what vice president of risk management for the contingent business interruption numWestfield; John Zachry, a retired surplus bers in Thailand are going to be,” he said, lines executive; Frank Beuthin, senior vice referring to the flooding in the rapidly president of Willis Group Holdings Plc; industrializing nation in 2011. Yohei Miyamoto, senior vice president of Erik Nikodem, executive vice president Aon Risk Solutions; Curtis SeVera, manat Lexington Insurance Co., said that the aging director of Marsh and Jeff Casillas, Boston, Mass.-based American International vice president of claims for FM Global. Group (AIG) subsidiary suffered more The event also served as an educathan $300 million in losses from the Japan tion opportunity for several students earthquake, the tsunami and the Thailand at CSFU’s Center for Insurance Studies, Floods; in line with industry estimates, 25 which has placed more than 1,000 stupercent to more than one third of the losses dents in jobs. was from contingent business interruption. According to the center Director Weili Steve Eilers, vice president of General Re, Lu, the center currently has 900 students, talked about the demand for earthquake and enrollment is on the rise.

30 | INSURANCE JOURNAL-WEST REGION November 5, 2012

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Captive Matters Will Regulatory Reform Trigger Doomsday for Captives?

I By Sydney Williams

f you’re startled by this headline, you’re not alone. Until recently, the words “reform” and “captive” were rarely used in the same sentence. That’s because captive insurance companies have long been immune to traditional insurance company regulation because of their special characteristics. Should captives be more heavily regulated? Many argue that captive insurance companies deserve a special place in regulatory regimes because they: • Are specialist underwriters primarily limited to writing the risks of their owners. • Have limited investment assets compared to traditional insurers. • Are often operated and managed by outsourced experts, with fewer resources to devote to compliance. • Use policy language related to owner concerns. • Perform uniquely, not following typical insurance cycles. • Are not subject to the law of large numbers like traditional insurers.

However, the formerly benign regulation of the captive segment is about to change. For the first time, captive owners and managers must contemplate the likelihood that regulatory flexibility may be sharply curtailed by regulations put into These are compelling arguplace in the wake of the most ments — especially for those recent financial crisis. For the first time, traditional insur‘There’s no question that Solvency ance and captive regulation are converging. II will present both a challenge While it can be argued and an opportunity for United that regulations spawned by Sarbanes-Oxley and States captive regulators.’ FINRA have had little effect on the captive marwho understand that regulatory ket, that line of reasoning ignores flexibility has been one of the three unintended consequences primary advantages to domicilof these legislative efforts: ing a captive insurance company • The cost of compliance has offshore. 32 | INSURANCE JOURNAL-WEST REGION November 5, 2012

caused financial officers to critically evaluate captive effectiveness in detail. • The general desire to achieve greater capital efficiency has caused senior management to drill down into areas of operations previously ignored. Many existing captives will not fare well when exposed to intense management scrutiny. • In anticipation of possible captive exits, there is already a substantial amount of insurance company surplus earmarked for potential captive runoff. And the United States legislative acts pale in significance when compared to Solvency II, the European Union effort to continued on page 34 www.insurancejournal.com

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Captive Matters When alternative risk management becomes popular again, new captive formations and re-domiciliation requests could swamp the existing captive insurance divisions of state regulatory departments. Captives, continued from page 32

regulate insurers. Solvency II is intended to reform insurance regulation, provide a safety net for policyholders and support market stability. It is scheduled to take effect June 2013, with full implementation by January 2014. Solvency II will place increased demands for compliance on the entire insurance industry, including captives. It is a risk-based regulatory effort with a high-level focus on the scale and complexity of risks. As such, it is driven more by risk management than by modeling. While Solvency II pertains to European Union members only, several major offshore captive domiciles have made significant progress toward obtaining equivalence under the proposed Solvency II regulations, Bermuda being the most notable. Such certification means that the EU regulators agree to accept the non-EU applicants’ regulations as acceptable under Solvency II, or “equivalent.” Just as important, several competing (offshore) domiciles, presumably seeking competitive advantage, have announced that they will neither comply with the requirements nor seek equivalence. The United States, with separate state jurisdictions and limited federal regulation of insurance, will have significant political and practical problems complying with Solvency II — essentially seen as a “continental regulatory issue.”

In Every Challenge Lies Opportunity There’s no question that Solvency II will present both a challenge and an opportunity for United States captive regulators. Naturally, the opportunity will come in the form of offshore captives fleeing domiciles that choose to meet Solvency II equivalence tests for captive insurers.

This quasi-forced re-domestication will present a new and fresh pool of applicants for licensing by new and mature U.S. domiciles. Just as with any significant change in a regulated environment, challenges will accompany opportunities. For example: • If re-domestication occurs from a Solvency II-affected domicile, what will be the attitude of the regulator toward the captive, the fronting carrier and the reinsurer(s)? • Is there a likelihood that only captives with compliance issues will redomicile, and if so, what safeguards need to be in place to ensure that the state’s captive insurance department is not simply licensing companies that are likely to incur future impairment? • Should the captive licensing and regulatory capital requirements of companies seeking re-domestication be considered in a different light than new applications? Even though captive formations have slowed in recent years due to the soft insurance market, that trend is likely to reverse as the economy recovers and the market hardens. When alternative risk management becomes popular again, new captive formations and re-domiciliation requests could swamp the existing captive insurance divisions of state regulatory departments. If this occurs, which class of new applicants will take precedence — those with a performance history returning to the United States to avoid Solvency II or new captive formations? These are questions that each regulator and state insurance department must consider. Whatever regulatory methodology is eventually adopted, the challenges ahead for all captives will hinge on whether regulations are geared for captive complexity,

34 | INSURANCE JOURNAL-WEST REGION November 5, 2012

the cost of compliance, minimum solvency requirements and the methodology used to meet regulatory approval. These are different and more sophisticated issues than many captive leaders have dealt with in the past.

Back to the Future While the future is always difficult to predict, the results of new regulations will likely be as follows: • The cost of compliance will increase for domestic captives, as well as those subject to Solvency II. • Some captive insurance companies will be unable or unwilling to access resources to pay for compliance. • Formerly inattentive financial officers will apply a new, high-level focus to captive operations to meet capital efficiency requirements and to contain reputational risk. • Some offshore captives, especially those in Bermuda, may look to redomicile to the United States to avoid Solvency II requirements. Others, especially high-performing captives, may be delighted to remain in a domicile with high compliance requirements. • There will be a significant runoff and/ or sale of captive liabilities as companies cease funding for marginal operations.

New Day, Not Doomsday The current regulatory changes are so remarkable and profound that the entire face of the captive risk transfer market may be altered by the results of their implementation. For captives around the globe, the next two years will represent a new day, but not necessarily doomsday. Smart captive leaders will proactively prepare now to position their organizations for a brighter, albeit more regulated, future. Sidney “Woody” Williams, CPCU, is vice chairman of Strategic Risk Solutions (SRS), a large, independent captive management company that provides strategic advisory services. Website: strategicrisks.com. Email: woody.williams@ srsmail.com. www.insurancejournal.com

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November 5, 2012 INSURANCE JOURNAL-WEST REGION | 35

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News & Markets

41 Percent of Intentionally Set Residential Fires Occur in Vacant Buildings

n estimated 16,800 intentionally set fires in residential buildings occur annually in the U.S., according to the latest report issued by the U.S. Fire Administration (USFA). These fires result in an estimated average of 280 deaths, 775 injuries and $593 million in property loss each year. The report, Intentionally Set Fires in Residential Buildings (2008-2010), examines the characteristics of intentionally set fires in residential buildings. The report is part of the

for 5 percent of all residential building fires. • Lighters (22 percent), heat from other open flame or smoking materials (19 percent) and matches (15 percent) were the leading heat sources of intentionally set fires in residential buildings. • The majority (76 percent) of intentionally set fires in residential buildings occurred in one- or twofamily dwellings. An additional 19 percent of fires occurred in multifamily dwellings. • 41 percent of the intentionally set resiAn estimated16,800 intentionally set fires in residential build- dential fires occurred in vacant buildings. ings occur annually in the U.S. • Rubbish, trash, and waste (8 percent); magazines, newspapers and writing paper Topical Fire Report Series and is (7 percent); and uncontained flambased on 2008 to 2010 data from the mable liquids or gas (6 percent) were National Fire Incident Reporting the items most often first ignited in System (NFIRS). intentionally set fires in residential According to the report: buildings. • Intentionally set fires accounted

Loss Measures for Intentionally Set Fires in Residential Buildings (3-year average, 2008–2010) Intentionally Set Residential Building Fires

Residential Building Fires (Excluding Intentional Fires)

Fatalities/1,000 Fires

8.3

3.3

Injuries/1,000 Fires

34.6

26.0

$21,320

$11,800

Measure

Average Loss:

Dollar Loss/Fire Source: NFIRS 5.0

1. Average loss for fatalities and injuries is computed per 1,000 fires; average dollar loss is computed per fire and is rounded to the nearest $10. 2. When calculating the average dollar loss per fire for 2008–2010, the 2008 and 2009 dollar-loss values were adjusted to their equivalent 2010 dollar-loss values to account for inflation. 3. The category

“Residential Building Fires (Excluding Intentional Fires)” does not include fires of unknown cause. The report found that the average loss of fatalities, injuries and dollar loss for intentional set residential fires was higher than those for all other residential fires. It also found that the fires typically occur in the evening hours and most often start in bedrooms.

Property Crimes Rose 11 Percent in 2011 By Pete Yost

he government says the number of violent crimes rose by 18 percent in the United States while the rate of total property crime increased 11 percent, from 125.4 to 138.7 victimizations per 1,000 households between 2010 and 2011. Household burglary increased 14 percent, from 25.8 to 29.4 victimizations per 1,000 households. Theft increased by 1.2 million victimizations, up from 11.6 in 2010 to 12.8 in 2011. The number of vehicle thefts remained steady, according to the report, with 628,000 victimizations occurring in 2011. The report did find that over a 10 year period between 2002 and 2011, total property crime declined 18 percent; there was no 36 | INSURANCE JOURNAL-WEST REGION November 5, 2012

Theft increased by 1.2 million victimizations, up from 11.6 in 2010 to 12.8 in 2011. change in the burglary rate during the same period. The information comes from the U.S. Bureau of Justice Statistics’ annual national crime victimization survey. The bureau cautions that the size of the percentage increases in both violent crime and property crime is driven in large part by the historically low levels seen in 2010. Copyright 2012 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. www.insurancejournal.com

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November 5, 2012 INSURANCE JOURNAL-WEST REGION | 37

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Client Interests Using Life Insurance Policy Reviews to Improve Customer Retention

lients value advisors who look out for their interests. They especially appreciate it when their representative is proactive in helping keep their financial house sound. One area that is often neglected is life insurance. A comprehensive review of their current life insurance program will let By Nolan Taylor the client know if their policies are in good order. A review may or may not ultimately lead to a sale, but it will always enhance your standing with your clients. A review has few attendant risks with a high likelihood of positive outcomes. Either the client will be reassured that their policy is in good shape or you can point out better potential uses of insurance dollars already being spent. There are critical questions a client needs answers to in a comprehensive review.

many policies that are seriously underfunded. If left unattended, these policies are in trouble. There are also many that are inefficient or poorly designed. Sixty to 70 percent of policies can be improved if the client is still insurable. Additionally, there are often problems with ownership or beneficiaries.

Are there better alternatives available? Many factors can improve the economic performance of a life insurance program. There is fierce competition in the life insurance marketplace that has lowered net costs across the board. Additionally improved designs, aggressive underwriting, and ongoing promotions, provide the client many alternative that may improve their situation substantially.

How can they know for sure?

Although there appear to be better options available, it may not mean a client can actually get underwritten. By gathering basic What do clients currently own? information on a client, including medical To answer this you need to obtain basic records, (requires a HIPPA authorization) facts about the client’s policies. Information that is critical might include; policy type, informal offers can be obtained before a client death benefit, cash value, loans, ownership, fills out an application or has a paramedic exbeneficiary designations, and so forth. A chart amination. Either the numbers work or they don’t. If they look favorable the client A review may or may not ultican choose to move forward. Even it mately lead to a sale, but it will turns out there is nothing better available, the client will at least understand always enhance your standing their current situation and clean up with your clients. any problems such as underfunding, ownership issues and beneficiary with all this information can then be given to designations. the client and become part of their file. Many As a trusted advisor you should be aware clients have never seen a comprehensive list of whatever life insurance your clients have. of their life policies. If this is a far as a client Helping them understand the life insurance chooses to go, it still will strengthen your relaproducts they own better enables you to tionship with them. serve them well. These clients will know they can count on you for guidance and Are the policies in good shape? advice in the future. From the basic information on the policies it is a straightforward process to determine Taylor has worked in the insurance industry for more than 20 years. He may be reached at Nolan@nolantaylor.net. the condition of the policies. Sadly there are 38 | INSURANCE JOURNAL-WEST REGION November 5, 2012

Reasons to Have Your Life Insurance Reviewed Periodically Older policies are sometimes inadequately funded. Finding this out early allows time to remedy the problem.

Beneficiary designation may no longer reflect the desires of the owner. g

Improper ownership can cause serious tax problems. g

There are often more cost effective policies on the market that use premium dollars much more efficiently, saving significant money. g

Improved designs provide better guarantees, and more flexibility. This allows policies to more adequately fit your specific situation. g

The financial strength of insurance companies can change over time and sometimes weaken. g

The amount of insurance may no longer be appropriate for the purposes for which it was originally purchased. g

Insurance that is no longer needed can sometimes be sold for a lump sum in the life settlement market. g

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November 5, 2012 INSURANCE JOURNAL-WEST REGION | 39

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News & Markets

Rebounding Economy Spurs Growth in Cargo, Supply Chain Risks By Stephanie K. Jones

haven’t learned the ins and outs of both their clients’ businesses and the appropriate insurance products and services to mitigate those risks. One important thing that agents and brokers need to know is that just about any commercial account has some vulnerability to supply chain issues, according to Don Harrell, senior vice president, Marine, at Liberty International Underwriters. During a recent webi‘As you can see … everything has nar hosted A.M. Best and an element that has cargo and sponsored by LIU, Harrell logistics and risks associated that cited the top 12 industries that are expected to experihappen along supply chain.’ ence growth over the next 10 years, areas where LIU believes “agents and brokers such exposures. The bad news is that and underwriters should focus their agents and brokers who are unfamilattention.” iar with these types of risks may find These industries include: health themselves in over their heads if they slow trend toward economic recovery in the United States may mean good news/bad news for insurance agents and brokers who handle commercial accounts with cargo and supply chain vulnerabilities. The good news is growth in sales and manufacturing will generate increased need for insurance coverage and risk management services for

40 | INSURANCE JOURNAL-WEST REGION November 5, 2012

care; health sciences; energy (traditional); alternative energy; petrochemical; agriculture; natural resources; technology (including bio technology); light manufacturing; insourced manufacturing; export-oriented industries; and shipping (rail, marine, trucking), Harrell explained during a recent webinar sponsored by LIU and A.M. Best. “As you can see … everything has an element that has cargo and logistics and risks associated that happen along supply chain,” Harrell said.

The Biggest Threat Natural catastrophes get lots of attention but the number one issue for supply chain risks is cargo theft, Harrell said. “The biggest issue that we see historically and today is theft. The increase in cargo theft is a major www.insurancejournal.com

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News & Markets problem,” he said. “If you look at organized crime, [there are] some staggering statistics around the estimated total crime and retail losses on an annualized basis. It’s close to $30 billion a year; it’s a huge problem. … Over 90 percent of retailers today — small, medium and large — are affected.” From a geographic perspective, states where cargo enters the country and where it is stored are the most vulnerable, Harrell said. The top 10 states for cargo theft, according to CargoNet’s Second Quarter 2012 U.S. Cargo Theft Report, are: California, Texas, Florida, Illinois, New Jersey, Georgia, Pennsylvania, Alabama, South Carolina and Tennessee. By product type, food and drink are most often stolen, followed by home and garden products, clothing and electronics. “Anything that can be sold on the street; anything

‘Risk can’t be 100 percent avoided.’ that people can use or consume, it is a target for theft,” Harrell said. CargoNet, an organization focused on preventing cargo theft and increasing recovery rates, noted that in the second quarter of 2012 warehouse/distribution centers surpassed truck stops as the primary locations where cargo thefts occur. Parking lots, terminals and terminal yards also ranked high on the list of common sites of cargo theft. Generally, the thefts are not random, Harrell said. There’s “a lot of inside information being given to the wrong people. … They know what they want and they know what they are going after and they do everything they can to get it.” www.insurancejournal.com

The issue of accumulation, too, is a huge challenge for the insurance industry. “Most cargo unless it’s sitting in a warehouse is in transit, it’s moving somewhere along the supply chain,” Harrell said. An insurer could potentially have the cargo of multiple clients on any one container ship or sitting in any one port, he said. “If it happens to be the time when Hurricane Isaac hits, or some other hurricane, you can have multiple clients exposed.” It’s challenging for both the shipper and the insurer to understand the accumulation issue, Harrell said. It’s much easier for the insurance industry to measure static exposures — such as warehousing and property values — especially with improvements in data gathering. “It’s just a matter if you can have acess to that data,” he said.

Know the Coverage “Risk can’t be 100 percent avoided,” said Patrick Ryan, vice president, Marine, for LIU, who also participated in the A.M. Best webinar. So it’s important for businesses that rely on cargo transit to partner with the right shipper, partner with the right producers and make sure those producers have the right contacts with the right underwriting companies, he added. Ryan suggested several questions a potential client should consider when it comes to selecting producers, underwriters and insurance carriers, such as: “What sort of long-time experience have the underwriters and producers had in the international insurance industry? Do the [insuring] companies have the right claims continued on page 42

A Growing Economy Media reports notwithstanding, the U.S. economy, while sluggish, is not in danger of going over the fiscal cliff. That’s according to a couple of insurance industry executives, who say that private sector job hiring is up, the housing industry is slowly improving and manufacturing is making a comeback in the United States. “I think some of the numbers show that particularly for the U.S. things are actually looking much better … the trends are looking better,” said Don Harrell, senior vice president, Marine, at Liberty International Underwriters, while participating in a recent webinar hosted A.M. Best and sponsored by LIU. “Economic growth will continue but it will continue modestly throughout the next year, 12 to 18 months,” Harrell said. “GDP growth is expected by the end of this year to be about 2 percent this year, as it grows, it’s going to grow next year up to about 3 percent.” Harrell’s comments echoed those made a little over a month earlier by Insurance Information Institute President and Chief Economist, Dr. Robert Hartwig. “Despite the 24/7, 365, bad news you hear from you hear on CNBC, the world is not coming to an economic end,” Hartwig said during a presentation at the Insurance Council of Texas insurance symposium in July. “Consumer spending is actually up. Business lending is actually up. … People are spending more on their credit cards. … New home sales are actually up and prices are up. There are a lot of little things to be positive about,” Hartwig said. “Business bankruptcies are falling. The housing market, yes its weak, but again, some improvements. Inflation is very, very tame. The private sector hiring, although anemic, is still positive, which is somecontinued on page 42 November 5, 2012 INSURANCE JOURNAL-WEST REGION | 41

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News & Markets Economy, continued from page 41

thing we couldn’t say four or five years ago.” Manufacturing is recovering compared with the past couple of years, Harrell said. “The value of manufacturing shipments in June 2012 was up 32 percent since June 2009,” he said. That growth in value is a “very good indicator on how manufacturing is doing in the U.S.” Harrell said there has been a “huge growth in durable goods; primary metals are up 20 percent over the last year; manufacturing and machinery, up 11 percent, fabricated metals up are up 6.5 percent. Even the non-durable goods are up. What this means is that the U.S. is manufacturing more … and exporting that more than they did last year. That means the demand on U.S. products is there. That means the growth of our importers and exporters and our manufacturers is positive.” Hartwig said that while construction has a long way to go before it gets back to what is considered a normal level activity, the good news is that the growth that is happening in construction is occurring in the manufacturing and energy sectors. And, it’s occurring entirely in the private sector. That’s good news, he said, “Because construction in manufacturing and the power business are long term investments. …You don’t build a power plant with the expectation that you’re going to run it for six months. You have the expectation that you’re going to run it for half a century at least, the same thing with manufacturing facilities. That implies hiring down the road.” — Stephanie K. Jones 42 | INSURANCE JOURNAL-WEST REGION November 5, 2012

brokers need to really know the terms of coverage and they need expertise? Do they have the right to explain it to their clients,” said risk engineering expertise to take a Joe Grasso, a partner in Wiggin and look at each risk and make specific Dana’s Litigation Department and corecommendations?” chair of its Insurance Practice Group. Good risk management on the “There may be a sophisticated risk part of the insurance provider manager involved, most likely there’s includes being involved in selectnot. So the agents and brokers ing a shipper, as well as “in where should communicate, communicate, the goods are going, in the packing, communicate with their clients and making recommendations to avoid let them know all of the terms of the risk even before the risk starts. coverage.” The more information you can get, Grasso, who serves as counsel to the more information that you can the American Institute of Marine disseminate to [your client], the Underwriters and the Inland Marine more expertise you can lend, the Underwriters Association, noted better risk you’re going to have,” that for agents and brokers, there Ryan said. are liabilities that have been around Coverage for domestic and forever. worldwide transits — whether by “One of them of course is that as a vessel, air, truck or rail — currentbroker or agent, you have to be very ly is very broad, Ryan said, noting careful that you are communicatthat carriers are being pushed to ing all material information to the add additional coverages, such as underwriter. And there’s got to be an open ‘The biggest issue that we see historiline of communication cally and today is theft. The increase in both in cargo theft is a major problem.’ directions,” Grasso stock storage, foreign inland transaid. “You have to make sure that sit, processing and installations. you are obtaining the coverage your For their own protection and client wants, and that your client that of their clients, “agents and understands what the coverage is.” Cargo, continued from page 41

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Minding Your Business 8 Rules for Family Run Businesses

amily businesses can be a blessing or a disaster. The root of a well-run family business is grounded in treating it like a business, not as an extension of the family. Below are guidelines any family business can follow to ensure the business’ success. 1. Have family members work somewhere else first. It is not necessary that it be in an insurance company or agency, although it would be helpful. They must prove to themselves, to you and to the other employees that they can succeed on their own. It also is healthier for the business if they come with fresh ideas and training. 2. Do not expect more or less of them than you would of any other employee. Family members might try harder, or not at all. They need motivation from the boss, just like other employees. Apply all agency rules to family members and adhere strictly to performance evaluations and salary administration. Give family members responsibility and authority as they become ready for it. Give them enough rope to prove themselves, and don’t second-guess their decisions within the parameters of www.insurancejournal.com

authority you have granted. Avoid the two extremes — either cutting them too much slack or riding them harder than other employees. 3. Do not create a job for a family member. Either you have an opening for which they qualify or you do not. If there is no suitable opening, wait until you need to hire someone and/or they have the appropriate qualifications. 4. Keep family and business issues separate. Never discuss family matters in front of other people in the agency. Use the family member’s name, and try not to call each other dad, mom or junior during business hours. De-emphasize the family relationship when around other employees. Don’t discuss business at family gatherings, because this can put a strain on personal relationships. 5. Keep open lines of communication. Let family members know your perpetuation plans, so they know what you expect from them long before they are old enough to come into the agency. Don’t expect them to read your mind. 6. Never leave the agency to two people (family members or not) on the basis of 50/50 owner-

ship. The buck always has to stop some place. Two siblings can have built-in differences of opinion that make decisions more difficult to handle effectively. It can work in some cases, but these are the exceptions. At a minimum, put one outside person on the board of directors as a deciding vote. 7. Develop an organizational chart that has family members reporting to people other than other family employees. Make sure the other employees understand their relation to the family members, and to whom they are responsible. Just because someone has the same last name as the owner does not mean they have the same authority, and everyone needs to know this. Unclear relationships can cause confusion and dissension, and can cost the agency good employees. 8. Make family members pay for ownership, even if it is at a discount. Most people do not appreciate something they got for free, compared to something they had to earn. The concept is that if they pay for it, or have to sacrifice something for it, they will value it more and do a better job of running the agency. In a similar fashion, children who are not associated with the agency should not be owners, because they might not appreciate what it takes to run the business. Also, keep the IRS in mind. You must properly value the ownership you turn over to family members, either through gifts or cash transactions.

By Catherine Oak

Do not create a job for a family member.

Oak is the founder of Oak & Associates, based in Santa Rosa, Calif. The firm specializes in financial and management consulting for independent insurance agencies and wholesalers. Website:www.oakandassociates.com. November 5, 2012 INSURANCE JOURNAL-NATIONAL REGION | N1

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News from LIU

Liberty International Underwriters Specialty Lines Insurance

LIBERTY INTERNATIONAL UNDERWRITERS EXPANDS U.S. GLOBAL CRISIS MANAGEMENT Sets up operation in Dallas to serve Southeastern and Southwestern U.S. NEW YORK – Liberty International Underwriters, a part of the Global Specialty division of Liberty Mutual Insurance Group, has increased its presence in Dallas by establishing an operation dedicated to handling Global Crisis Management (GCM) business for the Southeastern and Southwestern U.S. Led by Tom Dunlap, assistant vice president and regional manager for southeast and southwest regions of LIU Global Crisis Management, underwriters will have local decision-making authority for Contaminated Products; Product Recall; and Kidnap, Ransom and Extortion (KRE) insurance. Mr. Dunlap is joined by Underwriting Ofcer Karen McCullough and Underwriting Specialists Jan Lovell and Kim Gardner. “Businesses are increasingly seeking out crisis management insurance products to help better protect their assets from the uncertainty following crisis events such as kidnapping, extortion, contaminated food and dangerous products released into the marketplace,” said Louis Lubrano, senior vice president of global crisis management for Liberty International Underwriters. “Demand for LIU Global Crisis Management products is particularly strong in the southeastern and southwestern sections of the U.S., so it made sense for us to establish a presence in the region with underwriters who have extensive experience with area brokers. Tom is a well-known and respected insurance industry veteran whom brokers trust to put together the right solution for their clients’ unique needs.” The Dallas operation is the latest addition to LIU’s Global Crisis Management offering that includes ofces in New York and San Francisco as well as Toronto, London, Sydney and Melbourne. This new Global Crisis Management capability augments LIU’s already established Dallas-based primary casualty, excess casualty and oil, gas, petrochemical and chemical underwriters. LIU’s Global Crisis Management products are supported by red24, a leader in global security assistance, that gives brokers and their clients access to an experienced kidnap, ransom and extortion consulting and response team. Working with red24, LIU helps brokers provide the specialized loss control engineering and loss mitigation services necessary to protect clients’ employees, operations and reputation before, during and after a crisis. Brokers can contact Tom Dunlap directly at 469-232-5628 or Thomas.Dunlap@libertyiu.com.

Certain coverage 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. This is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions. © 2012 Liberty Mutual Insurance.

IDEA EXCHANGE

International Insider Trade Sanctions and Risk Management Understanding Economic Sanctions and Regulation When Doing Business Abroad

he U.S. government has increasingly used laws and regulations that impose economic sanctions on others as an instrument to advance foreign policy and national security goals, with some recent efforts aimed at putting additional pressure on Iran over its nuclear program. The U.S. governmentâ&#x20AC;&#x2122;s By Kathleen Ellis use of economic sanctions, however, opens up the potential for costly missteps by companies with overseas trading partners. Even the most sophisticated multinationals can inadvertently violate U.S. economic sanctions. But the challenges are often greater for smaller companies that are just beginning to expand into overseas markets. Large multinationals usually have experience in moving goods across borders and often have teams of lawyers at their disposal to help them sort through the requirements to stay in compliance. For smaller companies, however, economic sanctions often represent a new and complex field, rife with potential pitfalls. In a recent case, a U.S. computer equipment company exported computer-related goods from the United States to Iran through another company located in Dubai, United Arab Emirates, in violation of U.S. economic sanctions. Civil penalties totaled more than $1 million along with the forfeiture of assets of nearly $2 million. (See: www.treasury. gov/resource-center/sanctions/CivPen/ Documents/02242012_onlinemicro.pdf) In addition to complying with economic sanctions laws and regulations, exporters

must comply with export and re-export regulations, which are a separate set of rules administered by the Bureau of Industry and Security (BIS). The BIS jurisdiction is over most exports from the United States, including dual-use commodities, technology and software. Dual-use commodities are commercial items that could also have military applications. Also, jurisdiction extends to the re-export of U.S. originating items from third countries, including foreign products that contain U.S. originating content or that are based on U.S. technology. The responsibility to comply with U.S. export control laws and regulations rests with the U.S. exporter.

In non-comprehensive programs, there are no broad prohibitions on dealings with countries, but only against specifically named individuals and entities, according to the Office of Foreign Assets Control (OFAC). OFAC is the arm of the U.S. Treasury in charge of administering the trade sanction programs. The names of these individuals and entities are gathered by OFAC and added to the SDN list, which includes more than 6,000 names of entities, individuals and vessels that are connected with the sanctions targets. The assets of SDNs are blocked, and U.S. persons are prohibited from dealing with them. One of the most notorious SDNs, before he was killed in 2011, was Osama bin Laden. Also on the list was international arms dealer Viktor Bout, who was recently sentenced to 25 years in prison by a U.S. court for his role in supplying weapons to a Colombiabased terror group that had been on the SDN list since 2004.

U.S. Sanctions Programs Some of the challenges related to economic sanctions come in part because of the number and scope of the sanctions and the fact that, over time, the governmentâ&#x20AC;&#x2122;s sanctions programs are dynamic and changing. Recent Changes to Economic Sanctions The U.S. government maintains sanc Sanctions against countries and individutions not only on specific countries, but als can be in place for also on narcotics many years, but over traffickers, terrorist Sanctions against countries time, the programs can organizations, and and individuals can be in sometimes be expanded other non-state entities and individuals, place for many years, but the or relaxed. Sanctions programs can be expanded against Iran, for known as Specially instance, were imposed Designated Nationals or relaxed. in 1979 following the (SDN). Islamic revolution. In Sanctions can be recent months, the United States and the either comprehensive or selective, using the European Union have moved to impose new, blocking of assets and trade restrictions. tougher sanctions as a means of pressuring Comprehensive sanctions programs Iran to abandon its nuclear program. include Cuba, Iran, Libya, North Korea, The U.S. government, for instance, is using Sudan, Burma/Myanmar and Syria. Noneconomic sanctions as a means to reduce comprehensive programs include the Iranâ&#x20AC;&#x2122;s ability to sell its oil in world markets, Western Balkans, Belarus, Congo, Iraq, according to an Associated Press report. Ivory Coast, Lebanon, Somalia, Liberia, and Zimbabwe. continued on page N6

N4 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

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International Insider

Continued from page N4

These sanctions, if successful, will make it democratic transition. This would include more difficult for Iran to continue its nuclear lifting a ban on U.S. companies investing in program. For example, The National Defense or offering financial services to the county, Authorization Act for Fiscal Year 2012 according to a Reuters report. imposes sanctions on foreign financial insti On April 17, 2012, OFAC announced the tutions that do business with Iran’s central first of these measures (General License bank, barring them from operating in the 14-C), which authorizes the provision of United States to buy or sell Iranian oil. The financial services (including the provision of objective is to discourinsurance coverage) age these institutions in support of the Recent settlements show from facilitating Iran’s following not-forexport activities. These that OFAC has been profit activities in enforcing sanctions sanctions took effect Burma: humanitarian, at the end of June at democracy building, more vigorously than around the same time a educational, sportever before. European embargo on ing, non-commercial Iranian oil began. development and reli The sanctions against Myanmar (Burma), gious activities, provided that no SDN was on thexother hand, are starting to relax. involved. 7.5 4.625 Sanctions were first imposed in 1997 in The U.S. government has imposed sancjgs_umbrella_7.4x4.625v1 response to concerns about repression of tions through the years, but to be effective, 2012 democratic opposition. The U.S. government they have to be enforced. In addition to in April said it was ready to lift some of the administering the sanctions programs, OFAC sanctions to recognize Myanmar’s fledgling also is in charge of enforcing them.

Recent settlements show that OFAC has been enforcing sanctions more vigorously than ever before. About $3.5 million in fines were collected in 2008, but that rose to $772.4 million in 2009, based on some large cases. In 2010, collections were about $200 million, and 2011 was on track to top $100 million, according to OFAC. The fines for violations can be substantial. Depending on the program, criminal penalties can include fines ranging from $50,000 to $10 million, and imprisonment ranging from 10 years to 30 years for willful violations. Civil penalties range from $250,000 or twice the amount of each underlying transaction to $1.08 million for each violation. Compliance is expected from all U.S. persons, including all U.S. citizens and permacontinued on page N8

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International Insider Continued from page N6

nent resident aliens. In addition, all persons and entities within the United States, all U.S.-incorporated entities and their foreign branches also must comply. In the case of certain programs, such as those regarding Cuba and some aspects to the sanctions against Iran, all foreign subsidiaries owned

or controlled by U.S. companies also must comply. Trade Sanction Risk Management U.S. companies doing business with foreign nationals and corporations must understand their obligations under the economic

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sanctions laws and regulations, and practice due diligence with foreign customers. A request by a previously unknown individual to ship dual-use products — items with peaceful uses as well as more violent applications such ammonium nitrate fertilizer — ought to prompt the company to investigate who the individual is and what he or she wants with the goods. OFAC provides information on how to avoid violating sanctions, and maintains a list of SDNs. Companies also can use software to scan documentation against OFAC’s SDN list. OFAC also has information on its website and offers an agency hotline. For larger companies that do a high volume of business with foreign customers, it makes sense to develop an internal compliance program. A smaller company may need to rely on outside experts. If there is a violation, companies should cooperate with OFAC to resolve the problem. Companies that discover a violation(s) are encouraged to voluntarily disclose them to OFAC. Self-disclosure is considered a mitigating factor by OFAC in determining the appropriate penalty for a settlement. A U.S. company’s domestic and foreign affiliates, for instance, recently exported goods to Iran and Sudan and conducted transactions involving property with Cuba. OFAC determined that the company voluntarily self-disclosed the apparent violations, and that the apparent violations constituted a non-egregious case. The base penalty amount totaled $661,053 and the company agreed to pay more than $502,408 to settle apparent violations, according to OFAC. As U.S. companies expand and the developing world becomes more prosperous, opportunities for international trade improve. The United States has numerous sanctions programs in place and is constantly expanding them and revising them. Enforcement also has been increasing in recent years. Small companies that are starting to work with overseas partners may not have the expertise or resources to navigate this complex field and avoid potential fines. Ellis is a senior vice president of Chubb & Son and manager of Multinational Risk Group - Global Accounts

N8 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

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SPECIAL REPORT

Professional Liability

Competition, Hard Market, Healthcare Effects and More E&O Suits by Carriers By Andrea Wells

N10 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

www.insurancejournal.com

irmer insurance prices and an upward trend in agency revenues are signs of good times for most independent agencies. These same trends, however, are reflected in today’s insurance market for agency errors and omissions coverage, where they can pose Agency E&O Premium challenges for agents looking for protection. Change in 2011 While agency E&O prices are firming, experts say competition is still34% healthy48.9% and, Compared to 2010 according to some, likely to heat up. Increased “There is some tightening going 17.1%on,” Decreased Stayedsays sameRobert Sargent, president and CEO of Tennant Risk Services based in West Hartford, Conn. But for now, price increases in agency remain moderate and fragAgency E&O E&O Premium mented, he says. “There’s still a21.1% lot of compeChange in the Past tition … it is underwriting results-driven.” Three Years 61.5% Sabrena Sally, head of agency E&O in 17.4% Increased the United States for Swiss Re Corporate Decreased describes competition in the marStayedSolutions, the same ket as “mixed.” This year brought a few new competitors to the agency E&O market, she says, but established agency E&O carriers Prediction on E&O Premium mium m simultaneously increased their rates. As the al expects competiChange Next yearat comes to Renewal a close, Sally tion to heat up again. “Carriers become49.8% quite 43.7% Increase aggressive toward the end of the calendar Decrease year,” she says. Remain the same 6.5% Sally says she has seen rate increases filed with departments of insurance ranging from a low of 5 percent to a high of 18 percent. Nearly half (48.9 percent) of all agencies that responded to Insurance Journal’s 2012 Agency E&O Survey reported rate increases in their own policies in 2011 compared to 2010. Almost two-thirds (61.5 percent) said their agency’s E&O rates have increased steadily in the past three years. Agencies don’t anticipate getting rate relief either. Half of all agencies (49.8 percent) that responded to the survey expect a premium increase at the next agency E&O renewal. Gary Mann, director of professional liability for Fireman’s Fund, says the overall professional liability market is experiencing slight increases in rates, and agency E&O is tracking the same in that trend. He says professional liability tracks somewhat differently than the rest of the property/casualty marketplace. But the current market cycle appears to be different. www.insurancejournal.com

Annual Cost of Agency E&O Covera “Whenever the middle-market$1,000 and smallare trending up, and claims are part of 0.9% or less prices market spaces firm and soften, professional the reason. liability will sometimes lag and act indepen15.4% of $1,001 to $2,500 From a loss standpoint, the frequency dently,” Mann says. But that’s not happening claims in agency E&O had been close to an now. He sees “firming in the middle-market 22.8% $2,501 to $5,000 all-time record-low, Pearsall says. That’s startand small-business space, and there’s a slight ing to change. “Nothing dramatic,” he says. firming happening in professional as “It’s still very, very positive numbers, but 21.5% $5,001liability to $10,000 a whole, as well.” there is a slight uptick with claim frequency, In the past 10 years, new competitors have and I think that’s going to continue to go up.” $10,001 to $15,000 9.8% come in and out of the agency E&O market According to the 2012 Agency E&O place, according to Mann. Survey, more than a quarter (26.6 percent) of $15,001 to $25,000 8.3% Right now, the number of carriers writagencies reported having at least one E&O ing agency E&O is up, according to Curtis claim in the past five years, but nearly half $25,001 to $50,000 10.8% Pearsall, president of Pearsall Associates (45.5 percent) said their agency has never Inc., and a special consultant to the Utica had an E&O claim made against them. More than $50,000 10.5% customers National Agents E&O program. Pearsall, The recession has agency who also authors the monthly “E&O demanding more for their 0% 5% 10% money, 15% which 20% 25% Insights” column for Insurance Journal, expects is one reason there are more E&O claims, to see additional carriers entering the agency according to Pearsall. E&O market as well. “One of my concerns is the workload on “I’m aware of a number of carriers that the agency side of the business; it’s just so are looking to get into this market,” Pearsall heavy right now,” he says. “The carriers are says. “It is a line of business that carriers look looking for the agents to do more, and the to.” Pearsall predicts not only that the numcustomers are, what I call, driving the agents ber of carriers doing business in the agency crazy. Somebody will call: ‘My homeowner’s E&O market will increase in the next couple went up 10 percent or $10, what are you of years, but also that not many will leave. going to do about it?’ And it’s forcing the There are some companies that are agents to re-market a lot of this business, extremely aggressive, especially in the large which causes a lot of workload at the agency agency sector. Pearsall says this is somewhat side of the business.” surprising because the large agency E&O In this environment, some things fall market is also a sector that carriers seem to through the cracks, Pearsall says. “Over the be pulling back on. last couple of years, the re-marketing of With competition and the rates for agency business and the workloads, I think, are at E&O both increasing, agency owners may the root cause of the increase in some of the find this a good time to shop around. But claim frequency numbers.” Pearsall says it’s important to understand Fireman’s Fund’s Mann agrees that the that E&O policy forms vary considerably. economic downturn has had an effect on “Agents need to realize that no two E&O claims trends. policies are the same,” Pearsall says. “If they continued on page N12 look to place their coverage with a particular carrier, Comparison of Changes in E&O Premium they should make sure that they understand the policy By Region form and the commitment to Region Decreased Increased Same loss control, how good the Midwest 15.0% 51.0% 34.0% claims handling is going to East 13.0% 46.0% 41.0% be, etc.” South Central 19.0% 56.0% 24.0% Claims Despite the heightened competition, agency E&O

Southeast West

20.0% 19.0%

52.0% 42.0%

28.0% 39.0%

November 5, 2012 INSURANCE JOURNAL-NATIONAL REGION | N11

SPECIAL REPORT

Professional Liability continued from page N11

“E&O claims seem to mirror those of the middle-market space, so typically if you have middle-market experience a greater volume of claims, then E&O claims are going to mirror that. But it’s probably going to lag by 12 to 18 months,” Mann says. That makes sense, he says. “If the general insurance space had an increase in severity and frequency … there is going to be mistakes made and errors made on policies written by agencies.” Swiss Re’s Sally believes the recession spurred an increase in workload on agencies, but she is not convinced that it has led to more agency errors. “The largest driver of claims against insurance agencies continues to be just failing to get coverage as requested. That’s been historically true probably over the last two decades,” Sally says. “Customers looking for ways to save money may ask for a lower limit, or they may decide to drop a certain coverage,” Sally says. But they “may conveniently forget that at the time the claim is made,” she says. She said her claims department has seen “a little uptick” in that type of agency E&O claim.

Agency E&O Premium Change in 2011 Compared to 2010

34%

Increased Decreased Stayed same

Agency E&O Premium Change in the Past Three Years

17.1%

21.1% 17.4%

Increased Decreased Stayed the same

Prediction on E&O Premium mium m al Change at Next Renewal Increase Decrease Remain the same

43.7%

But she doesn’t attribute that trend to the Carriers with disappointing financial economy. results may be the most likely to pursue this “With a lot of vacant homes out there, a lot strategy. of things can happen,” she says. “Frequently, “A lot of carriers are under increased stress the homeowner simply doesn’t tell the because of their performance over the past insurance agent that the home is vacant. A three years,” Mann says. “Their loss ratios are homeowner’s policy, the coverage it proreally putting them under a lot of pressure vides, is much different than what would be for improvement. And particularly with very provided to a vacant dwelling. That’s caused large losses, you can see actions back against some increase in frequency of claims against the agents, where the carrier is trying to agents.” recoup their losses.” Agents who do a good job of documenting Swiss Re’s Sally, agrees. “Over the past files can often avoid a lawsuit. If a lawsuit is several years, we have seen an increased frebrought against the agency, if documentation quency of carriers being less willing to make is correct, then the agency’s E&O carrier has agency accommodations (pay a client’s claims a very defensible case, Sally says. when the circumstances of coverage might “We also see that more often than not, it’s be debatable), less interested in contributing a producer or an account exec or a CSR that’s to a settlement, and more willing to pursue involved in the claim, which is not surprisaction against the agency when the carrier ing,” Sally says. Most often an error occurs alleges that the agency made misrepresentawhen they’re writing new business, she says. tions on the application or other information Commercial lines experiences the most $1,000provided carrier, or when the agency 0.9% or less to the agency E&O claims, according to Mann. allegedly violated the carrier/agency agree“Claims are higher in severity and have$1,001 to ment,” 15.4% $2,500she says. more frequency,” he says. The most common Tennant Risk Services’ Sargent hasn’t himclaims include failure to provide coverage, self seen carriers becoming more aggressive 22.8 $2,501 to $5,000 failure to provide adequate limin pursuing losses from their agents, but he its and failure to replicate previsays such a shift in attitude would be consis21.5 $5,001 to $10,000 ous coverage. tent with a tightening market. “Carriers will go after their agents even $10,001 to $15,000 9.8% Agents Versus Carriers 48.9% in a soft market,” he says. However, Sargent As if E&O claims filed by cus- believes carriers consider carefully whether 8.3% tomers is not enough of $15,001 a worry, to $25,000 to pursue their agent partners in a lawsuit. agents are also facing another “A lot of factors go into the consideration, to $50,000 trend. Increasingly, they$25,001 are and the decision-making process10.8% is not easy,” being sued not just by agency Sargent says. “Factors obviously include the 10.5%etc.), customers, but by one ofMore theirthan $50,000 relationship (size, loyalty, longevity, own carrier partners trying to but also include the order of magnitude of 0% 5% 10% 15% 20% avoid a loss, experts say. the loss and their perspective on what the Fireman’s Fund’s Mann is seerelationship might be going forward.” 61.5% ing increased claims where there While the trend is not new, Pearsall agrees is action from the carrier back that carriers today are more willing to puragainst the agency. “That seems sue actions against agents. to be a growing trend,” he says. “Typically, it is where the agent has bound “Where the carrier sustained a the carrier to a risk that is outside of the loss and then they may sue the underwriting guidelines or misrepresented agent for that loss on the basis on the application the exact nature of the that the application was incorrisk,” he says. “This issue will only increase, 49.8% rectly filled out or there was especially in a hard market.” information that was withheld The litigation process can also have an 6.5% during the application process, impact on an agent’s liability. or something of that nature.” continued on page N14

N12 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

Annual Cost of Agency E&O Co

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Professional Liability continued from page N12

A carrier could decline coverage based on material misrepresentation on the application, and then the insured could pursue the agent directly, according to Sargent. “The biggest claim I was ever involved with was close to this situation — a declination for material misrepresentation (among other things). The carrier left the agent to deal with the problem, and the agent paid a large sum. Unfortunately for the carrier, the insured pursued the carrier for bad faith and won a huge award. So the process and outcome are never easy to predict,” Sargent says. Future of Agency E&O These experts predict that there will be

more pressure on rates and more competition in the agency E&O market in the future. “It’s that unique time in the market where people have to work hard to find an appropriate deal, but they’re there,” Sargent says. Today’s agency E&O market is driven by the characteristics of the agency, he says. “Certainly, a traditional, medium-sized agent or broker that’s never had a claim is going to be in a very different spot than a startup agency or an agency with a bunch of claims.” Pearsall expects long-standing agency E&O carriers to continue to look closely at their books of business and identify what areas perform better. He sees carriers making changes to agency E&O coverages or chang-

4 Tips for Agency E&O By Chris Burand

Below are four agency E&O tips, taken from Chris Burand’s E&O Blog found exclusively on InsuranceJournal.com. Divorce: In personal lines, it is important to verify that the person requesting a change in coverage has the authority. This can be difficult in divorces. Some states have a rule that when divorcing, neither spouse can cancel or modify insurance coverage, including not paying the premium, without advance notification to the other party. This rule may offer some protection to agencies, but it is better for the agency to ask questions of who is requesting the change and why the change is being made. Then, document the file thoroughly. Binding Authority: For an agency to properly bind a risk, the risk must absolutely fit within the agency’s binding guidelines. This does not mean underwriting guidelines nor qualifying for a quote. Binding guidelines generally have two major components: the policy limit and time. The policy limit can be property and liability. Second, agencies have to pay attention to the time allowed and limits.

Everyone who writes binders or binds without a binder should have a copy of each company’s binding authority at all times, and refer to it regularly. Claims: No one in an agency should convey that a claim will be paid or not be paid. An insurance contract is between the insured and the insurance company. Behind the scenes, an agency may influence whether a claim should be paid, but they should never communicate directly with an insured as to whether the claim should be paid. This includes repeating what a claims adjuster, especially an independent adjuster, tells the agency. Disclaimers: Most agencies have standard voice mail disclaimers that state, “No coverage can be bound or obtained by leaving a voice mail.” This creates two E&O exposures. First, many agencies do not mandate that all office phones use the disclaimer. The second exposure is created by cell phones. Many producers buy their own phones, so they do not want this disclaimer on their personal phones. Use the same voice mail disclaimer on all devices, regardless of the device type or who owns the device.

N14 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

ing risk appetites. “Larger agencies, those $100 million-plus size accounts, seem to be an area that many companies are de-emphasizing from an E&O standpoint,” he says. Fireman’s Fund’s Mann sees the industry assessing health care reform and how that will impact agencies that sell health insurance and employee benefits. “Agents are changing fee structures, and they are really trying to determine how their business models are going to continue going forward,” Mann says. “That’s going to the emphasis of agency management over the next 12 months irrespective of the elections.” The services agents provide to insureds could change when administrating enrollments, he says. “They could be providing consulting services; they could be advising exchanges that the employers are participating in, and so that is a little bit different than what their traditional role has been. It’s more of a consultative role versus a sales role.” From an agency E&O standpoint, that change could be questionable. “The coverage that we provide now will provide adequate coverage for that exposure,” Mann says. “That’s good, but as we go forward, we are going to continue monitoring that portion of the industry to make sure that our coverage language properly addresses that area.” Swiss Re’s Sally says she, too, will be watching how an insurance agent’s role will change under the new health care law. “What will the role of a ‘navigator’ be, and will insurance agencies be involved in that process somehow? And if so, what will their legal obligations be?” she asks. Sally says carriers also will be monitoring changes in technology, although those are the most difficult to predict. Above all else, carriers will be monitoring the effect of market cycles on insurance agency E&O, she says. “Over past market cycles, we had experienced that the frequency of claims against insurance agents increased when the market hardened,” she says. “As the overall P/C market hardens, there’s lack of availability of coverage, restricted terms and conditions, and that leads back to allegations of failure to provide coverage. So that’s something that we try to monitor and keep our hands on the pulse.” www.insurancejournal.com

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Professional Liability Closing the Liability Gap Underserved Fiduciary Market Creates Rich Opportunities for Agents

By John Trefry

hen it comes to fiduciary liability, ignorance is risk. Many fiduciaries of company-sponsored retirement and health plans are unaware that they face significant exposures in connection with their duties. A Travelers survey provides evidence of this “awareness gap.” More than 250 insurance professionals surveyed said that more than half of their clients (54 percent) generally do not understand if they have a fiduciary duty. When asked to name the top three reasons clients do not purchase fiduciary liability coverage, nearly 80 percent said, “Clients do not feel like there is an exposure.” Many of those clients may be mistaken. Under the Employee Retirement Income

Security Act of 1974 (ERISA), anyone who has responsibility for managing employee benefit plan assets or has discretionary responsibility for a plan’s administration is considered a fiduciary. Further, fiduciaries face personal liability, meaning their own assets could be at risk, for any breach of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA. Such liability can be expensive. Consider the $35 million judgment awarded by a Missouri federal district court, in Tussey v. ABB Inc., 2012 WL 1113291 (WD MO 2012), against fiduciaries of a private company’s 401(k) plan for numerous violations of ERISA, including a failure to monitor recordkeeping fees, causing the plan to pay excessive fees, and a failure to comply with the plan’s governing documents. Too many fiduciaries are operating without the knowledge they need to protect themselves, the survey results indicate. While agents are in a prime position to help educate and protect their clients with insurance solutions, they need to be proactive. Less than half of agents and brokers surveyed (46 percent) are offering quotes for fiduciary liability protection. Of those who do, however, nearly half of clients purchased coverage, demonstrating a high level of receptivity.

N16 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

Fiduciary liability insurance typically protects a company, its benefit plans, and its directors, officers and employees from litigation involving actual or alleged mismanagement breach of fiduciary duty and/or negligent administration of employee benefit plans. The top benefit, according to 68 percent of those surveyed, is that it covers the legal costs of defending the claims. Legal and Financial Exposure While agents may understand the risks of being a fiduciary and the coverage benefits, they need to communicate that information to clients and prospects. They can begin by ensuring that clients understand their potential legal and financial exposure. In 2011, the Department of Labor collected $1.38 billion in cases involving ERISA claims. Three-quarters of the 3,472 closed investigations included a monetary recovery. In a Towers Watson survey of organizations that experienced a fiduciary liability claim, the average settlement was $994,000, with average defense costs reaching $365,000. Agents also can provide in-depth information and dispel myths. Of course, agents may need to first brush up on their knowledge to become better advisors and salespeople. Forty-five percent of survey participants said “helping me better understand exposures” was one of the top three ways insurers could help increase fiduciary liability sales. continued on page N18

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Professional Liability Continued from page N16

Other options include seeking out a provider who can be a partner in advising and supporting clients, taking a class or finding a specialist who can train multiple people at their agency. Another option includes looking at compelling claims examples. One-third of survey respondents said providing claims

examples are the No. 1 supporting item needed to sell more coverage. Examples of actual claims are very effective in demonstrating the types of situations fiduciaries might encounter, illustrating the importance of managing fiduciary risk or showing the often-high costs of lawsuits.

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Risk Landscape Agents also can share with their prospects and clients the following points, which help to illustrate the fiduciary risk landscape. Plaintiffs often prevail: ERISA lawsuits are prevalent, expensive and frequently won by plaintiffs. Reliance can be risky: There are residual duties and potential liabilities associated with reliance on the services of outside investment managers. “Unsafe” Harbors: ERISA section 404(c)’s “safe harbor” protections require more than offering a diverse selection of mutual funds, and the protections aren’t as broad as some think. Focus on 401(k) plans: The Department of Labor and Internal Revenue Service are showing signs of greater interest in ensuring 401(k) plan compliance. Exposures go beyond investment choices: Imprudent investing is not the only exposure of ERISA plan fiduciaries. Workplace volatility adds perils: Employer’s exposure to ERISA lawsuits may be increased by employee layoffs, terminations and benefit plan changes. Follow the Code: Failure to comply with the employee benefit plan provisions of the Internal Revenue Code can be costly. The right insurance is critical: Unlike fiduciary liability insurance, most forms of insurance, including employee benefits liability and ERISA fidelity bonds, do not cover liability for breach of fiduciary duty under ERISA. With the challenges facing fiduciaries today, agents and other insurance professionals have an important role to play in raising awareness, promoting education and providing the right insurance solutions in an area that’s often poorly understood. Trefry is the fiduciary liability product manager for Travelers Bond & Financial Products.

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N18CDS16063.indd | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012 1

In one case involving a manufacturing company, the Department of Labor alleged that the trustees of an Employee Stock Ownership Plan (ESOP) violated ERISA by the sale of non-publicly traded stock from the ESOP at a price below fair market value. It cost about $800,000 to resolve the matter.

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SPECIAL REPORT

Professional Liability Hospital, Physician Professional Liability Undergoing Change: Aon

he way health care is delivered and financed is undergoing major change, and this is reshaping the risks that hospitals and physicians face on a daily basis. Among other challenges, hospital risk managers are grappling with greater physician integration and changes in state legislation that influence professional liability costs, according to an annual industry study by Aon Risk Solutions. The 13th annual “Aon/ASHRM Hospital and Physician Professional Liability Benchmark” report identifies other trends as well, including a rise in hospitals using their own self-insurance to provide medical malpractice coverage. The report captures key statistics on the performance of the hospital professional liability market, including: The projected loss rate for hospital professional liability is $3,030 per occupied bed equivalent (OBE) for events occurring in 2013. The frequency of claims is projected to be 1.93 percent per OBE, and the severity of claims is expected to be $157,000 per claim.

Projected loss rate for physician professional liability is $7,510 per class 1 physician for events occurring in 2013. The frequency of claims is projected to be 3.81 percent per class 1 physician, and the severity of claims is expected to be $197,000 per claim. The projected loss rate for obstetrics is $193 per birth; surgery is $124 per in-patient surgery; the emergency department is $7.04 per visit. Health care-acquired conditions such as infections, injuries, medication errors, objects left in surgery and pressure ulcers account for 29 percent of total hospital professional liability costs. The hospital professional liability benchmark database includes claims from 48 states. Florida ($7,660), Pennsylvania ($5,150), New York ($4,080) and New Mexico ($4,050) have the highest projected loss rate for 2013. Indiana ($950), Minnesota and New Jersey ($1,100) and Texas ($1,660) have the lowest

projected loss rate for 2013. Analysis provided by The Beazley Group shows the pediatric and academic health care systems exhibit lower frequency but significantly higher severity compared to other systems. State Legislation New types of state legislation are emerging as the Affordable Care Act is implemented. Two states recently enacted laws that address professional liability, or medical malpractice, and are focused on delivering quick and fair compensation to patients suffering a medical injury. Massachusetts enacted a law that adopts a mandatory 180-day cooling off period, where providers are given the opportunity to disclose the event, offer an apology and negotiate compensation. New Hampshire lawmakers passed an act establishing an early offer alternative in medical injury claims. The program provides patients the option to settle medical liability claims within 90 days of injury. “These states are at the forefront in changing the environment for health care providers as the laws move away from traditional tort reforms, such as caps on non-economic damages, and move toward restructuring the patient/provider relationship,” said Erik Johnson, Health Care Practice leader for Aon’s Actuarial and Analytics Practice and author of the analysis. “This legislative trend continued on page N22

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News & Markets

Hospital, continued from page N20

Top 10 Workplace Harassment Settlements

uring the past year, workplace harassment and discrimination complaints have cost employers more than $356 million in lawsuit settlement payments and judgments for monetary damages, according to eBossWatch. Sexual harassment is the most common type of workplace complaint leading to the employer paying a sizable settlement or jury award. Citing as sources and reports from news media and attorneys across the country, as well as reports from the federal Equal Employment Opportunity Commission (EEOC), eBossWatch compiled the following list of the top 10 largest workplace harassment and discrimination lawsuit settlements and judgments from the past 12 months. The list includes the following: 1. Mercy General Hospital (Sacramento, Calif.) will pay $168 million in a sexual harassment lawsuit judgment. 2. ArcelorMittal (Buffalo, N.Y.) will pay $25 million in a race discrimination lawsuit judgment.

3. Dr Pepper Snapple Group (Chicago, Ill.) will pay $18.3 million in an age discrimination lawsuit judgment. 4. YRC/Yellow Transportation (Chicago Ridge, Ill.) will pay $11 million to settle an EEOC race harassment and discrimination lawsuit. 5. Tesoro Refining and Marketing Co. (Los Angeles) will pay $8.5 million in a disability discrimination lawsuit judgment. 6. Cook County (Chicago) will pay $7.6 million in a race discrimination lawsuit judgment. 7. Lennox Industries (Richardson, Texas) will pay $6.2 million to settle an age discrimination lawsuit. 8. Aaron’s Inc. (Fairview Heights, Ill.) will pay $6 million to settle a sexual harassment lawsuit. 9. Sears (Sacramento, Calif.) will pay $5.2 million in a race discrimination lawsuit judgment. 10. AT&T (Kansas City, Mo.) will pay $5 million in a religious discrimination lawsuit judgment.

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shares a synergy with the health care reform legislation in that they are focused on innovations that would promote efficiencies and unlock savings that are currently ingrained within the system.” Physician Employment Trends Hospitals are employing more physicians and using self-insurance facilities to provide medical malpractice insurance coverage. Hospitals point to cost savings, streamlined claim defense and uniformity of risk management practices as benefits of such a strategy. Yet self-insurance involves unique challenges, such as consideration of physician tail and prior acts coverage. According to survey respondents, the majority of health care systems provide tail coverage for physicians leaving the organization, but most (67 percent) do not respond to claims related to prior acts that occurred before employment. “The ability to mitigate, transfer and/or manage the current traditional risks facing health care providers should be considered an assumptive core competency of health care providers and their business partners,” said Ron Calhoun, managing director at Aon. “The new health care landscape will be impacted by a range of developments, such as new alignments across all providers and care settings, and among multi-hospital and multi-physician groups; payerprovider links for risk sharing; data integration and patient management; and financial and data transparency. IT infrastructure and process improvement will be critical to success.” “This challenging environment increases the pressure on health care providers to seek the most appropriate and cost-effective insurance programs,” said Dominic Colaizzo, chairman of Aon Risk Solutions’ Health Care Practice. www.insurancejournal.com

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Closer Look

Cyber Liability Essentials: The Risk Landscape of Cyberspace

illiam Gibson coined the phrase “cyberspace” in his popular science fiction novel “Neuromancer” “to describe the real and cultural dynamics of people and machines working within the confines of computer-based By Steven Plitt networks.” Alexan-der C. Gavis, The Offering and Distribution of Securities in Cyberspace: A Review of Regulatory and Industry Initiatives, 52 Bus. Law 317, 319 n.6 (1996) (quoting G. Burgess Allison, The Lawyer’s Guide to the Internet 331 (1995)). Because of the rise of e-commerce, cyberspace perils pose significant litigation exposure. There are a panoply of risks that may arise in the third-party tort liability insurance context. E-commerce risks can be segregated into two categories: 1) media risks and 2) system risks. Media Risk A “media risk” arises primarily from the content of a website. Media risks include defamation or trade libel, which can be

caused by materials being knowingly published by webpage owners or maliciously inserted onto a webpage by hackers, invasions of the right of privacy including theft of consumer data, misuse of private customer information, false-light publications, and the use of the name or image of another without permission. In one case, a competitor sued a Florida corporation for invasion of privacy because it had placed negative information about the competitor on its website. See Lofton v. Turbine Design Inc., 100 F.Supp.2d 404 (N.D. Miss. 2000). The Court ruled in favor of the defendant, noting that the maintenance of a passive website does not confer personal jurisdiction. A large internet retailer recently faced invasion of privacy claims based on its use of cookies to obtain personal information about its users’ internet activities. See Supnick v. Amazon.com, 2000 U.S. Dist. LEXIS 7073 (W.D. Wash. 2000) (certifying class action against Amazon.com and Alexa Internet based on their practice of obtaining personal information about their users). Additionally, a company that had sought to improve its pro-

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cessing of internet payments by purchasing credit reports of its users faced a privacy action. See Kvalheim v. CheckFree Corp., 2000 WL 209058 (S.D. Ala. 2000). Media risks involve potential infringements of trademark, copyright, trade dress, trade secrets or other intellectual property, and may involve violations of unfair trade practices or consumer protection statutes, antitrust violations, and restraints of trade. System Risk A “system risk” arises because e-commerce hardware or data of third-parties that can result from malicious code placement into a computer system by hackers or through computer viruses. A system risk also can include liability for losses to third-parties caused by their inability to access the computer system due to a hardware or software failure, or what is commonly called a denial-of-service attack or a distributed denial-of-service attack. This makes a computer research unavailable to its intended user. Some commercial general liability (CGL) policies may provide advertising injury/personal

injury coverage for intellectual property, defamation/ disparagement, and other tort claims that may result from cyberspace activities. However, CGL policies do not generally provide coverage for every aspect of cyberspace risks. Loss of electronically stored data is not covered under the property damage provisions of a CGL policy because electronic data is not covered tangible property. See, e.g., Peoples Telephone Co. Inc. v. Hartford Fire Ins. Co., 36 F.Supp.2d 1335 (S.D. Fla. 1997). Because CGL policies are not principally designed to address internet risks, an insured business needs to consider supplementing the policy with express cyberspace coverage. Cyber Claims Cyberspace activity commonly gives rise to invasion of privacy claims. The inherently impersonal nature of e-commerce transactions has led many companies to

www.insurancejournal.com 10/11/12 8:59 AM

Risky? take affirmative steps to gather information about their customers, oftentimes potentially invading an individual’s privacy interests. One corporation may sue a competitor for invasion of privacy because the competitor has placed negative information about the target corporation on its website. See Lofton v. Turbine Design Inc., 100 F.Supp.2d 404 (N.D. Miss. 2000). E-commerce also has produced an increasing number of defamation and disparagement claims. This raises questions of whether a CGL policy will provide coverage for online defamation and disparagement, and whether the insured’s operation falls within the “broadcasters or publishers” exclusion. A cyberspace endorsement would eliminate this exclusion. Various trademark lawsuits have been brought recently against persons or companies using domain names suggesting that the company is affiliated with or sponsors the website. To combat this, in 1995, the InterNIC (a registered service mark of the U.S. Department of Commerce that assists with registering domain names) adopted a policy requiring domain-name applicants to make warranties and representations about the applicant’s ability to use the name without infringing upon a third-party’s trademark or other intellectual property rights. Although this process assists companies in curtailing piracy by cyber squatters, it does not affect disputes over the protection available to a federally registered user who may wish to expand its trademark usage beyond a limited geographic area. The AntiCybersquatting Consumer Protection Act, 15 U.S.C.A. § 1125(d) establishes a cause of action for registering, trafficking in, or using a domain name confusingly similar to, or dilutive of, a trademark or personal name. The traditional CGL policy forms contain a number of coverage gaps that increase the probability that no coverage will exist for a significant number of cyber-related claims.

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News & Markets New Program Offers Tenant Protection for Rental Property Owners

SC, an insurance and risk management services and products provider for large and small financial institutions, has launched a Tenant Policy Offering (TPO) protection program for owners of rental properties. TPO pairs job-loss/unemployment protection with tenant liability insurance coverage. The new product offers tenants protection against the loss of income from unemployment while simultaneously protecting the tenant’s and the landlord’s liability. Under the program, the owner or landlord of the property pays the premium on the liability insurance and job-loss program. “Tenants know they will receive income even if they lose their job, and landlords know that the risk of losing rental income or suffering a liability loss is much lower with the TPO program,” explains Don

Curtis, senior vice president of OSC, a financial risk management and lender protection company. The program is designed to provide equity investors in residential real estate portfolios, hedge funds, financial institutions, apartment owners, property managers, lenders and mortgage servicing companies an added protection from common risks that can jeopardize the cash flow of rental properties. The liability policy insures the tenant’s premises, similar to renters’ insurance coverage. Optional features include coverage of contents and special risks such as mold, pets and bed bugs. The policy is issued

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‘The program will help keep rental properties occupied, help maintain property conditions and will contribute to the revitalization and stabilization of neighborhoods.’ job-loss protection and homeowner’s insurance package of products. OSC and its parent Breckenridge Insurance Group also market a stand-alone two-year home warranty program that covers appliances and major structural defects for home buyers. OSC is concentrating on developing a group of products that link protection for lenders, property owners, investors and consumers into property protection packages.

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by an A-rated insurance carrier. The job loss/unemployment benefit can provide as much as $2,500 per month for up to one year. “The program will help keep rental properties occupied, help maintain property conditions and will contribute to the revitalization and stabilization of neighborhoods,” Curtis says. Ted Lamb, COO of OSC, says, TPO is a natural outgrowth of OSC’s home warranty,

9/7/12 11:43 9:50 AM 9/11/12

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NATIONAL COVERAGE

MyNewMarkets Limousine Service Companies

Farm Labor Workers’ Compensation Program

Market Detail: Western Experts in Transportation (www. westerndwf.com) can provide insurance for auto liability; auto physical damage; primary and excess; self-insured retentions; deductible programs; general liability; fleets; and owners/operators. Available limits: Maximum $5 million Carrier: Zurich in North America States: All states except Alaska, Hawaii, Mass., N.Y., and Wyo. Contact: Amy Perkins at 800-843-2430 or email: aperkins. fergu08@insuremail.net

Market Detail: General Agency Services Inc.’s (www. gasinsurance.net) farm labor workers’ compensation program is specifically designed for row crops, orchards, vineyards, and produce packing. Available limits: As needed Carrier: PMA Insurance Group States: Ariz. and Calif. Contact: Eric Duell at 626-523-2412 or email agentericduell@ paula.com

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Security Guard, Alarm and Investigator Program With Auto Market Detail: Izzo Insurance (www.IzzoInsurance.com) has added an A-rated admitted auto market for security guards and investigators to complement their portfolio of liability and workers’ compensation carriers. The program is offered in every state and includes broadened policy definitions. Izzo writes all lines of business for security guard, alarm and investigative industry including general liability, workers’ compensation, auto, fidelity bonds and employment practices liability insurance (EPLI). Available limits: Minimum $2,500 Carrier: Fireman’s Fund Group States: All states except Alaska Contact: Kelly Izzo at 800-800-1704 or email: KellyIzzo@ IzzoInsurance.com

Equipment Rental and Sales Market Detail: Hays Companies’ (www. hayscompanies.com) program is for aerial equipment rental yards (rental/sales/service) without an operator. They can handle other kinds of equipment such as forklifts, generators, compressors etc., but the majority of revenue needs to be generated from aerials/ scissor lifts. Hays can provide general liability, umbrella, auto, property and inland marine. Carrier is A-rated. Requirements include: acord; equipment list; three to five years loss runs ;copy of rental agreement (front and back side); and maintenance checklists. Available limits: As needed Carrier: Unable to disclose, non-admitted States: All states except Alaska, Hawaii, and N.Y. Contact: Debbie Szyszka at 312-376-8648 or e-mail: dszyszka@hayscompanies.com

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7/24/12 12:14 PM 7/25/12 8:34| AM November 5, 2012 INSURANCE JOURNAL-NATIONAL REGION N27

NATIONAL COVERAGE

News & Markets Q2 Direct Premium Written Up Nearly 5% for P/C Companies

verall, property/casualty insurance companies continued to serve their clients during an increased number of catastrophic events in 2011 as well as the tough economic conditions that have defined the better part of the past decade. Perhaps as a reward for persevering in the face of adversity, the P/C market is showing signs of hardening. Through the second quarter 2012, total direct premium written (DPW) for all P/C insurers is up By Douglas A. 4.65 percent compared to Powell DPW through second quarter 2011. This increase in DPW represents nearly $11.4 billion in premium growth, of which approximately $4.4 billion is attrib-

uted to the Top 25 P/C insurers in terms of direct premium growth. For the six months ending June 30, 2012, P/C companies comprising the Top 25 in terms of direct premium growth leveraged their experience and increased their DPW nearly 8.8 percent over the six months ending June 30, 2011. This continues the Top 25 insurersâ&#x20AC;&#x2122; impressive display of premium growth, financial stability and execution. The Top 25 accounted for almost 39 percent of the total DPW growth for the P/C insurance industry. In contrast, insurers that comprise the rest of the industry reported an increase in DPW growth of only about 3.6 percent, or approximately $7 billion, period-over-period. In total, DPW for the P/C industry grew 4.65 percent, nearly $11.4 billion.

As mentioned last quarter, if P/C insurers can continue to demonstrate the same rate of premium growth for the remainder of 2012, total DPW will exceed $500 billion for the year. In fact, when analyzing the second quarter and year-end results from the past 10 years, if premiums hold to historical patterns, year-end DPW would total $517 billion for 2012, the highest level of DPW ever reported by the P/C industry. Powell is a senior financial analyst with Demotech Inc. and possesses extensive experience in monitoring, reviewing and assessing the financial stability of insurers. He also acts as a liaison on behalf of Demotech and its clients in correspondence with various government agencies, insurance industry associations, insureds and the media. Email questions and comments to dpowell@demotech.com. You can also follow him on Twitter â&#x20AC;&#x201C; @powdoug.

Top 25 Property/Casualty Companies

Based Upon Dollar Amount of Direct Premium Written (DPW) Growth Year-to-Date Results June 30, 2012 Versus June 30, 2011 DPW Company Name

Continental Casualty Co. GEICO Casualty Co. Allstate Fire and Casualty Insurance Co. ACE American Insurance Co. LM General Insurance Co. State Farm Fire and Casualty Co. Factory Mutual Insurance Co. Liberty Mutual Insurance Co. GEICO General Insurance Co. Travelers Property Casualty Co. of America Atlantic Specialty Insurance Co. Zurich American Insurance Co. State Farm Mutual Automobile Insurance Co. LM Insurance Corp. United Services Automobile Association USAA Casualty Insurance Co. USAA General Indemnity Co. Foremost Insurance Co. Garrison Property and Casualty Insurance Co. Texas Farmers Insurance Co. Starr Indemnity & Liability Co. Nationwide Affinity Insurance Co. of America Erie Insurance Exchange QBE Specialty Insurance Co. Companion Property and Casualty Insurance Co. Top 25 by DPW Growth All Other P/C Companies Total

6/30/2012

2,492,377,463 592,495,314 2,228,583,072 1,913,804,325 315,056,857 8,275,249,352 1,420,679,701 2,495,425,017 3,264,617,824 2,142,544,686 165,283,068 2,531,003,719 15,420,498,456 384,578,486 3,097,882,427 2,088,738,741 624,210,098 801,780,330 463,335,057 295,267,454 483,580,312 403,198,029 1,872,465,618 451,255,606 350,057,417 54,573,968,429 200,974,486,551 255,548,454,980

DPW 6/30/2011

2,097,601,077 286,193,169 1,961,708,087 1,666,458,771 83,739,594 8,054,827,547 1,209,976,877 2,286,487,698 3,073,772,459 1,967,881,387 728,863 2,368,320,175 15,260,030,311 236,217,745 2,954,026,958 1,960,232,905 500,876,551 680,221,225 341,918,669 175,676,448 368,472,632 289,822,455 1,761,160,035 343,636,164 246,527,160 50,176,514,962 194,018,506,583 244,195,021,545

$ Growth

394,776,386 306,302,145 266,874,985 247,345,554 231,317,263 220,421,805 210,702,824 208,937,319 190,845,365 174,663,299 164,554,205 162,683,544 160,468,145 148,360,741 143,855,469 128,505,836 123,333,547 121,559,105 121,416,388 119,591,006 115,107,680 113,375,574 111,305,583 107,619,442 103,530,257 4,397,453,467 6,955,979,968 11,353,433,435

% Growth

18.82% 107.03% 13.60% 14.84% 276.23% 2.74% 17.41% 9.14% 6.21% 8.88% 22576.84% 6.87% 1.05% 62.81% 4.87% 6.56% 24.62% 17.87% 35.51% 68.07% 31.24% 39.12% 6.32% 31.32% 42.00% 8.76% 3.59% 4.65%

Data Source: The National Association of Insurance Commissioners, Kansas City, Missouri, by permission. Information derived from an SNL product. The NAIC and SNL do not endorse any analysis or conclusion based upon the use of its data.

N28 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

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Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: http://www.insurancejournal.com/adshowcase/ Abacus Insurance Brokers, Inc www.abacus.net W33 Abram Interstate www.abraminterstate.com W16 ACE Insurance www.acelimited.com W31; SC13; SE13; E13; M13 Agency Ideas www.agencyideas.com N20 Agent Support Network of America www.asnoa.com W3; M3 American Integrity Insurance Group www.aiicfl.com SE27 American Safety Insurance Service, Inc. www.amsafety.com W7; SC7; SE7; E7; M7 Anderson & Murison, Inc. www.andersonmurison.com N25 Applied Underwriters www.applieduw.com W11; SC11; SE11; E3; M11 Arrowhead General Insurance Agency www.arrowheadgrp.com W21 Astonish Results www.astonishresults.com W10; SC14; SE14; E14; M14 Catlin US www.catlinus.com N29 Century National www.cnico.com W19 Charity First Insurance Services, Inc. www.charityfirst.com N5 Chubb Corporate www.chubb.com W9; SC9; SE9; E9; M9 CNA Insurance www.cna.com W25; SC23; SE25; E17; M22 CSUF Center for Insurance Studies www.centerforinsurancestudies.com W39 Demotech www.demotech.com N21 First American Specialty Insurance Company www.firstam.com W17

Fujitsu PFU www.fcpa.fujitsu.com N19 General Star www.generalstar.com W29; SE17; E15; M15 Great American Insurance Group www.greatamericaninsurancegroup.com W76; SC64; SE60; E56; M56 Great American- Specialty Human Services Division www.specialtyhumanservices.com N22 Insurance Technologies Corp. www.insurancewebsitebuilder.com N15 Ironshore www.ironshore.com W35; SC19; SE19; E19; M22 JM Wilson www.jmwilson.com SE16; M20 K&B Underwriters www.kbunderwriters.com N27 Liberty Mutual www.libertymutual.com N2, N3; W3 M.J. Hall & Company, Inc. www.mjhallandcompany.com W18 Monarch E&S Insurance Services www.monarchexcess.com W13 NAS Insurance Services, Inc. www.nasinsurance.com N17 Nautilus Insurance Company www.nautilusinsgroup.com N9 Oak Street Funding www.oakstreetfunding.com W37; SC29; SE15; E21; M17 Pacific Gateway Insurance Services www.pgiainsurance.com W15 Partners Specialty Group www.psgins.com N25 PersonalUmbrella.Com www.personalumbrella.com W5; SC5; SE5; E56; M56 Philadelphia Insurance www.phly.com W27; SC17; SE23; E11; M21 Pilot www.pilotcat.com N13

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Preferred Property Program www.umbrellaprogram.com N6 PULIC - Professional Underwriters Liability Insurance Company www.pulic.com N26 R. E. Chaix www.rechaix.com W22 RiskMeter.com www.riskmeter.com N18 Scottsdale Insurance Company www.scottsdaleins.com W2; SC2; SE2; E2; M2 Southern Insurance Underwriters www.siuins.com SE18 State Compensation Insurance Fund www.statefundca.com W1 Tejas American General Agency www.taga1.com SC3 Texas Mutual Insurance Company www.texasmutual.com SC15 Texas Surplus Lines Association www.tsla.org SC21 The Sullivan Group www.gjs.com N23 Tuscano Agency www.tuscanopro.com SE21 United Contractors Insurance Agency www.ucisg.com N16 Universal North America www.uihna.com W23; SC25; SE3 Volunteers Insurance Services Association, Inc. www.cimaworld.com N24 Western World Insurance Company www.westernworld.com N7 Zurich Insurance Company www.zurichna.com W75; SC63; SE59; E55; M55

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ris Ch by

Insurance Journal’s Academy of Insurance Presents:

s gg Bo

Insurance, Risk & Risk Management Is “risk” the enemy or is it necessary? What is risk management? How does insurance fit into the concept of risk management? This book defines risk, discusses the theory of risk management, details the risk management process, and delves into insurance and its rightful place within risk management. All experience levels can benefit from this book.

About the Author Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS is the Director of Education with Insurance Journal’s Academy of Insurance. With more than 22 years insurance and risk management experience, Boggs’ background includes loss control, insurance production, consulting, and teaching.

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IDEA EXCHANGE

Closing Quote The Arbitration Trap

By Daniel McNeel Lane Jr.

or decades now, your company has reinsured a substantial portion of its risk under reinsurance contracts (treaties) negotiated by executives who retired long ago. But just a few years ago, your reinsurer — now in run-off and no longer looking for your business — changed several of its long-standing positions as to liability under the treaty and then commenced an arbitration to recoup millions of dollars in claims it had previously paid. Today, after your company incurred heavy discovery costs and attorneys’ fees, and many of your employees and former employees were deposed to testify at a multi-week hearing, the dispute has been submitted for decision to a three-person arbitration panel. Each party appointed one of the panel’s arbitrators, but by agreement, the umpire was selected from a list the reinsurer provided after it won an odd-even guess on the closing price of a major stock index. The situation is stark. The financial fortunes of your company will turn upon the sole judgment of a long-retired reinsurance executive who now makes his money as a full-time umpire selected by reinsurers. And when he decides this case, your company will have no possibility of appeal whatsoever, absent some unlikely egregious misconduct. Rather than lamenting, you should be considering how to avoid such a scenario in the future. Because, even as the umpire is deciding your dispute, a team within your company is negotiating another reinsurance treaty focusing on premium rates, scope of coverage and numerous other “business” terms. But they are likely to trade away your company’s ability to enforce those terms by agreeing to include an arbitration provision that invariably favors the reinsurer. Your company does not have to agree to an arbitration provision and should not do so unless it receives some value for doing so. Traditional justifications for arbitration no longer warrant including such a provision. Don’t believe the canard that arbitration is necessarily less costly than litigation. Arbitration panels are reluctant to limit discovery unless the parties agree to do so, and oppressive discovery tactics are a tool your reinsurer can use to inflict cost and extract a settlement. It’s the insurer that maintains the majority of potentially responsive documents in a reinsurance dispute, and they may have to be gathered from numerous corners of a vast business enterprise. If the reinsurer is in run-off, it is likely to have even fewer documents, and thus has even less incentive to limit discovery. Today it is not uncommon to produce millions of documents in an arbitration proceeding, and your company will have to pay for them to be gathered, processed and reviewed. It’s a misconception that arbitration is necessarily faster

N32 | INSURANCE JOURNAL-NATIONAL REGION November 5, 2012

than litigation. An astonishingly small number of arbitrators and umpires serve on a majority of reinsurance arbitration panels. Reconciling their crowded schedules can result in hearing dates set far in the future. The burden of discovery is likely to ensure that the dispute is not resolved any more quickly. In addition to paying costs of discovery, your company will pay for its separate arbitrator and half of the umpire’s time. Another misconception is that outcomes in arbitration are likely Instead of an to be as just as in litigation. Recent court decisions establish that there arbitration is almost no way to overturn an clause, include arbitration decision based on bias a provision absent egregious circumstances. Even if the umpire completely selecting the misunderstands and misapplies the law, or unjustifiably disregards venue and your sound legal positions, remedy waiving a jury. is unlikely because he does not have to disclose his reasoning. Finally, there is an alternative that works. Instead of including an arbitration clause, include a provision selecting the venue and waiving a jury. That way, a judge will decide the dispute based on the facts and the law. If knowledge of industry custom and practice is necessary to decide the case, you can present such evidence through an expert. If the judge makes an erroneous ruling of law, your company has the right to appeal it. And your company won’t have to pay separately for the judge to hear and decide the case. If the judge believes the case should be settled quickly, the parties will be ordered to mediation. McNeel Lane Jr. is a partner at Akin Gump Strauss Hauer & Feld LLP. His practice represents insurers in class action litigation, reinsurance arbitration proceedings and other disputes. Email: Nlane@akingump.com. Phone: 210-281-7070. www.insurancejournal.com

www.insurancejournal.com

November 5, 2012 INSURANCE JOURNAL-WEST REGION | 75

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