Insurance Journal - Sept 9, 2013 by Insurance Journal

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Inside This Issue

On The Cover

Special Report:

Intellectual Property

September 9, 2013 • Vol. 91 No. 17 • West

NATIONAL COVERAGE

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IDEA EXCHANGE

10 Workers’ Compensation Benefits, Employer Costs Rise

W1 Los Angeles Councilman Proposes Quake Building Inventory

W2 Science Matters: Hotspot Volcanoes: Earthquake Risk in Hawaii

10 Most People Believe World Is Getting Riskier: Swiss Re

W1 Family of DUI Victims Sues Montana Bar

W10 Legal Notes: California Supreme Court Expands Unfair Competition Law to Insurers

14 Premium Increases Under Obamacare Not as High as Expected

W1 Driver’s Licenses for Immigrants Declining in New Mexico

16 Spotlight: Top 25 Workers’ Comp Insurers 19 Commercial Rate Hikes Continue; Workers’ Comp Profit Ahead: Moody’s 20 Closer Look: Challenges Remain Despite Improvements in Workers’ Comp 22

Special Report: Intellectual Property CEOs, Insurers Finally Ready to Embrace Intellectual Property Insurance?

24 Helping Clients Understand Risks of Handling Credit Cards

6 | INSURANCE JOURNAL-WEST September 9, 2013

W1 Idaho Man Sues Experian, Says Credit Report Wrong W4 Yosemite May Be Harbinger of California’s Wildfire Potential W8 Nevada Legislator Wants Names of Doctors Who Overprescribe

27 Product Safety Recalls Generating Greater Insurance Risks 30 The Competitive Advantage: Chris Burand 32 Insurance Coverage for Discounting the Price of Goods for Sale? 34 Minding Your Business: Catherine Oak & Kelsey Johnson 38 Closing Quote: Winning Share & Loyalty in Auto Insurance

26 Spotlight: 10 Things to Know About Residential Contractors 28 Market & Financial Survey Reveals an Optimistic Marketplace: MarshBerry

DEPARTMENTS 8 Opening Note W6 People 12 Business Moves 15 Declarations 15 Figures 35 MyNewMarkets www.insurancejournal.com

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Opening Note Knowing Their Business

nderstanding the exposures of commercial clientele is not only important in reducing an agency’s errors and omissions risk; it’s important to the agency’s and carrier’s bottom line, too. Small commercial lines insurance customers most value having an insurance agent or broker who completely understands their individual business and helps them assess, and manage, their risk. The highest-ranked small business insurers deliver on both of these metrics for 60 percent of their customers, compared with the lowest-ranked insurers at 33 percent, according to a new study by J.D. Power, “2013 U.S. Small Business Commercial Insurance Study.” The study examines overall customer satisfaction, insurance shopping and purchase behavior among small business commercial insurance customers with 50 or fewer employees. Overall satisfaction is comprised of five factors (in order of importance): interaction; policy offerings; price; billing and payment; and claims. The overall customer satisfaction among small business customers is 777 on a 1,000-point scale. The study found that satisfaction is significantly Small businesses that receive higher when an agent or regular face-to-face contact broker understands their are more likely to be satisfied customer’s business and provides guidance regardand loyal customers. ing risk (835) than when neither of these metrics is met (645). Policy offerings — not price — is the primary reason small business customers select an insurer while the level of service is the primary reason they stay with their insurer for more than two years. Among the five factors impacting satisfaction, interaction has the highest importance weight at 29 percent, followed by policy offerings at 26 percent. Interaction satisfaction is highest when customers interact with an agent or broker in person (854). In contrast, satisfaction is significantly lower when customers interact via email (819). Customer satisfaction is highest among small businesses with 11-50 employees, compared to businesses with four or fewer employees (790 vs. 769, respectively). Higher scores among larger businesses are influenced by agents and brokers spending more time with these key accounts. Consultation via face-to-face interactions is the gateway to better understanding a customer’s needs. Small businesses that receive regular in-person contact with agents are more likely to understand their coverage, its value and the reason for a price adjustment should one occur. Plus, these customers are also more likely to be satisfied and loyal to their agents and insurers.

Andrea Wells Editor-in-Chief

8 | INSURANCE JOURNAL-NATIONAL September 9, 2013

EDITORIAL Editor-in-Chief Andrea Wells | awells@insurancejournal.com 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 Senior Editor Susanne Sclafane | ssclafane@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Chris Burand, Steven Plitt Contributing Writers Regina Anderson, James B. Auden, Tanguy Caitlin, Burke Coleman, Nick Economidis, William Gausewitz, Steven J. Groeschen, Tommy McDonald, Claire Pontbriand, Sharmila Ray, Alan Schoem, Khosrow Shabestari, Bernie Steves, David Surles 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 Ly Nguyen (800) 897-9965 x125 | lnguyen@insurancejournal.com MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns (619) 584-1100 x120 | eburns@insurancejournal.com New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com DESIGN/WEB V.P. of Design Guy Boccia | gboccia@insurancejournal.com V.P of 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 ADMINISTRATION Chairman Mark Wells | mwells@wellsmedia.com Chief Executive Officer Mitch Dunford | mdunford@wellsmedia.com Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly 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 2013 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 3618, Northbrook, IL 60065-3618 ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rhondab@fosterprinting.com. Visit insurancejournal. com/reprints for more information.

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News & Markets Workers’ Compensation Benefits, Employer Costs Rise: Study

oth workers’ compensation benefits paid to insureds and costs for employers increased in 2011, a new study revealed. Total workers’ comp costs to employers rose by 7.1 percent to $77.1 billion, while workers’ comp benefits rose by 3.5 percent to $60.2 billion, reported the National Academy of Social Insurance (NASI). The benefits include a 4.5 percent rise in medical care spending to $29.9 billion and a 2.6 percent rise in wage replacement benefits to $30.3 billion. “Workers’ compensation often grows with the growth in employment and

earnings,” said Marjorie Baldwin, chair of NASI’s Workers’ Compensation Data Panel and Professor of Economics in the W.P. Carey School of Business at Arizona State University. When benefits and costs are measured relative to total covered wages, then benefits remained unchanged, and costs to employers rose very modestly (to $1.27 per $100 of wages) after declining in the previous five years. The new report shows changes in coverage, benefits, and employer costs for all 50 states and the District of Columbia. Statelevel changes in 2011 include: • Coverage and wages increased in all 50

states and the District of Columbia. • Total benefits paid to injured workers increased in 29 jurisdictions. However, benefits as a percent of total wages increased in only 17. • Employers’ costs of workers’ compensation as a percent of total wages increased in 31 states, and remained unchanged in four. • The share of benefits paid for medical care exceeded 50 percent in 33 states. Workers’ compensation was the first social insurance program in the United States; 2011 marked the 100th anniversary of the first state laws. NASI’s report, “Workers’ Compensation: Benefits, Coverage, and Costs, 2011,” is the 16th in an annual series. The report provides comprehensive data on workers’ compensation benefits, coverage and employer costs for the nation, the states, the District of Columbia and federal programs.

Most People Believe World Is Getting Riskier: Swiss Re

new survey, commissioned by Swiss Re on the occasion of its 150th anniversary, has found that people around the world say they’re acutely aware of the risks they may face in the future, and are ready to shoulder the financial burden personally. At the same time, respondents say they want their political leaders to do more to tackle a riskier world ahead. Swiss Re listed the following “key findings” from the survey: • 70 percent of respondents are prepared to take personal responsibility for their own retirement costs. • 84 percent think that climate change will be responsible for more natural disasters in the future. • Nearly 8 in 10 fear damage from an earthquake, flood or other natural disaster within the next 20 years. • 75 percent would use renewable energy if it were made available. • 91 percent want governments to do more 10 | INSURANCE JOURNAL-NATIONAL September 9, 2013

to promote energy efficiency. • Hunger is a major concern, not just in the developing world. The 150th anniversary survey was conducted by Gallup, the consulting, polling and research organization, which spoke with nearly 22,000 citizens across 19 markets on five continents, aged 15 and above. The survey was carried out in April and May 2013. Under the motto “Open minds – connecting generations,” Swiss Re said its aim is to “foster a dialogue about risks and how society and generations are to tackle them in the future. People were asked what concerns them most, including ageing, climate change, natural disasters, energy and food supplies. Almost everyone is worried about prospects

for the economy, according to the survey. Concerns about global warming and natural disasters are also widespread. Most respondents say they are well aware of the risks they may face in future, and are willing to take action to address them — even if this is going to hit their own pocket. But many also say that government policy does not fully address the risks faced today and by future generations. Swiss Re’s Group Chief Risk Officer David Cole noted that the “findings show that individuals are willing to take as much responsibility as their leaders.” The findings are a call for better co-operation between government and the private sector, Cole said, adding that it’s vital to prepare systematically for the future. www.insurancejournal.com

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News & Markets Los Angeles Councilman Proposes Quake Building Inventory

Los Angeles councilman is urging the city to find and list the potentially thousands of buildings that could collapse in an earthquake. Tom LaBonge is proposing a city inventory of so-called “soft-story” buildings — those where the top stories could collapse onto the lower floor during a major temblor. Many are apartment and condo buildings with ground-floor parking. The inventory would list buildings built before 1978 with at least two stories and five units. About 200 were badly damaged or destroyed

during the 1994 Northridge earthquake, including an apartment building that pancaked, killing 16 people. The proposal comes four months after San Francisco passed a law forcing owners to strengthen about 3,000 soft-story apartment buildings. Officials there estimated the cost per building at $60,000 to $130,000. The Los Angeles City Council rejected a proposal to require retrofitting of vulnerable buildings in 1996 and instead opted for a voluntary program. The idea of creating a list of soft-story buildings is fine but any attempt to require retrofitting would be a concern, said Jim Clarke, chief executive officer of the Apartment Association of Greater Los Angeles. Some property owners would be in trouble unless they could pass on the cost to tenants, he said. “Forty-three percent of our members are senior citizens,” Clarke said. “A big hit like that would be devastating.” Copyright 2013 Associated Press. All rights reserved.

Driver’s Licenses for Immigrants Declining in New Mexico

s more states prepare to offer driving privileges to immigrants who illegally entered the U.S., heavily Hispanic New Mexico appears headed in the other direction. An Associated Press review of state records shows New Mexico is issuing fewer driver’s licenses to them, with the number of first-time licenses dropping 21 percent during the first half of this year. The reason for the abrupt decline remains unclear. Officials in Republican Gov. Susana Martinez’s administration say there’s been no recent crackdown by the Motor Vehicle

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Division and the requirements for immigrants to obtain a license haven’t changed, although the governor has fought unsuccessfully for three years to scrap the license policy. An immigrant rights advocate suggests New Mexico’s weak economy may be a cause. Copyright 2013 Associated Press. All rights reserved.

Family of DUI Victims Sues Montana Bar

Montana woman whose mother and daughter died in a drunken driving crash has filed a lawsuit against a Helena bar, alleging the driver was served alcohol shortly before the crash, despite being visibly intoxicated. Heather Smith filed the lawsuit against O’Toole’s Bar and Lounge; the estate of its former owner; and bar employee William Gleed. Gleed has pleaded not guilty to two counts of serving alcohol to an intoxicated person. The driver, 22-year-old Arielle Michelle Schescke, has pleaded guilty to two counts of vehicular homicide for deaths of 51-yearold Mildred Richard and 16-year-old Justine Smith near East Helena. Copyright 2013 Associated Press. All rights reserved.

Idaho Man Sues Experian, Says Credit Report Wrong

ose Luis Calderon says he had the cash to buy a car, but he decided to get an auto loan so he could build up a credit history. It wasn’t until he was turned down that the 27-year-old Nampa man realized he already had a credit history — one he says belonged to somebody else. Now Calderon is suing the credit reporting company Experian Information Solutions, saying he tried more than a dozen times in vain to get the company to remove incorrect and derogatory information on his report. Calderon says in the meantime he lost a chance to buy a home. The lawsuit is expected to go before a jury in Boise’s U.S. District Court in December. Experian spokeswoman Susan Henson says she can’t comment a pending case. Copyright 2013 Associated Press. All rights reserved. September 9, 2013 INSURANCE JOURNAL-WEST | W1

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Science Matters Hotspot Volcanoes: Earthquake Risk in Hawaii By Khosrow Shabestari and Claire Pontbriand

t was June 15, 1990, when Mount Pinatubo, on the island of Luzon in the Philippines, awoke from its 500-year slumber to produce the second largest volcanic eruption of the 20th century. Nearly a year before, Luzon was shaken by a magnitude 7.8 earthquake epicentered about 60 miles northeast of the volcano. Thousands of smaller earthquakes also occurred in the months leading up to the eruption as magma moved toward the surface from more than 20 miles below the volcano. Like most volcanoes, Mount Pinatubo is located along the boundary of tectonic plates. It is here where massive pieces of the Earth’s rigid outer shell, or lithosphere, converge or diverge, producing most seismic and volcanic activity. But volcanoes and seismic hazards exist as well in the interior of tectonic plates. The Hawaiian Islands, for example, sit well within the interior of the vast Pacific Plate. On Hawaii, earthquakes accompany the movement of magma within and under active volcanoes such as Mauna Loa, Kilauea, and

Figure 1. Historical seismicity in Hawaii since 1868 W2 | INSURANCE JOURNAL-WEST September 9, 2013

Hualalai, and sometimes release the strain that accumulates along the flanks of these volcanoes. These and other volcanoes also influence Hawaii’s seismicity, as their heavy weight can stress the Pacific lithosphere to the point of triggering an earthquake. The culmination of these risks produces seismic hazard on the south side of Hawaii Island that is comparable to that of coastal California, even though Hawaii is far from any plate boundary. Historical Seismicity Thousands of earthquakes occur every year on and around Hawaii Island, or the Big Island. Most of these temblors are

too minor to be felt, but some are strong enough to cause minor to moderate damage. Earthquakes are particularly common on the south side of the island, where the largest events have taken place and where the historical earthquake rate is relatively high (See Figure 1). While roughly 20 earthquakes of magnitude 6.0 or greater have occurred on or very close to the Big Island since 1868, only six events have taken place northwest of Hawaii Island, from Maui to Molokai. This decrease in historical seismicity from the southeast to the northwest across the island chain is a result of Hawaii’s geologic history — a unique combination of plate tectonics and hotspot volcanic activity. Hawaii’s Origins The Hawaiian Islands are located at the southeastern end of an extensive volcano chain consisting of hundreds of islands, islets, and seamounts (submarine mountains) spread across some 1,500 miles in the central Pacific Ocean. These islands formed nearly 70 million years ago as a result of a hotspot deep within Earth’s mantle. The hotspot caused a plume of magma to rise up through the Pacific tectonic plate and erupt at Earth’s surface. Over time, countless eruptions caused a seamount to rise from the ocean floor until it finally emerged above sea level to form an island volcano. Appropriately, this type of volcano is known as a hotspot volcano. As the Pacific tectonic plate moved in a continued on page W7 www.insurancejournal.com

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News & Markets Yosemite May Be Harbinger of California’s Wildfire Potential By Don Jergler

he massive wildfire in Yosemite is seen by some as a harbinger of what could be a “worst case scenario” when California enters its typical wildfire season in October — continued drought, lots of unburned fuel and a weather outlook that offers little hope for early precipitation. The Rim Fire was fueled by dry, warm conditions and winds gusts between 15 to 30 mph. As of the time this article went to press the 236,000-acre and growing fire had only burned roughly 100 structures, but it was within miles of water and hydropower sources for San Francisco, costing the city hundreds of thousands of dollars for replacement electricity, officials said. Nearly 5,000 personnel were involved with fighting the Rim Fire, which at the time was 75 percent contained,

according to fire officials. While the cause of the fire is currently under investigation, experts were faulting the extended drought in the West as a prime driver of the size of the fire. “Certainly the drought overall for a number or years has been quite intense in the

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western states, and certainly this past summer,” said Tomas Girnius, a senior scientist at catastrophe modeling firm AIR Worldwide in Boston, Mass. “And it’s nowhere close to Santa Anna season.” Drought severity figures from the National Oceanic and Atmospheric Administration placed the area where the Rim Fire was raging under “extreme” or “severe” drought rankings continually since midMay. “The time before that wasn’t necessarily great either,” Girnius added. California had less than 50 percent of its typical precipitation last year for the wet weather months, November to May, according to Roger Lamoni, a fire weather climatologist for NOAA’s Western region. Like Girnius, Lamoni is turning his attention toward the state’s annual Santa Anna winds. “As we go into the fall season, it’s basically Santa Anna time,” Lamoni said. The Santa Annas are created by cool air from the Great Basin flowing rapidly out toward the warmer climes around the ocean, which can cause a drop in humidity and yield blustery winds that can stoke small wildfires into raging blazes. “It’s like water pouring out of a pond into a lower elevation,” Lamoni said. “Relative humidity during Santa Anna days can drop to 5 percent, and the early Santa Annas can come when there are areas experiencing temperatures over 100 degrees.” The plentiful fuel for the fires comes from consecutive dry seasons, such as last year, which has left the state with an abundance of “drought-stressed vegetation” that is receptive to any source of ignition, Lamoni said. Such dry tender is what also enables fires continued on page W12 www.insurancejournal.com

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People Alan Boring

Wells Fargo Insurance named Alan Boring senior vice president and managing director for its Sherman Oaks, Calif., office. Boring will lead the office’s business development, client service and sales, and cross-sell strategy for the company’s regional insurance operations. Based in Sherman Oaks, he will report to Sam Elliott, regional managing director for Wells Fargo Insurance’s West region. Boring, who has more than 30 years of experience, joined Wells Fargo Insurance in 2008. Before that Boring was senior vice president at Aon Risk Services. He began his career at CIGNA’s Special Risk Facility in Los Angeles and later became a risk management broker at Marsh Inc. Wells Fargo Insurance, part of Wells Fargo & Co., has 127 offices in 36 states.

Jon Scott

Ben Mckay

Pinnacol Assurance, a large workers’ compensation insurance provider in Colorado, named Jon Scott associate vice president of agency and product development. Prior to Pinnacol, Scott was regional vice president of sales and distribution at the Hanover Insurance Group. His nearly 30-year career includes profit and growth responsibilities in the property/casualty marketplace. Pinnacol reports more than 55,000 customers in Colorado. Surplus Line Association of California Executive Director Benjamin J. McKay was named to the Insurance Industry Charitable Foundation’s Western division board of directors. The IICF board is comprised of industry professionals with commitment to philanthropy. McKay joined SLA in 2012 following from the Property Casualty Insurers Association of America. Prior to PCI, McKay was chief of staff to a member of the United States House of Representatives, and before that he was a staffer to several members of the Florida legislature. He also

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served for a time as a regulator at the Florida Department of State. San Francisco-based SLA serves as the statutory surplus line advisory organization to the California Department of Insurance. Since its inception in 1994, IICF has contributed more than $20 million in grants to charities and 166,000 volunteer hours to nonprofit organizations. Los Angeles, Calif.-based Farmers Insurance named Steven Weinstein general counsel. Weinstein is the former chairman of the Barger & Wolen law firm. Weinstein replaces Frank Ceglar, who retired from Farmers after 36 years with the company. Weinstein will oversee the company’s legal department, including its litigation team. In private practice Weinstein handled insurance regulatory matters, complex business litigation and bad faith litigation. He was recently appointed as a board member of the California Insurance Guarantee Association. The Farmers Exchanges are three reciprocal insurers (Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange), including their subsidiaries and affiliates, owned by their policyholders. Farmers Group Inc. is wholly owned by the Zurich Insurance Group. The Leavitt Group’s Woodland Hills office named Robert Clarke vice president in commercial insurance. Clarke specializes in hospitals, clinics, and environmental and manufacturing industries. Clarke has 18 years of insurance experience. He co-founded the Affordable Medical Benefits Health Plan, an individual healthcare plan for the working uninsured. Clarke, who once received the Heffernan top producer award, is a former member of the California Waste continued on page W12

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IDEA EXCHANGE

Science Matters continued from page W2 magma, and generating temblors like the Modeling the Risk northwesterly direction, it carried the sea1868 M7.9 Mauna Loa earthquake, the largest A catastrophe model must capture the mount with it while the Hawaiian hotspot in Hawaii’s recorded history. diversity of the earthquake hazard across the remained fixed in place. While this seamount Seismicity also comes from deep, non-volHawaiian Islands. The 2013 AIR Earthquake was cut off from the source of the hotspot, canic earthquakes that are triggered by the Model for Hawaii does so by way of a 10,000a new seamount formed in its place. Over release of long-term accumulations of lithoyear catalog of nearly 15,000 simulated time, these successive seamounts caused spheric stresses due to flexure of the crust earthquakes. Regional seismicity along the an undersea mountain range, known as the under the heavy load of the islands. island chain is modeled by five types of seisHawaiian-Emperor seamount chain to form. mic source zones, including the flanks The oldest seamounts have since eroded to below sea level; today’s state of Hawaii ‘Earthquake hazard on the Hawaiian of active volcanoes on the Big Island, Kilauea rift zones, shallow smoothed comprises the still exposed peaks of the Islands is greatest along the flanks zones, deep smoothed seisyoungest mountains. As a result of being of the Big Island’s active volcanoes: seismicity micity zones, and a single large zone both older and farther from the hotspot, Kilauea, Mauna Loa and Hualalai.’ encompassing the northwest islands which today is located roughly beneath (See Figure 2). The model also includes the southeastern side of the Big Island, These earthquakes typically occur at two extreme disaster scenario events that the northwest Hawaiian Islands have lower depths of 20 to 60 km (12.4 to 37.2 miles). can help assess large loss potential. rates of volcanic and seismic activity. The 2006 M6.7 Kiholo Bay event and its While these scenarios are highly unlikely M6.0 aftershock, both of which ruptured at and are associated with considerable uncerSeismic Hazard Across the Island Chain a depth of 29 km (17.98 miles) on the northtainty, they are nevertheless scientifically Earthquake hazard on the Hawaiian west part of the Big Island, were likely genplausible and would produce large losses Islands is greatest along the flanks of the erated by the release of stress due to crustal if they were to occur. The first event has Big Island’s active volcanoes: Kilauea, Mauna loading. a magnitude of 6.9 and occurs near the Loa and Hualalai. The volcanic activity here The 2006 event was the strongest earthHawaiian capital city of Honolulu and the generates abundant small earthquakes and quake to affect Hawaii in the last 20 years; census-designated place of Kailua on Oahu. seismic swarms. it caused more than $100 million (2006 The second event has a magnitude of 8.2 and Large earthquakes, rupturing along major USD) in economic losses in a relatively occurs at the southeastern side of Hawaii and rift zones beneath the active volcanoes, sparsely populated part of the island. would produce large losses in Hilo — the are caused by release of strain accumulat In the northwest Hawaiian Islands, there settlement with the majority of the insured ed along the mobile flanks of the volcais a gradual decrease in seismicity away loss on Hawaii Island. noes through the magmatic processes of from the hotspot due to the slow rebound island-building. of the Pacific Plate and the relaxation of the The southern flanks of Kilauea and Khosrow Shabestari is a principal scientist at AIR lithosphere over time. Mauna Loa periodically shift seaward, Worldwide and Claire Pontbriand is a scientist in releasing the strain, making room for more seismology at AIR Worldwide.

Figure 2. Seismicity zones in AIR’s Earthquake Model for Hawaii www.insurancejournal.com

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News & Markets Nevada Legislator Wants Names of Doctors Who Overprescribe

he chairman of the Nevada Senate Judiciary Committee is asking the drug company that makes OxyContin to turn over information about Nevada doctors suspected of overprescribing the powerful pain medication. Sen. Tick Segerblom, D-Las Vegas, wrote a letter to the president of the drugmaker Purdue Pharma LP, saying the company has an ethical duty to provide the information to the Nevada Board of Medical Examiners. “I have been concerned for some time about the mounting death toll related to certain addictive drugs, such as OxyContin,” he wrote in the letter. Segerblom made the request days after two California lawmakers did the same based on a Los Angeles Times article that

ABRAM16718.indd 1

W8 | INSURANCE JOURNAL-WEST September 9, 2013

cotic be sent, as well.” said the company has a database of The drugmaker, based in Stamford, 1,800 doctors who showed signs Conn., did not immediately respond to of dangerous prescribing but requests for comment. OxyContin is a trade has referred only 154 cases to name for the drug oxycodone hydrochloauthorities since 2002. ride, which is prescribed for chronic pain. “I am dismayed by the findings of Douglas Cooper, executive director of the the Los Angeles Times investigation that state medical board, said that in addition revealed that although Purdue Pharma has to the names of physicians, he also would compiled a database of hundreds of doctors need the information that raised red flags who are suspected of recklessly prescribing about them before OxyContin, it has been unwill- ‘I have been concerned for some he could investiing to alert time about the mounting death gate. If the information was provided authorities in and was the basis each state about toll related to certain addictive drugs, such as OxyContin.’ for a complaint, its findings,” he said the board he said. “I am would open an investigation. also requesting that the criteria utilized In 2007, Purdue Pharma paid $600 million by Purdue Pharma in determining signs of to settle claims that it misled doctors about reckless/dangerous prescribing of this narthe drug’s risk of addiction. Larry Pinson, executive secretary of the Nevada State Board of Pharmacy, said there is no question that prescription drug abuse is a huge problem in the United States. Pinson said 80 percent of manufactured opiates in the world, which includes OxyContin, are consumed in the U.S. Pinson said Nevada has one of the longest-running prescription monitoring programs in the country, which identifies consumers who are “doctor-shopping” to get prescription drugs. Doctor shopping is a felony in Nevada, he said. A Centers for Disease Control and Prevention report last year called prescription drug overdoses an epidemic. The CDC said the unprecedented rise in overdose deaths in the U.S. parallels a 300 percent rise since 1999 in the sale of strong painkillers such as OxyContin. A 2013 CDC report showed that Nevada had the third-highest prescription drug overdose deaths in 2008. In 2010, Nevada was tied for second among states in the amount of prescription painkillers sold per 10,000 people. Copyright 2013 Associated Press. All rights reserved. 8/26/13 10:13 AM

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Legal Notes California Supreme Court Expands Unfair Competition Law to Insurers

which such actions may be brought by he California Supreme Court issued policyholders. One line of cases has held its long-awaited decision in Zhang v. that policyholders may not “plead around” Superior Court, a case examining the scope the Moradi-Shalal rule by recasting a UIPA of the California Unfair Competition Law claim as a UCL claim, and have therefore (UCL, California Business and Professions prohibited UCL Code §§ 17200 et seq) on claims in which Aug. 1. the alleged vio Zhang addressed the lation is based question of whether an upon allegainsurer may be sued for tions of unfair violation of the UCL claims practices. based upon allegations By William Another line of that the insurer had Gausewitz cases has held violated the California that UCL actions Unfair Insurance Practices Act (UIPA, may be brought by policyholders when the California Insurance Code § 790.03). underlying “unfair competition” is based The UCL generally prohibits any business upon some alleged violation other than from engaging in “unfair competitionm,” a violation of the claims practice requirebut doesn’t provide for payment of damages; ments of the UIPA. its remedies are limited to restitution and In Zhang, the plaintiff contended that the injunction. Also, the prevailing plaintiff in a violation supporting the UCL claim was UCL action may seek payment of attorneys’ not the insurer’s unfair claims practices, but fees as a private attorney general under was instead the insurer’s purported “false California Code of Civil Procedure § 1021.5. advertising,” in which the insurer promised The history of this issue dates back to “to provide timely coverage in the event of the 1979 California Supreme Court decision a compensable loss, when it had no intenin Royal Globe v. Superior Court. Royal Globe, tion of paying the true value of its insureds’ which held that a third party claimant in a covered claims.” The California Supreme liability claim may bring an action directly Court held that such an allegation of false against the liability policyholder’s insurance advertising was sufficient to support a UCL company if the insurer was alleged to have claim against an insurer since a false adverviolated the UIPA. Royal Globe was overtising claim is not an exclusive prohibition turned by the California Supreme Court in of the UIPA. The the 1988 decision Moradi‘It seems likely that for court said that Shalal v. Fireman’s Fund. “Moradi–Shalal Following the issuance of the foreseeable future the Moradi-Shalal decision, every first party bad faith does not preclude first party UCL many plaintiffs attempted claim will also include a actions based on to circumvent the ruling by suing insurers. The lawsuits UCL claim based upon the grounds indepenwere not explicitly based false advertising theory.’ dent from section 790.03, even when upon an alleged violation of the insurer’s conduct also violates section the UIPA, but upon the argument that the 790.03.” insurer’s alleged violation of the UIPA con The law under Zhang appears to be that stituted unfair competition and therefore an insurer cannot be sued under the UCL was prohibited by the UCL. for improper claims handling. However, The courts have generally prohibited an insurer can be sued if its improper third party UCL lawsuits against insurers, claims handling demonstrates that the but they have been split on the extent to W10 | INSURANCE JOURNAL-WEST September 9, 2013

insurer made false assertions in promising to handle claims. Under this rule, there appears to be little left of the restriction against pleading around Moradi-Shalal with respect to claims handling. As long as the claims handling dispute is characterized as a false advertising claim, it is permitted under Zhang. The long-term impact of this decision is unclear. It seems likely that for the foreseeable future every first party bad faith claim will also include a UCL claim based upon the false advertising theory. However, this claim would most likely be absorbed within the associated bad faith claim. It is difficult to see how an insurer would be subjected to sanctions under the UCL claim if the associated bad faith claim is defeated. Based on legal precedent, an insurer’s exposure to loss under the UCL claim seems to be subordinate to the exposure associated with the bad faith claim. Further, remedies under the UCL claim are limited to injunction and restitution, not damages. It’s difficult to ascertain exactly how a court would construct an order of restitution or an injunction based upon alleged false advertising associated with a bad faith claim. In Zhang, the court acknowledged this conundrum but declined to address it, leaving those issues to lower courts. Although a UCL claim can also be a basis for legal fees, it is unclear how this will be handled in practice. Despite these ambiguities, the underlying implications for insurers are clear. The result of Zhang is that insurers must prepare to deal with these UCL issues that will probably become a standard component of every policyholder bad faith action based upon allegedly wrongful claims handling. William Gausewitz is a partner in Michelman & Robinson LLP and a member of the lawfirm’s regulatory and administrative department. Phone: (916) 447-4044. Email: bgausewitz@mrllp.com. www.insurancejournal.com

WEST COVERAGE

News & Markets continued from page W4 to spread quite rapidly, he added. These are among the considerations in the National Interagency Coordination Center’s National Significant Wildland Fire Potential Outlook issued for September. It calls for “above normal” fire conditions for much of California. Adding to concerns is a neutral forecast for precipitation, meaning early rainfall before or during the October-throughNovember Santa Anna timeframe is less than likely. Those concerns and the Rim Fire are the impetus for a group that provides insurance information to consumers to alert homeowners to increased potential of a rough fire season. While the area of the Rim Fire is a lesser populated portion of the state, there are an abundance of homeowners living in high-risk areas, such as those in the wildland-urban interface, facing a potential scary couple continued from page W6 Association. The Leavitt Group’s Woodland Hills office is part of Leavitt Insurance Services of Los Angeles. Sullivan Brokers Wholesale Insurance Solutions named Clancy Marie Johannsen to the firm’s professional and management liability practice group in the position of vice president. Johannsen specializes in tough-to-place risks. Sullivan Brokers is a nationwide wholesale brokerage specializing in healthcare, professional, management and transaction liability. Beecher Carlson named Scott Lee vice president in its Las Vegas office. Lee is responsible for risk analysis, program design and delivery of Beecher Carlson services and resources. He reports to Brad Darr, senior managing director. Lee has more than 12 years of experience in risk management. Prior to Beecher Carlson, he was director of risk and insurance for Caesars Entertainment Corp. Prior W12 | INSURANCE JOURNAL-WEST September 9, 2013

of months, according to the Insurance Information Network of California. According to a wildfire risk study of California last year conducted by IINC and Verisk Risk Solutions (ISO), the counties that comprise Yosemite National Park have some the highest percentages of homes in high wildfire risk areas.

‘If you take the total number of high-risk homes in California, which is more than 2 million, that’s more than the total number of homes in Colorado.’ Toloumne is at 80.14 percent, and Mariposa is at 81.4 percent, that report shows. IINC was actively warning homeowners last year of the increased danger season. “It’s worse now,” IINC spokesman Pete

to that Lee was an account executive at both Willis and Marsh. Atlanta, Ga.-based Beecher Carlson is a subsidiary of Brown & Brown Inc., which is headquartered in Daytona Beach, Fla. SullivanCurtisMonroe named Dan Fein vice president in its Los Angeles office. Fein comes to from Whorton Insurance Services. Before that he was with Elkins Jones. For the past 10 years, Fein has focused on real estate, manufacturing and hospitality. Privately-held SCM offers commercial property/casualty, employee benefits and personal lines coverage, and has offices in Irvine, Los Angeles and Corona. Woodland Hills, Calif.-based Poms & Associates Insurance Brokers Inc. named Robin Fuduli senior vice president and director of marketing. Fuduli will create and lead the overall strategic direction of Poms’ marketing initiatives. Prior to Poms, Fuduli was senior vice

Moraga said. “We’ve had another year of pretty much drought in many areas.” Comparing the potential for catastrophic losses with other states, Moraga noted that Colorado has had two consecutive seasons in which wildfires wrought record insured losses and record losses in terms of scale. Yet the potential for losses in California eclipse those in Colorado, Moraga added. “If you take the total number of high-risk homes in California, which is more than 2 million, that’s more than the total number of homes in Colorado,” he said. For Moraga, Lamoni and Girnius the fuel, lackluster rainfall in the forecast and the potential for Santa Annas puts the “worst case scenario” phrase at the forefront of their conversations about the state’s wildfire season. “The risk is there,” Girnius said. “We seem to be in conditions that would be very conducive to very catastrophic fires.”

president for Kessler/Hub International Insurance Services. Fuduli serves as president of the National Association of Professional Women’s Santa Monica Chapter. Poms has offices in California, Colorado, New Mexico and Washington. Edgewood Partners Insurance Center added Dawn Jeffery as a property/casualty insurance producer in its Inland Empire division in Southern California. Her responsibilities will include the acquisition of new clients as well as the design, placement and oversight of risk management and property/casualty insurance programs. She reports to Dan Ryan, managing principal of EPIC’s Inland Empire division. Jeffery has 28 years of experience in risk management and commercial insurance program development. Prior to EPIC, Jeffery owned her own consulting business, Insurance Management and Consultants. EPIC operates from 10 offices across California. The firm also has offices and in Denver, Colorado and New York. www.insurancejournal.com

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Business Moves social services, agents E&O, and energy business. MSW is now a 100 percent wholly owned subsidiary of MarketScout Corp. with locations in Florida, Indianapolis, New Jersey and Texas. MarketScout owns the MarketScout Exchange as well as over 40 other online and traditional underwriting and distribution venues.

Markel Ventures, Eagle Construction Markel Ventures Inc. announced that it acquired Eagle Construction of VA LLC and its affiliated entities. The terms of the transaction were not disclosed. Markel Ventures invests in businesses outside of the specialty insurance marketplace. It’s a subsidiary of Markel Corp. in Glen Allen, Va. Founded in 1984, Eagle Construction mostly engages in the construction of single family residential homes in Virginia. Through its subsidiaries Eagle Realty, Eagle Commercial Construction and NAI Eagle, the Glen Allen, Va.-based Eagle Construction also provides residential realty, commercial construction and commercial realty services. Eagle will be the fourteenth company in the Markel Ventures family of companies. MarketScout, MSW MarketScout Corp., an insurance distribution and underwriting company headquartered in Dallas, has acquired 100 percent of the stock and assets of MSW. MSW will convert from a generalist brokerage to a specialty intermediary providing access to unique and exclusive products in areas that require highly technical expertise. MSW has engaged 11 new brokers who are specialists in areas such as products liability, high-value homeowners, sports and leisure, 12 | INSURANCE JOURNAL-NATIONAL September 9, 2013

Specialty Underwriters & Risk Evaluators, WSIB Insurance Specialty Underwriters & Risk Evaluators LLC has acquired Jackson, Mich.-based WSIB Insurance Agency from the Capacity Group of Cos., headquartered in Mahwah, N.J. WSIB currently operates as a wholesale broker and is one of the leading providers of motorsports insurance. WSIB writes about $14 million in premium and operates nationwide. Chubb Custom Market is currently the primary provider of insurance of products and services that WSIB provides to the motorsport industry. Holly Shopoff, who has 25 years of underwriting and marketing expertise in the motorsports niche, has joined the company as vice president of motorsport programs. WSIB will continue to operate under the WSIB brand name. Fidelis Group Holdings Fidelis Group Holdings LLC, through its subsidiary company Continental Underwriters Ltd., announced the formation of an inland marine division. The new unit will be based in New York. The new division will be underwritten through Fidelis Group Holdings’ established relationship with Houston Casualty Co., a subsidiary of HCC Insurance Holdings Inc. The group will underwrite a broad-based inland marine portfolio on a national level. Headquartered in Covington, La., Fidelis Group Holdings provides primary and excess marine insurance for hull and maritime liability coverages (P&I) for vessel owners, ship builders, terminal operators, fleet operators, stevedores, cargo handlers, marine

contractors and a variety of other maritime insurance products. ECM Solutions, Ferguson Agency ECM Solutions of Charlotte, N.C., which sells commercial and personal insurance along with risk management services, has acquired the Ferguson Employee Benefits Agency in Greenville, S.C. ECM Solutions was founded in 1987 and has more than 6,000 clients. Founded in 1980, Ferguson Agency specializes in employee benefit packages for large employers. The Charlotte agency will remain ECM Solutions; Greenville’s former Ferguson Employee Benefits Agency will be known as ECM/Ferguson Solutions. Jim Muse will serve as president of the new company. He has been with ECM Solutions since its inception in 1987. Jeff Haney, a partner and treasurer of ECM Solutions, is slated to become president of the company in January. Poms & Associates Poms & Associates Insurance Brokers Inc. has expanded to a new 20,000-squarefoot office space in Northern California and launched its construction risk practice. The new practice will offer insurance, surety bonding and risk advice to the construction industry, including owners, contractors, developers, subcontractors, builders and real estate investors. Poms has offices in California, Colorado, New Mexico and Washington. The Buckner Co. The Buckner Co. opened a new office in Boise, Idaho, and named as head of the operations Chad Williams, who spent the past decade in the Boise commercial insurance arena. Expanding into the Boise market has been a long-term goal of the firm, which has opened two other Idaho offices in recent years. Williams works with clients in the nonprofit and social services sectors, technology firms, manufacturing and agriculture. Salt Lake City, Utah-based The Buckner Co. has five offices throughout the West. www.insurancejournal.com

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News & Markets Premium Increases Under Obamacare Not as High as Expected: Study

and the amount of he federal Affordable Care Act will coverage purchases. not lead to widespread premium The oldest person increases in the individual health insurance can be charged three market. That’s according to a new analysis times as much as the of 10 states and the United States overall youngest adult, with by RAND Corp., which predicts no prevsmokers paying up to alent trend in sharply higher prices under 1.5 times more than Obamacare. nonsmokers. While there have been other reports that Researchers used indicate the cost of individual policies may an updated microsimjump sharply under healthcare reform, the ulation model, which RAND analysis shows the cost of policies predicts the effects of health policy changes in the individual market will vary mostly at state and national levels, to estimate the by states and individual factors such as an likely impacts of the Affordable Care Act individual’s age and whether they smoke. on the individual and small group markets “Our analysis shows that rates for polionce the law is fully in force. cies in the individual market are likely to vary from state to state, with some expeStates Vary riencing increases and some experiencing There is a considerable range among decreases in cost,” said Christine Eibner, the states in the number of people who will study’s lead author and a senior economist remain uninsured under the Affordable at RAND, a nonprofit research organizaCare Act. For 2016, the study’s estimates tion. “But our analysis found no widespread range from a low of 5 percent in Minnesota trend toward sharply higher prices in the to a high of 12 percent in Texas. States with individual market.” larger immigrant populations, such as Texas RAND researchers modeled how the and Florida, will tend to have more uninAffordable Care Act is likely to change cost sured people. and coverage patterns in both the individual The number of people who buy individmarket and small group market in 10 states ual policies under the Affordable Care Act — Florida, Kansas, Louisiana, Minnesota, will more than double New Mexico, North ‘Our analysis found no from 4.3 percent of the Dakota, Ohio, nonelderly to 9.5 perPennsylvania, South widespread trend toward Carolina and Texas. sharply higher prices in the cent of the nonelderly. Prices in the indiThe report also con- individual market.’ vidual market will vary siders the potential among states, too. The analysis showed consequences for health insurance enrollthat in 2016 there will be no premium ment if Medicaid is not expanded in Texas, changes in the United States overall and in Louisiana and Florida. five states (Florida, Kansas, Pennsylvania, Under the federal Affordable Care Act, South Carolina and Texas). Three states insurers who sell policies to individuals and (Minnesota, North Dakota and Ohio) could small groups (pools of fewer than 50 peoface premium increases of up to 43 percent, ple) must offer coverage regardless of health although those costs may be covered by fedstatus or pre-existing conditions. Prices can eral tax credits. vary by only a few factors, including age, Louisiana and New Mexico may face tobacco use, geographic location, family size 14 | INSURANCE JOURNAL-NATIONAL September 9, 2013

premium declines. The differences are explained largely by the proportion of a state’s residents who have insurance. Minnesota, North Dakota and Ohio all have low numbers of uninsured residents, meaning fewer young, healthy people will be brought into the individual insurance market as a result of the law. Small Groups The Affordable Care Act will increase the number of people insured in the small group market. There will be increases in small group coverage of up to 5 percentage points in the United States overall and in seven states (Florida, Louisiana, Minnesota, New Mexico, Ohio, South Carolina and Texas). Three states (Kansas, North Dakota and Pennsylvania) will experience declines in small group of up to 2.2 percent. Small group premiums largely will be unchanged under the Affordable Care Act. For the U.S. overall and in nine states (Florida, Kansas, Louisiana, Minnesota, North Dakota, Ohio, Pennsylvania, South Caroling and Texas) small group premiums will see only minimal differences from existing levels. The research was sponsored by the Center for Consumer Information and Insurance Oversight and the office of the Assistant Secretary for Planning and Evaluation. The report is available at www.rand.org. www.insurancejournal.com

NATIONAL COVERAGE

Declarations Workplace Fatalities

Still Displaced From Sandy

The Votes to Pass

“Killing 35 citizens isn’t acceptable to us. We all can do a better job. It’s just frustrating. We’re all in this.” — Kim Floyd, executive director of the Wyoming AFL-CIO, questioned the success of efforts to improve worker safety in the state. Workplace fatalities in Wyoming reached the highest number in five years in 2012 when 35 people died on the job in Wyoming.

“We are exhausted and frustrated, and feel let down.” — New Jersey resident Lee Ann Newland’s comment during her testimony at the Aug. 15 joint N.J. Senate-Assembly hearing on the pace of rebuilding after Superstorm Sandy. She said she and her husband still can’t return to their home in Neptune, N.J., yet must still pay its mortgage and taxes.

“The way things are going, it looks like they have the votes to pass it. … But what’s sad to me is I’m getting email from the medical community urging me to support the bill. But, at the same time, these same people have stayed silent on Medicaid expansion.” — Oklahoma State Rep. Jeannie McDaniel, D-Tulsa, anticipates that tort reform legislation would pass both chambers of the legislature in a special session slated for September.

More Clarity

Katrina Lesson

“The goal is to make federal crop insurance more objective and to provide clarity for the producers facing prevented planting losses.” — Risk Management Agency Administrator Brandon Willis, who met with North Dakota farmers about changes to clarify rules for prevented planting insurance in five Upper Midwest states in 2014. He was accompanied by U.S. Sens. John Hoeven, R-N.D., and Heidi Heitkamp, D-N.D.

“By far the most important lesson Mississippi has learned is the value of preparedness.” — Mississippi Gov. Phil Bryant on the eighth anniversary of Hurricane Katrina striking his state.

Figures $29 Billion

6,900

The dollar amount of exports shipped worldwide from Louisiana in the first six months of 2013. That figure is 3.4 percent higher than the amount the state exported in the same period in 2012. The World Trade Center of New Orleans said Louisiana’s principal export markets through the second quarter were Mexico, $3.26 billion; China, $2.58 billion; and Singapore, $1.53 billion. They were followed by Japan, Canada, Brazil, the Netherlands, Panama, Egypt and France.

The estimated number of firearms that were reported stolen or lost in Ohio last year, ranking it sixth among states with the most missing guns, the Associated Press reported. Most were listed as stolen; 78 were reported lost. At least 190,000 firearms were reported lost or stolen in the U.S. last year. Nearly 16,700 of those were reported stolen or lost by dealers.

$940,995

The amount that the Delaware insurance department recovered for the state’s consumers during the first six months of 2013.

Was the number of workplace fatalities reported by the Montana Department of Labor and Industry’s Research and Analysis Bureau for 2012. That is down by 15 from the previous year.

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$12Million The court award for a Georgia woman who lost her right leg and pelvis and suffered brain damage when a tree limb fell onto her as she sat in a truck in Savannah in 2010.

September 9, 2013 INSURANCE JOURNAL-NATIONAL | 15

SPOTLIGHT

Top 25 Workers’ Comp Insurers Workers’ Comp Premiums Jump 8.1% in First Half of 2013

emotech’s review of second quarter 2013 data, as recently reported by insurers to the National Association of Insurance Commissioners (NAIC), shows three straight years of growth in workers’ compensation direct written premiums. Workers’ compensation insurers reported an 8.1 percent increase in direct premiums written By Steven J. Groeschen during the first six months of 2013 versus the same period in 2012. This increase is less than the 10 percent increase observed for full year 2012 versus 2011. Written premiums are nearly 29 percent higher than in 2010 and are nearing the

peak achieved in 2006. Given the slow pace of job growth during the economic recovery, most of this premium growth has come from rate increases and other pricing actions rather than payroll growth. Top 25 Insurers The top 25 workers’ compensation insurers, ranked by the highest dollar amount of direct written premium growth, reported a 30.3 percent increase during the first six months of 2013 versus the same

period in 2012. This increase is impressive since 12 of the insurers in this year’s top 25 group were also in last year’s top 25 group, which had a similar percent increase. All continued on page 18

Top 25 Workers’ Compensation Insurers Based on Premium Growth from June 30, 2013 versus June 30, 2012 Company Name Group Name Travelers Prop. Cas. Co. of America Zurich American Insurance Co. Insurance Co. of the West Cypress Insurance Co. Technology Insurance Co.. Security National Insurance Co Wesco Insurance Co. Texas Mutual Insurance Co. Prop. and Cas. Ins. Co. of Hartford California Insurance Co. Zurich American Ins. Co. of Illinois LM Insurance Corp. Federal Insurance Co. Accident Fund General Insurance Co. Sentinel Insurance Co. Employers Compensation Ins. Co. Starr Indemnity & Liability Co. American Zurich Insurance Co. Everest National Insurance Co. Trumbull Insurance Co. Republic Underwriters Insurance Co. National Union Fire Ins. Co. of Pa. Twin City Fire Insurance Co. Ins. Co. of the State of Pennsylvania Atlantic Specialty Insurance Co.

Travelers Group Zurich Insurance Group ICW Group Berkshire Hathaway Group AmTrust Fincl. Services Group AmTrust Fincl. Services Group AmTrust Fincl. Services Group N/A Hartford Fire & Casualty Group Berkshire Hathaway Group Zurich Insurance Group Liberty Mutual Group Chubb & Son Inc. Group BCBS of Michigan Group Hartford Fire & Casualty Group Employers Insurance Group Starr Group Zurich Insurance Group Everest Reins Holdings Group Hartford Fire & Casualty Group Delek Group American Intl. Group Hartford Fire & Casualty Group American Intl. Group White Mountains Group Top 25 All others Total

Year to Date 06/30/2013 $739,122,103 $825,947,819 $238,021,205 $239,993,027 $314,403,904 $155,661,360 $163,187,509 $510,490,984 $81,958,391 $119,350,721 $72,390,206 $295,613,865 $328,890,704 $122,929,520 $180,921,624 $221,342,499 $51,133,827 $457,292,027 $191,772,914 $78,424,875 $77,645,845 $225,206,625 $431,483,684 $350,106,064 $36,781,363 $6,510,072,665 $17,537,235,795 $24,047,308,460

Year to Date 06/30/2012

Growth

$623,480,079 $712,035,906 $131,540,372 $139,666,166 $218,381,034 $67,402,505 $77,811,615 $442,536,227 $24,864,945 $69,832,246 $23,222,293 $247,212,259 $282,518,955 $76,596,240 $137,041,052 $178,061,957 $8,247,772 $414,560,881 $151,522,707 $38,456,607 $38,376,512 $186,889,880 $393,335,004 $313,049,659 $466,678 $4,997,109,551 $17,251,357,495 $22,248,467,046

$115,642,024 $113,911,913 $106,480,833 $100,326,861 $96,022,870 $88,258,855 $85,375,894 $67,954,757 $57,093,446 $49,518,475 $49,167,913 $48,401,606 $46,371,749 $46,333,280 $43,880,572 $43,280,542 $42,886,055 $42,731,146 $40,250,207 $39,968,268 $39,269,333 $38,316,745 $38,148,680 $37,056,405 $36,314,685 $1,512,963,114 $285,878,300 $1,798,841,414

% Change 18.5% 16.0% 80.9% 71.8% 44.0% 130.9% 109.7% 15.4% 229.6% 70.9% 211.7% 19.6% 16.4% 60.5% 32.0% 24.3% 520.0% 10.3% 26.6% 103.9% 102.3% 20.5% 9.7% 11.8% 7781.5%

30.3% 1.7% 8.1%

Data Source: The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., by permission. Information derived from an SNL Financial product. The NAIC and SNL Financial do not endorse any analysis or conclusion based upon the use of this data. This exhibit is based upon the initial reporting of second quarter 2013 data, estimated to be over 93 percent of the companies that report quarterly. 16 | INSURANCE JOURNAL-NATIONAL September 9, 2013

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SPOTLIGHT

Top 25 Workers’ Comp Insurers continued from page 16 other insurers combined reported only a 1.7 majority of the states over the past year. percent increase. Growth does not always ensure success, Texas Mutual Insurance Co. continued to however. Insurers that had significant grow as a result of the strong Texas econoworkers’ compensation premium growth in my. recent years but are no longer active due to Nine of the top 25 insurers wrote more adverse loss reserve development include than half of their total SeaBright Insurance workers’ compensation (runoff), Majestic The majority of total Co. premium in California: Insurance Co. (conserworkers’ compensation vation), and ULLICO Travelers Property losses are now Casualty Co. of America, Casualty Co. (liquidation). Insurance Co. of the Both rate adequacy and associated with West, Cypress Insurance reserve adequacy depend medical costs. Co., Security National critically on accurate estiInsurance Co., California mates of future costs. Insurance Co., Employers Compensation The majority of total workers’ compensaInsurance Co., Everest National Insurance tion losses are now associated with medical Co., Republic Underwriters Insurance Co., costs. The future impact of the Patient and National Union Fire Insurance Co. of Protection and Affordable Care Act on costs Pittsburgh, Pa. within the healthcare system is uncertain. Most of the other top 25 companies are The increasing use (and sometimes abuse) National or Near National P/C insurers of narcotics for pain management results in that benefited from rate increases filed in a escalating prescription drug costs for both

short and long term claims. Most recently, the California Workers’ Compensation Institute has noted that the American Medical Association’s reclassification of obesity as a treatable disease could result in new or increased medical costs for workers’ compensation claims. Historically low interest rates are suppressing current investment income which offsets some of these costs. In addition, there are concerns that an increase in interest rates may reduce the value of long term fixed income investments that are traditionally used for workers’ compensation reserves. Groeschen is the chief consulting actuary and risk analyst of Demotech Inc., Insurance Journal’s official research partner. Based in Columbus, Ohio, Demotech is a financial analysis firm specializing in evaluation of the financial stability of regional and specialty insurers. Website: www.demotech.com. Email: sgroeschen@demotech.com.

Volunteer • Give • Make an Impact Join IICF Week of Giving October 12-19, 2013

Bring your talent and energy Help your community • Join other insurance professionals Sign up your volunteer team at weekofgiving.iicf.org. Week of Giving funds will support the IICF-Sesame Workshop early childhood literacy initiative, Every Day is a Reading and Writing Day. * Text INSURANCE to 50555 to donate $5 or donate at IICF.org. *Standard message and mail rates apply. For full terms visit www.mGive.org/T. The Insurance Industry Charitable Foundation is a registered not-for-profit organization under section 501(c)(3) of the IRS code. Federal Tax ID #20-1240972.

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NATIONAL COVERAGE

News & Markets Commercial Insurance Rate Hikes Continuing; Workers’ Comp Profit Ahead in 2014: Moody’s By Susanne Sclafane

oody’s expects property/casualty commercial insurance rate hikes to continue for the balance of the year, making 2013 the third straight full year of rising rates for commercial lines carriers, according to a special comment published Aug. 26. Referring to survey data collected from rated issuers for the workers’ compensation, commercial general liability, professional liability, commercial auto and commercial multiple peril lines, Moody’s reported that commercial insurers are expecting average rate increases of roughly 7.5 percent for policies written in 2013, up from 6.5 percent for 2012 and 2.5 percent in 2011. Given the current level of price increases, which are outpacing loss ratio trends, Moody’s forecasts that underwriting margins will also continue to improve, with the industry aggregate commercial lines combined ratio falling to 101 for 2013 and down

to 96.5 for 2014. Both figures are substantially better than the 105.5 Moody’s calculated for 2012 based on SNL Financial data. According to the report authored by Moody’s analyst Jasper Cooper, surveyed companies expect accident-year loss ratio trends to continue at about 2.5 percent in 2013 and 2014 — a level similar to 2012. Workers’ Comp Analysis Particularly striking among Moody’s line-by-line analysis of the combined ratio impacts of price changes relative to loss ratio trends is the degree of improvement indicated for the workers’ comp line. For workers’ comp, Moody’s estimates an accident-year 2013 combined ratio coming in just a point above break-even, at 101, compared to 107.5 for 2012 and 118 as recently as 2010. For 2014, Moody’s is projecting an accident-year combined ratio of 95 for the line. While combined ratios are improving,

Moody’s reveals that a number of workers’ comp carriers are signaling “a moderate decline in risk appetite” for 2013. The Moody’s report suggests that this reduced appetite will push further pricing improvements in 2014 but notes that the appetite decline is not as pronounced as it was during the early part of the last decade. Operating returns-on-surplus for workers’ comp are still low relative to target returns, and further rate increases are needed given the line’s sensitivity to low new-money rates and lower reserve releases on older accident years, Moody’s says. Moody’s estimates that a 101 combined ratio for workers’ comp for accident-year 2013 would result in a pre-tax operating return-on-surplus of about 8.5 percent (assuming a 3 percent investment yield), while a 95 combined ratio for accident-year 2014 would result in a pre-tax operating return-on-surplus of about 12 percent. What If Pricing Falls The report, which includes a similar analysis for each of the five major commercial insurance lines, also provides indications of where combined ratios and returns-on-surplus will fall at different prospective investment yield levels and if insurance pricing improvements don’t persist into 2014. For workers’ comp, for example, Moody’s believes that impact of each percentage-point increase in investment yield on operating returns is equivalent to about a 5.5-point decrease in the combined ratio. In addition, a 12 percent return-on-surplus — predicted for 2014 assuming a 3 percent investment yield — would jump to 15 percent if the yield is 4 percent and fall to 10 percent for a yield of 2.5 percent. Further, if price increases were to stop in 2014, the accident-year 2014 combined ratio for workers’ comp could come in at 99 rather than the 95 that Moody’s is forecasting under a scenario of continued price improvements.

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September 9, 2013 INSURANCE JOURNAL-NATIONAL | 19

CLOSER LOOK

Workers’ Compensation Workers’ Compensation Market: Challenges Remain Despite Recent Improvements

he market for workers’ compensation insurance is in a recovery phase of the underwriting cycle after several years of poor results. In particular, premium rates continued to increase meaningfully through the first half of 2013, coupled with stabilizing loss trends promoting improved nearterm underwriting By James B. Auden performance. The potential for enduring industry underwriting gains, however, remain less likely, given competitive forces, inherent claims expense and reserving uncertainty, and regulatory and legislative complexity.

2007-2011. The industry aggregate statutory calendar-year combined ratio in workers’ compensation peaked at a highly unprofitable 117 in 2011. For the five-year period 2008-2012, workers’ compensation generated an average statutory combined ratio of over 110, nearly 7 points worse than the commercial lines industry aggregate for the same period. Loss reserves from prior underwriting periods in the workers’ compensation line have developed unfavorably in each of the last four consecutive years, compared with continued favorable loss experience in all other lines combined over that period.

Underwriting Loss The U.S. commercial lines underwriting cycle tilted toward a hardening phase in the second half of 2011 as market participants responded to growing underwriting Chronic Underperforming Segment losses and a declining investment contribu As the largest individual commercial tion to earnings from persistent low interlines segment, est rates. Premium based on premium The workers’ comp segment rate increases have volume, workers’ endured in commerhistorically has produced compensation is cial lines through the an underwriting profit only first half of 2013, and a key driver of once in the last 15 years. underwriting perthe worst-performing formance for the market segments — U.S. property/casualty insurance industry. including workers’ compensation — have Relative to other large commercial lines, experienced the most including other liability, commercial auto substantial price hikes. and commercial multi-peril, workers’ comAccording to the quarpensation has stood out in recent years as terly commercial lines one of the weakest industry segments in market survey pubterms of underwriting performance and lished by the Council of loss reserve strength. Insurance Agents and The past economic recession greatly Brokers, workers’ comp impacted workers’ compensation reverates have increased for nues as premiums are typically based on the last nine consecupayrolls, which sharply deteriorated with tive quarters. The most expanding unemployment levels. These ecorecent (second-quarter nomic factors, coupled with several years of 2013) survey reported price competition and consistent loss cost an average quarterly growth, which exceeded inflation, promotrate increase of 8.3 pered strong underwriting loss expansion from cent in workers’ comp. 20 | INSURANCE JOURNAL-NATIONAL September 9, 2013

Premium rate increases and a modest economic recovery have promoted a return to healthier premium growth in the workers’ compensation line. Industry workers’ compensation net written premium volume increased by 7 percent in both 2011 and 2012 — the largest change of all major commercial insurance market segments. Premium revenue improvement, coupled with relative stability in 2012 claims costs, led to material improvement in the industry combined ratio to 110 for the year. Overall workers’ compensation claims cost trends have tied more closely to general inflation levels recently. The historical downward trend in workers’ compensation claims frequency tied in large part to benefits from greater risk management sophistication and safety processes resumed in 2012, following a recession-related boost in frequency. Results Vary Considerably A review of statutory underwriting results for the top 10 writers of workers’ compensation at year-end 2012 reveals significant disparities in company underwriting performance. The chart below shows the average statutory combined ratio from 2008-2012 and the change in net written premiums over the last five years in workers’ compensation insurance by company,

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revealing a distinct relationship between underwriting performance and premium growth over this period. Companies with weaker underwriting performance, such as Liberty Mutual Insurance Co., American International Group Inc., Zurich American Insurance Co. and California’s State Compensation Insurance Fund, have reduced workers’ compensation premium volume over this period. The reduction in writings in less profitable lines is a significant contributing factor to recent market underwriting and pricing improvements. Despite past unfavorable market conditions, several insurers have generated consistent underwriting profits in this line. Companies among the leading writers of workers’ compensation that have combined ratios below 100 over the last five years include The Chubb Corp., Hartford Fire Group, National Indemnity Co. and Travelers Cos. Inc. These companies have expanded their premium bases over the period, while the industry’s aggregate workers’ compensation premiums declined by 14 percent from year-end 2007-2012. Market share across companies has shifted significantly in recent years. Liberty Mutual continues to reduce its workers’ compensation book of business but remains the largest individual writer of workers’ compensation, and AIG’s premium base declined markedly from its prior leading market position. National Indemnity reported the most notable recent increase in workers’ compensation market activity, nearly doubling written premium volume in 2012 from expansion of regional operations. Recent movements by National Indemnity to bolster its U.S. primary commercial and excess and surplus lines operations will likely lead to further workers’ compensation expansion going forward. Future Uncertainty The cumulative effects from successive renewal-price increases and generally stable economic trends are likely to promote further performance improvement going forward. However, the workers’ compensawww.insurancejournal.com

tion segment historically has produced an underwriting profit only once in the last 15 years. The likelihood of the market generating consistent underwriting profits going forward remains slim. The durability of the current market hardening phase remains in question due to factors tied to pricing and loss costs. • Workers’ compensation remains a very competitive segment of the insurance industry with a large number of market participants. • Current favorable pricing movement is tied more to a collective reaction to weaker profitability than a reduction in market underwriting capacity. • As capital allocated to commercial lines remains robust, competitive forces are likely to promote a return to flat or declining premium rates. • Most recent pricing indicators are showing that the level of renewal rate increase in commercial lines, including workers’ comp, remains positive but is already slowing. From a claims and loss costs perspective, medical costs remain a key cost driver of workers’ compensation claims. Medical severity was relatively stable in 2012 but historically has been a more volatile cost factor. Going forward, the impact of implementation of the Patient Protection and Affordable Care Act (PPACA) on the U.S. healthcare market and healthcare costs remains highly uncertain. Besides potential changes in traditional regulatory and legislative requirements inherent to the workers’ compensation business, looming expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) at year-end 2014 creates addi-

tional uncertainty. Workers’ comp writers may have large aggregations of underwriting exposures to terrorist events occurring during the work day, particularly in larger urban centers. TRIPRA and its predecessor programs since November 2002 have provided a risk-sharing mechanism between private insurers and the federal government in the event of a large-scale terrorist event. Elimination of this government-sponsored reinsurance protection would increase net exposures to terror events for many domestic commercial insurers. Unlike commercial property and other lines, workers’ comp insurers are not allowed by statute to exclude terrorism in policy coverage. In the event of a TRIPRA non-renewal, the inability to exclude terrorism may induce workers’ comp underwriters to withdraw from the market, creating greater difficulty for policyholders to find coverage and increasing premium rates. Auden is sector head for North America P/C insurance ratings at Fitch Ratings. Email: jim.auden@ fitchratings.com.

September 9, 2013 INSURANCE JOURNAL-NATIONAL | 21

SPECIAL

REPORT

Intellectual Property

CEOs, Insurers Finally Ready to Embrace Intellectual Property Insurance? By Amy O’Connor

he small yet complicated niche of patent and intellectual property (IP) insurance has seen more interest lately as patent claims rise and companies look to protect their ideas or company trade secrets from so-called patent trolls and infringement lawsuits. While IP insurance is becoming more important, the insurance market has had a hard time accepting this risk, although that 22 | INSURANCE JOURNAL-NATIONAL September 9, 2013

could be starting to change, say experts. CEOs report managing their intellectual property as one of their top three risks because they have begun to recognize it is one of their most valuable assets, says Sarah Benolken, executive vice president and global tech/media/telecom practice leader for Willis. The insurance industry and the agents and brokers working with these companies now need to respond. “There is a big shift happening in this market, more products and more competition are coming,” she says.

Though they may not realize it, almost all companies from small to mid-size to large have an IP risk and need IP insurance to protect their market share and deter exuberant or frivolous charges, especially in light of the current IP trends, says Robert Fletcher, president of Intellectual Property Insurance Services Corp. (IPISC). According to IPISC, IP lawsuits filed in the U.S. have trended upward dramatically with 5,189 patent actions recorded in 2012 — the highest number ever and an increase of 29 percent over 2011. www.insurancejournal.com

There has also been a worsening in infringement allegations from patent assertion entities (PAEs) or “patent trolls.” These entities sue companies for the sole purpose of extracting licensing fees. “IP remains an important part, if not the most important part, of a company’s value,” says Fletcher. “IP is everywhere. It’s in product packaging by way of design patents and trade dress; recipes by way of trade secrets and utility patents; and advertisements and marketing protected by copyrights.” IP insurance availability, on the other hand, has stayed static. IPISC, a Lloyd’s coverholder, is just one of a handful of insurance agencies that will work with this risk in the U.S. The company has provided IP www.insurancejournal.com

and risk transfer options. The broker is also insurance since 1990, including abatement working on building additional tools and insurance, defense insurance; multi-peril partnerships around the intellectual propIP insurance rider and unauthorized discloerty risk, as well as providing more specific sure insurance. tools for larger companies. Last fall, IPISIC launched its InventPro “This space really has a perception vs. program to help enforce a policyholder’s reality problem. The perception is you can rights against infringers who may be larger never make money writing patent insurand more financially able to withstand ance. Willis doesn’t believe that mantra. You costly IP litigation. The policy targets invencan manage IP just as much as you can mantors and small companies that have one to age tangible properties,” says Pedersen. three patent applications, issued patents, Insurers aren’t the only piece of the IP trademark applications and/or registered puzzle that has needed prodding. It has trademarks. been a struggle to engage customers as well. IPISC said it plans to announce a new “It has taken some time to get the mescoverage specifically targeting “patent troll” sage out because people don’t have a finite accusations or infringement within a year. understanding of intangible assets,” says Global-broker Willis has also focused on Pedersen. “People are very comfortable with the niche for the past five years, but Karl property and tangible assets, but when it Pedersen, senior vice president of Willis’ comes to the FINEX North ‘There is a big shift happening in fact that 60 America Cyber this market, more products and percent of a and E&O team, company’s assets says it has been a more competition are coming.’ are intangible struggle to bring — including IP — companies don’t know underwriters around, something the broker what they should be doing.” is trying to change. IPISC has also found it difficult to edu “There are a lot of limitations built into cate insureds on why they need a specific IP the amount of coverage or the type of induspolicy. Many clients will turn to their comtry, and most companies don’t have that mercial general liability (CGL) policies for baseline for insurability,” he says. “We are IP coverage, says Fletcher, but most insurers trying to say ‘why aren’t there other markets exclude any coverage for IP. Patents are also writing IP coverage? Why are there so many frequently excluded. cyber markets out there but only a few for “Any coverage for IP under a CGL policy patents?’” is extremely rare and explicitly limited to Willis brokers believe one reason is the cases where advertising injury involves there hasn’t been historical data available the patent claims directly covering the act to U.S. insurers. The broker has worked of advertising itself. Otherwise, a defense on addressing that with its PatentWize insurance policy specific to cover IP risk is product that it launched back in 2010. the only viable solution,” says Fletcher. PatentWize works through a partnership As always, the burden to get the meswith online IP business intelligence softsage out falls on the insurance industry. ware platform Innography to help compaFletcher says agents and brokers need to be nies manage their patent risks by providing proactive in assessing their clients IP risk, patent, trademark, legal, financial and other explaining to clients what that IP risk is key IP information. and the significant exposures it creates, and The software combines dozens of patent, advising clients on insurance options. trademark and business data sources from “An important part of this challenge is more than 70 countries to assist companies to educate the market that prices, limits with their IP analysis and research. and restrictions are continuously becoming PatentWize is part of Willis’ IP offering more favorable to insureds,” he says. that also includes technology, consulting September 9, 2013 INSURANCE JOURNAL-NATIONAL | 23

SPECIAL REPORT

Cyber Liability Helping Clients Understand Risks of Handling Credit Cards

hese days, the vast majority of businesses selling goods and services are dependent on being able to accept credit cards as the primary form of payment, whether on location, online, or even over the phone. Few, however, realize that the processing of thousands, sometimes millions, of customer credit By Nick Economidis card records carries a range of different financial risks, one of which is compliance with the Merchant Services Agreement, a contract at the heart of being able to accept credit payments. This certainly appears to have been the case with Cicero’s, a small restaurant located in Park City, Utah. Cicero’s sued its bank and the affiliated payment processor alleging, amongst other things, that they failed to inform Cicero’s of its obligations under a merchant agreement to accept credit card payments. (Cicero’s Inc. vs. Elavon Inc., Third Judicial District Court, Summit County, Utah) According to the complaint, Cicero’s incurred claims against them exceeding $90,000 as well as other significant costs

due to a potential breach of payment card information from its computer system. The good news is, by better understanding loss exposures associated with payment card information, a merchant’s general obligations under common Merchant Services Agreements, and insurance options available, insurance agents and brokers can assist their clients to fully understand and manage the risks associated with handling credit cards.

Determining Payment Card Exposures To help a client determine the severity of a credit card exposure, the agent or broker needs to assess how the merchant processes credit card transactions and also review the exact terms of the Merchant Services Agreement. Many small merchants may simply swipe the credit card through a special electronic box. The “swipe box” will capture and transmit the card information to the payment processor, but will not retain the card information. The card information gets transmitted directly to the processor via a direct telecommunications line. Because the information is not retained to the merchant’s computer system, merchants using this type of system generally have a low exposure to the o find the right coverage brokers should take into risks of losing payment card account the following considerations: information. Is there express coverage for PCI Fines/Penalties? Payment card exposures, Will the insurer pay for an attorney to advise the insured however, are highest for with the PCI adjudication process? merchants that process cred Will the insurer pay the cost for the insured to retain a it card transactions directly computer forensic consultant approved by the PCI Data through a Point of Sale (POS) Security Standards Council? system. If recommended by an attorney, will the insurer pay for a Typically, this is the case second forensic auditor to mirror the investigation completwhen the merchant swipes ed by the computer forensic consultant approved by the PCI the payment card via a Data Security Standards Council? reader directly affixed to the Will the insurer pay for the cost to retain a computer POS system which stores security expert for the insured to be re-certified as PCI DSS the card information on the compliant after a covered loss or event?

Insurance Coverage Considerations

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merchant’s computer systems. Many merchants mistakenly believe that because a POS system encrypts card information as the card is swiped, or because the POS system is certified as “PCI Compliant,” there is little to no exposure to loss. Unfortunately, hackers have been able to circumvent these protections and Merchant Service Agreements do not protect the merchant in these cases. Payment card exposures are also significant for online merchants that process credit card pay-

ments directly on their websites, and possibly even retain the information in their computer systems to facilitate easy ordering for future orders. The Merchant Services Agreement Clearly, there is a range of ways a merchant can process credit card information, which will dictate the merchant’s level of exposure to loss. Because there are so many different ways of handling credit card transactions, the best way to determine a client’s exact exposure to loss is to examine their obligations under a Merchant Services Agreement. www.insurancejournal.com

The Merchant Services Agreement is not based on obligations imposed by statutory or common law, but through obligations imposed under contract. Most notably, the Merchant Services Agreement requires the merchant to maintain compliance with the Payment Card Industry Data Security Standards (PCI DSS),

as well as accept certain obligations in the event of payment card information breach. The PCI DSS is a set of standards promulgated by the Payment Card Industry Security Standards Council composed of all the major credit card brands. The extent of a merchant’s responsibility to demonstrate compliance with the PCI DSS is based on the number of transactions that a merchant handles annually. Specifically, merchants handling less than six million transactions a year are generally required to complete a Self-Assessment Questionnaire (SAQ). Merchants handling more than six million transactions a year are required to supply a Report on Compliance (ROC) from an approved IT-security expert. Most merchants are also required to obtain a quarterly network scan of their computers systems from an approved provider. In addition to demonstrating compliwww.insurancejournal.com

ance with PCI DSS, the Merchant Services Agreement will place obligations on the merchant when a payment card company suspects that the merchant is a source of a breach. If suspected to be the source of a breach, the merchant is often required to obtain a computer forensic audit (at the merchant’s expense) from a forensic auditor that has been approved by the PCI Security Standards Council. If the forensic auditor finds that the merchant is the source of a breach, the merchant may be held accountable for fines and penalties (if not in compliance with PCI DSS standards) as well as for the costs incurred to re-issue cards to consumers. As demonstrated in the Cicero’s case, these costs and assessments may be substantial.

Compliance with PCI Security Standards

Risk Management Once an assessment of a merchant’s payment card exposures has been completed, good risk management requires implementation of appropriate risk controls as well as appropriate risk financing techniques. No set of risk controls can guarantee that a loss will not occur. As such, the entity should consider the use of insurance, or other risk financing techniques, to finance recovery from a loss that cannot be prevented. Careful adherence to the PCI DSS will provide a basic level of risk control, but insurance may be needed for higher exposures. Companies often fail to recognize the significant risks they carry when accepting credit card payments. This is especially true when they don’t understand or properly comply with Merchant Service Agreements. Brokers can help clients mitigate those risks by helping them to understand the responsibilities, and possible ramifications, accepted in a Merchant Services Agreement, as well as by helping these companies to implement the right risk management strategy and insurance solutions.

nsurance brokers can assist clients that handle payment card transactions through a POS system to identify common compliance failures by asking the following questions: Were payment processing systems installed and configured with the assistance of a systems integrator, reseller or consultant qualified by the PCI Security Standards Council Qualified Integrators and Resellers (QIR)™ program? Have all default and vendor supplied passwords for payment systems been modified? Are all the devices and servers that handle payment card transactions inside the network completely segmented by firewalls at each internet connection as well as from the remainder of your corporate network? Has access been restricted to and from the PCI environment to only necessary systems and ports inside your corporate environment? Do you restrict external traffic from “untrusted” networks and hosts? Have you prohibited direct public access between the internet and all components inside your PCI environment?

Economidis is a technology, media and business services underwriter for Beazley.

September 9, 2013 INSURANCE JOURNAL-NATIONAL | 25

SPOTLIGHT

Contractors 10 Things to Know About Residential Contractors There is a key difference between an independent contractor and a subcontractor. An independent contractor relationship exists where there are two parties, such as the owner and the contractor. A subcontractor relationship exists when there are three or more parties: 1) the owner; 2) an upper tier contractor (usually referred to as the “general contractor”) hired by the owner; and 3) a lower tier (or subcontractor) hired by the general contractor. — Insurance Journal’s Academy of Insurance.

There were an estimated 943,000 building permits authorized for privately-owned housing units in July 2013, according to the U.S. Census Bureau and the Department of Housing and Urban Development. The revised rate for June 2013 was 918,000 and in July 2012 there were 839,000 building permits authorized for privately-owned housing units.

In 44 states and the District of Columbia, workers’ compensation statutes make an upper tier contractor responsible for work-related injuries suffered by employees of a lower tier contractor that does not have workers’ compensation coverage in place at the time of injury. — Insurance Journal’s Academy of Insurance.

Thirty-seven states posted year-over-year gains in construction employment in July 2013 compared to July 2012, according to the Associated General Contractors of America (AGCA).

ISO introduced the Primary and Noncontributory - Other Insurance Condition (CG 20 01) endorsement. This allows the lower tier contractor to extend coverage to an additional insured (generally the upper tier contractor) on a “primary and noncontributory” basis as required by many construction contracts. — Insurance Journal’s Academy of Insurance.

All construction-related additional insured endorsements were altered by ISO in 2013. Wording in these revised endorsements limits coverage extended to the additional insured to the maximum amount of transfer allowed by the subject state’s indemnification (or anti-indemnification) statute — regardless of the level of transfer specified in the contract. — Insurance Journal’s Academy of Insurance. Just because the lower tier agreed to indemnify or hold the upper tier harmless for a specific act does not mean that such indemnification is protected by insurance. The subcontractor can agree to far more than is covered by insurance. — Insurance Journal’s Academy of Insurance.

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The largest year-over-year percentage increase in construction jobs occurred in Wyoming (16.7 percent, 3,500 jobs), followed by Mississippi (12.3 percent, 5,800 jobs) and Hawaii (11.6 percent, 3,400 jobs). Texas added the most jobs over the past 12 months (33,100, 5.7 percent), followed by California (17,800, 3.0 percent) and Florida (15,700, 4.6 percent). (AGCA)

Fatal injuries among construction trade workers rose in 2012 to 577 after five years of decline, according to the U.S. Bureau of Labor Statistics (BLS). This was an 8 percent increase over the 533 construction trade workplace deaths in 2011, but a 41 percent drop from the high of 977 reported in 2006.

The leading causes of worker deaths on construction sites are falls, followed by electrocution, struck by object and caught-in/between, according to the BLS.

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IDEA EXCHANGE

Product Recall Product Safety Recalls Generating Greater Insurance Risks

onsumer product safety recalls in the United States have escalated significantly in recent years, up 61 percent since 2007, according to the U.S. Consumer Product Safety Commission (CPSC). Financial disaster can result for manufacturers that confront litigation through regulatory penalties, costs of implementing a recall, third party costs, attorney fees and damaged reputations. By Bernie Steves In addition, the CPSC is now authorized to obtain civil penalties of up to $15 million for failure to report safety hazards and for violations of mandatory safety standards and banning regulations. Manufacturers should & Alan Schoem apply procedures to minimize potentials for a recall in the first instance and understand the extent of recall insurance they may need, including options available and type of recall insurance required. Not all manufacturers and distributors are aware of their coverage depth or lack thereof, or types of coverage they may require. Today’s recall rate has increased the number of companies providing recall insurance and the number of coverage options available. Among many options are policies or riders that cover announcing a recall; shipping and warehousing recalled products; product disposal; legal costs; third party brand name recalls; and additional types of coverage options including so-called “reputation rehabilitation expenses.” The spiraling recall rate also has fueled product safety management programs to help firms in almost every industry, including the pioneering program noted here. Recall Insurance Policies Product recall policies for non-food products are triggered by recall or market

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withdrawal of the product. Policies do require that a potential for bodily injury or property damage be evident. Some carriers are able to extend bodily injury requirements to include “impaired property” (the component part making the end product less useful). However, this only applies to component parts and third party elements of coverage. Losses resulting from a recall generally are classified by insurers as either first party losses or third party losses. First party losses are those that may be directly incurred or suffered by the insured. Third party losses are those suffered by customers of the insured and for which the insured may be legally obligated to reimburse. Third party “recall” liability losses should not be confused with general liability or product liability exposures of bodily injury and/or property damage. Covered losses under these policies are generally separated into first and third parties. For manufacturers of finished goods under their own labels and importers of consumer, commercial or industrial products, the initial first party financial exposures lie in the logistics of the recall itself and the notification expenses incurred in notifying the public of a safety issue and recall. First party coverage can also be extended to include repair, replacement or refund expenses and business interruption losses associated with the recall. Pioneering Program In 2009 — for the first time at a U.S. university — a product safety management certificate curriculum was launched at the Center for Supply Chain Management Studies at Saint Louis University (SLU) in Missouri. It has since expanded to four courses in risk assessment, product safety program development and product

safety management, and today includes an Advanced Product Safety Management Program. Topics cover all aspects of managing product safety within companies. Instructors visit from corporations and product safety enterprises across the United States, and include SLU faculty. This program is attended by product safety specialists, attorneys, insurers and supply chain managers, including Microsoft and other major enterprises. Recall insurance should always be part of a manufacturing company’s policy portfolio, as should participating in a consumer product safety management program. Inez Tenenbaum, CPSC Chairman, says: “Creating quality assurance and product safety systems in manufacturing is the optimum way to prevent unsafe products from reaching consumers. Knowing how to set up product safety systems, recognizing product hazards, managing supply chains, analyzing data and tracking all raw products that go into a finished product is essential for the development of safe products.” Those perspectives may be a good lesson for all of us. Steves is managing director and practice leader of Aon Crisis Management, a division of Aon Risk Services Central Inc. Schoem has spent his career in product safety areas as a lawyer at the U.S. Consumer Product Safety Commission from 1973 to 2004, and as a risk consultant in the Global Product Risk Practice at Marsh USA from 2004 to 2011.

September 9, 2013 INSURANCE JOURNAL-NATIONAL | 27

NATIONAL COVERAGE

News & Markets 28th Annual Market & Financial Outlook Survey Reveals an Optimistic Marketplace: MarshBerry

agencies and brokers. favorable supplemental income for the Employee benefits commission averaged majority of respondents. Some 70 per4.1 percent growth in 2012 and mid-year cent reported recognizing increased or projections are estimating rates in this key consistent levels of contingency income, line of business to only grow at 2.5 percent while 87 percent of respondents indicated in 2013. enhanced or consistent override commis Forecasts are difficult to calculate with sions over the prior year. all of the market ambiguity, but even if the The survey revealed that 92 percent Affordable Care Act implementation does of respondents are expecting similar or not hinder account retention, a shift to feeenhanced profits in 2013. based compensation may become the norm Amplified growth metrics have made for many brokers, which would negatively way for increased owner return, driving affect industry growth. agency values up 11.2 percent over the About one-third of survey respondents prior year. plan to continue investment in their employee benefit value The Perpetuation platform; while anoth- The average balance Challenge er 30 percent plan to Despite significant optisheet value in the do nothing regarding mism in key market funindependent agency healthcare reform. damentals, year-over-year sector actually dropped agency valuation increasas a percentage of net Agency Growth es, and performance Most respondents revenues in 2012 despite metrics contained in the grew organically while 2013 Market the highest growth year MarshBerry less than 8 percent of & Financial Outlook respondents indicated in recent history. Survey, the internal perthat they executed an petuation challenge conacquisition in commercial lines, personal tinues to be the biggest long-term threat lines or employee benefits revenue during to the independently-held distribution the past 12 months. marketplace. Overall growth in core revenues drove The survey revealed that in addition to industry-wide aging issues, most firms have not instituted an executable rein10-Year Stock Investment Return vs. Agency Valuations (2002-2012) vestment plan needed to build the next generation of ownership. In addition to Public Broker Composite (1) 18.1% lackluster and often sporadic reinvestment, most independent agencies have not 113.8% Private Ind. Agencies (2) built the financial discipline, inclusive of an adequate balance sheet, to fund internal 57.1% Dow Jones perpetuation. The average balance sheet value in 62.1% S&P 500 the independent agency sector actually dropped as a percentage of net revenues 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% in 2012. This is despite the highest growth 1 Public Broker Composite is a weighted composite which includes Aon, Arthur J. Gallagher, Brown & Brown year in recent history and a high concenInc., Marsh & McLennan, National Financial Partners, and Willis Holdings Public Limited Co. 2 Private Independent Agency index values are estimated based on year-end and 2012 mid-year tration of agency owners indicating higher valuations completed through 5/31/13. profitability. Sources: SNL Financial and MarshBerry n June of this year, MarshBerry launched its 28th Annual Market & Financial Outlook Survey in conjunction with Insurance Journal. The survey compiled anonymous general independent agency information along with financial, market, carrier and technology data. Initial data shows that By Tommy 2012 and 2013 brought a McDonald much needed lift to the insurance distribution space creating optimism within the industry. With dismal total commission growth over the past five years, property and casualty (P/C) estimated growth rates in 2012 and 2013 are more than 8 percent with continued growth forecasted into 2014. Survey results credit workersâ&#x20AC;&#x2122; compensation, commercial property and homeowners insurance rates as the key drivers of P/C growth. More than 90 percent of survey respondents also felt that the economy will remain flat or will improve in 2014. The premium rate forecast echoes the industryâ&#x20AC;&#x2122;s expectation with anticipated growth averaging 5 percent, providing controllable market lift for many independent

28 | INSURANCE JOURNAL-NATIONAL September 9, 2013

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competitive landscape across the country.

and others including: • Key agent and broker performance trends from 2007–2014 with results segmented by revenue size and region; • Largest threat to agency growth; • Carrier partner strengths; • Five year expense trends (CAGR); and • Staffing trends. Those that completed the survey, and provided their contact information, will receive a link to download the complete report on Oct. 23, 2013. The report will be available for purchase online on Oct. 23 by visiting www.MarshBerry.com for $199. To learn more about the survey, or to download a copy of the “Executive Summary,” visit: http://info.marshberry. com/executivesummary.

Survey Highlights The MarshBerry 2013 Market & Financial Outlook highlights these areas

McDonald is a vice president at MarshBerry and is responsible for the company’s Peer Exchange Networks.

What is your primary strategy regarding healthcare reform? 3.3%

Divest

9.8%

Private exchange development

10.6%

Partner with another firm Hope for a broker role with state/federal exchange

14.6%

Invest in becoming an employee benefits consultant

31.7%

Do nothing

30.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Source: MarshBerry Market and Financial Outlook Survey, 2013.

Without a dramatic shift in agency perpetuation preparedness, leadership development, financial management and reinvestment discipline, rapid consolidation will likely continue to reshape the

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September 9, 2013 INSURANCE JOURNAL-NATIONAL | 29

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The Competitive Advantage Quickest Way to Raise Agents’ Ire

hat is the quickest way a consultant can raise the ire of agents everywhere? Write an article stating producers have a responsibility to produce. What is the next best way to raise agents’ ire? Write an article that producers should not be given any call-in or walkin business, nor should they be given accounts By Chris Burand that CSRs are currently already servicing and are perfectly capable of servicing in the future. Many readers will think these points are so incredibly obvious they do not see the point of even writing about them. To these readers, you have a great advantage because so many of your peers completely disagree. Here are some examples of comments I have received that clearly raised the ire of some agency owners and producers.

One agency owner accused me of creatthe producers do not produce. The owners ing a rebellion (his word) among his CSRs take great pride in paying these nonproducbecause after reading my article and realizing producers a great deal of money with no ing they were doing the agency’s producers’ results required. The owners like the atmowork but the producers were being paid, sphere this scenario creates. As one insurthey demanded to be compensated for their ance consultant once wrote, at the heart of sales. They had figured out they sold more the matter, they like having a kingdom and than the producers, knights that while servicing their A producer’s job is to produce. cannot fight Period. Quality is important, but better than no respective books and the producers’ only if sales are generated first. knights at all. books, but the proEmotionally, ducers were given all the credit and paid as I truly believe they are indeed happier with if all sales were generated by the producers. producers who do not and cannot produce I seriously doubt I created a rebellion. rather than no producers. Happiness is Grossly unfair policy is almost always the worth a fortune so their decision is acturoot cause of rebellions. Not only was this ally quite reasonable. I just do not see this gentleman practicing poor human resource industry remaining fat enough to maintain policy, he was making a horrendous busithis welfare system. A key reason many ness decision. Why even employ producers agencies must sell is because for them to that sell less than the agency’s CSRs? afford producers at the going rate, the Asking such a question is heretical in agency has to grow and/or be far more their world. I have been fired from consultprofitable than normal. What ing jobs for asking that single queshappens to growth and tion in agencies where profit when employing producers who do not produce? Producers who respond with anger to that question do not even know they are telling the world they cannot produce. I’ve received responses such as, “production is a hard job so producers should be cut some slack” and “maybe CSRs’ compensation should be cut to make CSRs more productive and leave the producers alone.” I totally understand how difficult the

job is. But how difficult the job happens to be is beside the point. As Zig Zigler aptly stated, “Too many people substitute effort for accomplishment.”

ducer will have 200 accounts — one renewal per day. That leaves many hours and days for selling. If retention is 90 percent and growth is 5 percent, then only 23 new accounts per year A Producer’s Job must be written. This is only one account These “producers” make the same points every other week. While not a walk in the in an effort to change the sensitive subject park, it is completely feasible and if the of their production. goal is $2,000 per account, then it is only 12 A producer’s job is to produce. Period. accounts per year, one a month. Writing one Quality is important, but only if sales are new account per month certainly seems like generated first. Retention is important, but a reasonable requirement. only if sales are generated first. A person Others sadly just cannot do the math. can tell the world that building relationThey seem to think they are getting a raw ships and going to meetings and coaching deal because they only get 40 percent (or insureds and working with underwriters whatever their particular commission rate and joining civic clubs are important, and is) of the 12.5 percent, for example, the they are, but only if they lead to sales. agency receives as its commission on the Some agency owners and producers premium. So here is the math. claim their job is to service. Servicing cli They are upset at getting only 5 percent ents is indeed an important job, but the (12.5 percent times 40 percent) of the preterm “service” is unfortunately, for effective mium. At 30 percent, this equals 3.8 percent measures, ambiguous. The reality is that of the premium. Somehow or another, they most service work is done or can be done think they should be paid the entire 40 perby quality CSRs on at least 75 percent of a cent of the premium (even though the agentypical agency’s accounts. cy only gets 12.5 percent), not 40 percent of Large, more complex accounts do require the commission the agency earns! (For those a producer’s involvement, but quite frankly, readers whose jaws are on the floor, please most producers fail be assured I am in this instance, Why even employ producers that not making this too. They fail up. I am not because 90 percent sell less than the agency’s CSRs? that creative.) of these produc These same ers do not use coverage checklists so the people then opine that to make up the value of any expertise they bring is limited. difference, the agency should just pay the Coverage checklists are one of the very CSRs less. best tools for selling and one of the very Keep in mind the beauty of their argubest tools for making sure clients get the ment. If CSRs are paid less, they will usualcoverage they need. And yet, these kinds of ly do less, meaning the producers will have producers almost invariably fail to use them. to service more and therefore, they will Another claim is that it is insulting have a better excuse for not selling! to these producers to think they just sit If you are a producer and want a pay around waiting for business to walk in the raise, you are in an incredibly fortunate job door. I am not sure what many producbecause it is one of the few jobs for which ers are doing with their time other than you can get a raise without asking the boss waiting for business to arrive because their for more money. Just go out and sell more! results surely do not show they are selling. Here are some facts. At 40 percent, pro At $200,000 commission to the agency at ducer compensation is by far the biggest an average of $1,000 per account, the procost an agency has on any single account. www.insurancejournal.com

On a book of $150,000, the producer’s cost including typical benefits is $75,000 to $80,000. The fact is the median producer in this industry generates approximately $200,000 of commissions to their agency. This is not producing, not when mediocre producers generate $300,000 and not when good producers can generate at least $500,000 in commissions in any location in North America (they may have to travel to do it, but no rules exist saying a producer cannot travel). The Challenge This article will upset many people. These people are likely in the wrong job or the wrong industry for these times. They are probably already challenged and scared. One solution is to make sure a sales job in this industry is really for them. Sometimes the outcome is terrific when a producer leaves an agency for their true calling and returns for a visit later a much happier person. Another solution is intensive sales training by a high quality sales consultant, one that demands performance. The ultimate solution is management that demands success. I would not like being a competitor of any producer or agency owner that accepts this challenge. When they succeed, they will have a conviction that is nearly impossible to reproduce and that is extremely powerful because it comes from successfully changing one’s ways, from successfully breaking poor habits. For other readers that can already produce, here is my suggestion: Every agency and producer who cannot produce has five to 10 good accounts. These are low hanging fruit for you. The only losers are those people that keep insisting that producers do not need to produce. Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719485-3868. E-mail: chris@burand-associates.com.

September 9, 2013 INSURANCE JOURNAL-NATIONAL | 31

IDEA EXCHANGE

Essentials Insurance Coverage for Discounting the Price of Goods for Sale?

odern commercial general liability (CGL) policies provide coverage for personal and advertising injury. This type of coverage is discussed extensively in Practical Tools for Handling Insurance Cases, §§ 13.32-13:53 (Thomson Reuters 2011). One of the enumerated offenses for this type of coverage involves “[o]ral or written publication of material that slanders or By Steven Plitt libels a person or organization or disparages a person’s or organization’s goods, products or services.” Recently, a California Appellate Court rendered a decision which strained the boundary line when it found coverage for this enumerated offense where the allegation involved a retailer’s selling of products at a discount. Travelers Property Cas. Co. of America v. Charlotte Russe Holding Inc., 207 Cal.App.4th 969, 144 Cal.Rptr.3d 12 (Cal. App. 2nd Dist. 2012), rev. denied (2012), involved coverage for a manufacturer’s allegation that a national retailer had offered the manufacturer’s products for sale at severely discounted prices, resulting in a diminution of the brand. The national retailer submitted the claim to Travelers alleging that it triggered personal injury coverage for product disparagement. Charlotte Russe Charlotte Russe, a national retailer, contracted in December 2008 with Versatile Entertainment, and its parent company, People’s Liberation Inc. (collectively Versatile) under which Charlotte Russe became the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel, which included jeans and knits. In the complaint brought against Charlotte Russe, Versatile identified the People’s Liberation brand as a premium, high-end brand in which Versatile had invested millions of dollars developing that brand so it would become associated in the mar32 | INSURANCE JOURNAL-NATIONAL September 9, 2013

ketplace with high end casual apparel, distributed exclusively through fine department stores and boutiques. 207 Cal. App.4th at 972, 144 Cal. Rptr.3d at 15. Versatile alleged that while Charlotte Russe had never offered this type of apparel for sale at the higher price point commanded by a premium brand, Charlotte Russe had promised to provide the investment and support necessary to promote the sale of premium brand denim and knit products for Versatile in order to encourage its customers to purchase such premium products at Charlotte Russe stores. It was alleged that Charlotte Russe failed to live up to these representations. Versatile alleged that Charlotte Russe held a “fire sale” of People’s Liberation branded apparel at “close-out” prices and that the sale of Versatile’s premium brand clothing at severe discounts not only violated the parties’ agreement but that the fire sale resulted in significant and irreparable damage to and diminution of the People’s Liberation brand and trademark. Versatile’s allegations of discounting apparently involved Charlotte Russe publicly displaying signs in store windows and on clothing racks announcing that People’s Liberation brand jeans were on sale as well as on Charlotte Russe’s written markdowns on individual People’s Liberation clothing items. The alleged discounts involved price markdowns of 70 percent to 85 percent.

Based on an experienced apparel industry expert, the markdowns and dramatic price reductions had the potential to have a disparaging effect on the People’s Liberation brand because it suggested to consumers that the product — particularly premium high-end or luxury goods such as People’s Liberation brand products — were of inferior quality. Id. at 973, 144 Cal.Rptr.3d at 16. People’s Liberation The court found that Versatile’s allegations could reasonably be interpreted to allege that Charlotte Russe disparaged the People’s Liberation brand and led to potential customers believing that it was www.insurancejournal.com

not a premium, high-end brand. Therefore, it was improper for the trial court to grant summary judgment in favor of Travelers. In so holding, the court rejected Travelers’ contention that allegations of price discounts did not accuse Charlotte Russe of either product disparagement or false statements and therefore those allegations did not trigger the policies’ personal injury or advertising injury coverage and did not give rise to a duty to defend. See 207 Cal.App.4th at 978, 144 Cal.Rptr.3d at 19. The court also rejected Travelers’ contention that “disparagement,” in the insurance context, referred “to the tort of trade libel,” which is a tort that required pleading and proof of a false statement of fact. Versatile did not allege any “injurious false statement disparaging Versatile’s products.” 207 Cal. App.4th at 979, 144 Cal.Rptr.3d at 20. In rejecting this argument, the court pointed to the fact that Versatile’s pleadings alleged that the People’s Liberation brand had been identified in the marketplace as high-end goods and that Charlotte Russe had published prices for those goods implying that they were not premium, high-end goods. The allegations made by Versatile carried with them the implication that Charlotte Russe’s pricing was false because the goods were, in fact, premium and high-end. That was enough to trigger coverage according to the court. 207 Cal.App.4th at 979, 144 Cal.Rptr.3d at 20-21 (citing Nichols v. Great American Ins. Cos., 169 Cal.App.3d 766, 774, 215 Cal.Rptr. 416 (1985) (statement may constitute product disparagement if plaintiff pleads facts showing the statements’ defamatory meaning “by innuendo”); E.piphany Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244, 1253-1254 (N.D. Cal. 2008) (insured’s claim of superiority of its products necessarily implied inferiority of competitor’s products)). The court observed: “[W]e cannot rule out the possibility that Versatile’s pleadings could be understood to charge that the dramatic discounts at which the People’s Liberation products were being sold communicated to potential customers the implication — false, accordwww.insurancejournal.com

ing to Versatile — that the products were not (or that the Charlotte Russe parties did not believe them to be) premium, high-end goods. Arguably, a trade libel claim might survive under these theories. According to the comments to the Restatement Second of Torts, the concept of trade libel encompasses ‘a statement in the form of an opinion, if the statement implies the existence of undisclosed facts that justify the opinion....’” 207 Cal.App.4th at 980, 144 Cal.Rptr.3d at 21 (citations omitted). Finally, in rejecting the trade libel tort argument, the court noted that the phraseology of the coverage made coverage for disparagement an alternative to coverage for libelous materials and was not just an element of that coverage. The policy covered publications of material either that slandered or libeled a person or organization, or that disparaged a person’s or organization’s goods, products or services. Because of this language, both were not required to establish coverage. The California courts have strained personal and advertising injury coverage to the extreme point of requiring a defense of insureds who sell products at discounted

prices because of the implication that the discounting of prices suggests inferiority of those products. At what point in the discounting process does the product become disparaged? For example, is a 70 percent discount a potential disparagement during normal retail business operations but may not be a disparagement during marketplace acknowledged sales campaigns on holidays like Memorial Day. If a store advertises itself as going out of business, does that fact result in no coverage and defense obligation when products are sold at what some would call a fire sale? What about close-outs on products when the season’s new fashions are offered to the public for the first time? Plitt is chairperson of the insurance coverage practice group at Kunz Plitt Hyland & Demlong, P.C., based in Phoenix, Arizona. He is a nationally recognized expert in insurance law and has authored numerous insurance treatises and articles, including contributions to Insurance Journal and Claims Journal. He has a national expert witness practice.

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Minding Your Business How to Develop a Sales and Marketing Plan

very year a firm should develop a new sales and marketing plan. This is an essential element of strategic planning. Many carriers want to meet with the agency owners to set the game plans for the coming year and it is best for agencies to be proactive in this process. To be a “preferred” agency it is often required that an agency have a sales and marketing plan. The best starting point is to first define the agenBy Catherine Oak cy’s “personality.” The “personality” of an agency is the book of business and it will in turn define what to look for from the various markets and the selection of new markets to represent. For example, a large & Kelsey Johnson urban agency that sells only very large commercial accounts will have different expectations than a small town agency that sells all lines of insurance. Start by finding out what the split of business is along each line: personal, commercial, life, group benefits and program business, etc. Then calculate the average size of account for each line. Also, how much of the agency business comes from the top 10 accounts? Finally, analyze the distribution of business and identify the top five industries for the agency and by producer. It is important to also perform all these same steps for each producer in the firm. The big picture is good for identifying the trends. However, the detail on each producer will define how the journey will take place to get to the goals. It is the individual producer’s goals that define what the agency can expect for the overall agency goals. The analysis of the producer’s top 10 and top 50 accounts plus reviewing the most common industries in that producer’s book will define what they like to sell and their expertise. These should be the initial areas of focus for future growth. However, the 34 | INSURANCE JOURNAL-NATIONAL September 9, 2013

producer’s focus needs to be in line with the products and carriers available, as well as the overall marketplace conditions. Bottom Up It is easier to create a sales plan from the bottom up. Overall new sales goals for the agency should be determined by the sum of new sales goals for each producer. An experienced producer in a typical agency should generate at least $40,000 to $60,000 in new commission each year. For large firms with large accounts, the amount would be much higher, maybe even $75,000 to $150,000, or more in new commissions. The hit ratio of each producer needs to be determined. Hit ratios less than 25 percent to 33 percent cost the agency a lot of time and money. The technique of producers with low hit ratios needs to be checked and adjusted. Often, the producer fails to pre-qualify the prospect. Sometimes producers just are not approaching businesses that match up with the products the agency has expertise in writing, nor markets that are competitive for those classes of business. Use the successful producers as a model. After adjusting the initial target goal for each producer based on time available, hit ratios, attrition rates, niches and centers of influence, a good, solid goal will result. The overall agency goal is then the sum of each individual goal. Writing the Plan When writing a sales and marketing plan, list the current overall hit ratio, average new business produced and the average size of account and breakdown of the book of business. Write next to those numbers the target growth for the next year. Below

that write two or three actions that need to be accomplished to reach those goals. Then list the five most important markets (not necessarily the largest) and the agency’s volume with them. Write realistic agency production goals next to those numbers. Next, list one or two markets that you do not have, but feel the agency could use. Write down the dates you will approach them (create action plans by carrier). Finally, list two or three markets the agency has outgrown and should exit. Share the Plan The beautiful thing about a well-written plan is that it does not need to only be used internally. It can be shared with prospects, clients and insurance companies. Such a plan helps the firm look organized and efficient and, in reality, makes the agency management and sales force feel directed and on task. Oak and Associates now offers a template for a sales and marketing plan for $275 (or $499 with an hour of consulting). Oak is the founder and Johnson is a financial analyst at Oak & Associates, based in Santa Rosa, Calif. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. Email: catoak@gmail.com. Phone: 707-935-6565. Website: www.oakandassociates.com.

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My New Markets Artisan Program for Workers’ Comp Market Detail: PMC Insurance Group (www.pmcinsurance.com) is a wholesaler for workers’ compensation markets. PMC can write a wide range of classes which include: plumbers, carpenters, electricians, painters, masonry, and landscapers. Minimum premiums start at $2,000, however most carriers require one full-time employee and a minimum of $28,000 in payroll. Height exposure over two stories and tree pruners are excluded. Program eligibility varies by carrier and state. Available Limits: Minimum limit $2,000 Carriers: Unable to disclose, admitted States: All states except Ga., Hawaii, Ind., Minn., N.D., Neb., N.J., Ohio, Tenn., Utah, and Wyo. Contact: Kate Alben at 781-449-7744 or e-mail: kalben@ pmcinsurance.com

Products Recall Expense Insurance Market Detail: MRM Group (www.recalladvantage.com) provides product recall coverage for all industry segments with special programs for agriculture industry and meat industry. Available limits: As needed Carrier: Unable to disclose States: All states Contact: Customer service at 800-815-0060

losses; minimum five years exposure data; financials; and website information. Available limits: Minimum $1 million; maximum $25 million Carrier: Arch Insurance States: All states Contact: Customer service at 212-651-6500

Marinas, Boat Dealers, Boat Repairers Market Detail: Continental Marine (www.continentalmarineins. com) can write almost any type of marine risk, whether it commercial or personal, with over 16 marine markets to choose from. Available classes include: boat repair, boat dealers, marina operators, cargo, boat manufacturer, builder’s risk, charter, luxury yacht, terminal operators, and yacht brokers, to name a few. Available limits: As needed Carrier: Unable to disclose, admitted and non-admitted available States: Ariz., Calif., Idaho, Nev., Ore., and Wash. Contact: Jeana Ramos at 866-699-2747 or e-mail: jeana@ contintentalriskins.com continued on page 36

Energy Casualty Market Detail: Arch Insurance Group’s (www.archinsurance.com) Energy Casualty team has products for clients and brokers within the Energy segment. Arch tailors coverage to the specific needs of 1/4/08 USA12043.qxd the energy clients in all casualty lines including primary general liability, auto liability, excess and umbrella. Industry segments include: power generationpower plant, wind, solar; mining – surface mines, underground mines; oil and gas – drilling contractors, field service contractors, lease operators, pipeline; and ethanol and bio-diesel water utilities. Primary limits of $2 million/$4 million/$4 million available and capacity up to $25 million. The amount of capacity deployed and attachment point is determined on a risk by risk basis, which is dependent on the particular energy industry sub-set and the complexity of the individual risk. Limits can be used on a 100 percent layer or on a quota-share basis. Key features include: ability to write primary layers as well as lead umbrella and excess placements; ability to write on an admitted or non-admitted basis; occurrence and claims made forms. Submission guidelines: include industry supplemental application; full description of operations for each entity; minimum five years of historical www.insurancejournal.com

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My New Markets continued from page 35

Wealth Security Policy Market Detail: Woodruff-Sawyer & Co. (www.wsandco.com) have crafted a new personal protection product for independent board members called “wealth security policy.” Independent directors of corporations are subject to unlimited, personal liability. They can be named defendants in securities class action suits and are often the targets of derivative suits. The Wealth Security Policy is a personal policy for independent board members and is specifically designed

Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/ Abram Interstate www.abraminterstate.com Agent Support Network of America www.asnoa.com AIG www.aig.com American Agents Alliance www.agentsalliance.com Applied Underwriters www.applieduw.com Arrowhead General Insurance Agency www.arrowheadgrp.com Astonish Results www.astonishresults.com Bass Underwriters www.bassuw.com Burns & Wilcox Ltd www.burnsandwilcox.com City of Hope www.cityofhope.org Helmsman Mangement Services, LLC www.helmsmantpa.com IICF www.iicf.org Independent Insurance Agents of Virginia www.iiav.com Insurance Technologies Corp. www.insurancewebsitebuilder.com M.J. Hall & Company, Inc. www.mjhallandcompany.com McClelland & Hine www.mhi-tx.com Monarch E & S Insurance Services www.monarchexcess.com Patriot Underwriters www.pnigroup.com PersonalUmbrella.Com www.personalumbrella.com SIAA www.siaa.net State Fund First www.statefundfirst.com Tejas American General Agency www.taga1.com Texas Mutual Insurance Company www.texasmutual.com Universal Service Agency, Inc. www.universalbonds.com Vertafore www.vertafore.com

W8 3 13 W11 9, 40 2 W6; SC2; SE2;E2; M2

36 | INSURANCE JOURNAL-NATIONAL September 9, 2013

2 2 29

to protect an independent director against personal liability when the director’s company and the company’s D&O cannot or will not. Available limits: As needed Carrier: Unable to disclose States: All states Contact: Judy Roberts at 415-399-6313 or e-mail: jroberts@ wsandco.com

Forced Placed and REO Insurance Market Detail: Seattle Specialty Insurance Services (www.seattle. com) specializes in lender placed and REO insurance with automation to simplify insurance servicing for banks, mortgage bankers, and private lenders. Available limits: Maximum $5 million Carrier: Various, admitted and non-admitted available States: All states Contact: Customer service at 800-597-1866 ext. 3223

Personal Umbrella Market Detail: PersonalUmbrella.com Insurance Services Inc. (www.personalumbrella.com) is an online provider of standalone personal umbrella policies. Policies are available within 24 hours. No MVRs and no signed applications required; direct bill to insured new and renewal. Available limits: Maximum $10 million Carrier: AAIC States: All states except Alaska, Hawaii, La., Ga., S.D., W.V., Vt., and N.H. Contact: Daina Kawchack at 800-564-1799 or e-mail: dkawchack@ personalumbrella.com

17 18 SE1; E1 W3 W4 SC1 W9 4,5 7 2 W5 2 SC3 35 11

EPLI Market Detail: Belmont Underwriters LLC (www.belmont underwriters.com) is an MGA focused on EPLI for insurance agents and brokers as well as architects and engineers; other classes also welcome. Minimum premiums start at $1,250. Wage and hour coverage available as well as defense outside the limits. Available limits: Minimum $500,000, maximum $2 million Carrier: Unable to disclose, admitted States: Calif., Nev., Ore., Utah, Colo., Texas, Mo., Ill., Ga., Ohio, Pa., Va., N.J., Mass., Md., Contact: Customer service at 888-533-5177

cruceSeguro Market Detail: American Border Insurance Services’ (www.abisgroup.com) cruceSeguro program offers auto liability coverage for Mexican registered vehicles crossing the border into the U.S. Available Limits: Minimum limit $15,000, maximum $300,000 Carriers: Chartis Seguros Mexico States: Calif., Ariz., N.M., and Texas Contact: Customer service at 800-554-2247 www.insurancejournal.com

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Closing Quote considered brands at each step. This news is particularly relevant for carriers that have neither the resources nor the appetite to match the marketing spend of the leading brands to secure a place in the initial consideration set.

Winning Share and Customer Loyalty in Auto Insurance

By Tanguy Caitlin

& Sharmila Ray

he $175-billion U.S. auto insurance industry could be spending its marketing dollars in more effective ways: targeting consumers based on needs rather than behavior; finding the optimal balance between retention and acquisition; and reaching shoppers with the right message at the right moment in their decision journey. These are among the insights from recent McKinsey auto insurance research surveying more than 16,500 consumers on both their shopping behavior and the needs that drive their decisions. The broad scope of this research allowed us to examine whether assumptions about how consumers choose an auto insurance policy really hold water. The “window” for influencing auto insurance shoppers is open for longer than ever, increasing marketing options for carriers. Conventional wisdom based on the marketing “funnel” has long stated that, for carriers, being a part of the initial consideration set is all-important — their one big chance with insurance shoppers. However, this is not necessarily the case. As they move from gathering information through the quote and purchase phases of their journey (and beyond to post-purchase support), auto insurance shoppers are more open than ever to considering new brands and dropping

38 | INSURANCE JOURNAL-NATIONAL September 9, 2013

Blurred Lines Channel distinctions are blurring. We know that auto insurance shopping is a multichannel experience. But the degree to which shoppers are switching channels — even during the same step in the decision journey — points to a significant opportunity. Carriers that can deliver a seamless cross-channel experience throughout the consumer decision journey will have a distinct advantage. There is more than one kind of loyalty. McKinsey’s research shows that loyal policyholders are not a monolithic group of satisfied customers. A subset of loyalists does fit this description, but another subset is identified by the survey as “loyal” in name only. That is, they remain with their carrier more out of inertia than out of satisfaction. Members of this significant minority of “passive” loyalists can, however, be dislodged and represent significant value hiding in plain sight. Some 18 percent of consumers are only passively loyal, and they are worth roughly $30 billion in direct written premiums. Consumer needs trump demographics and behavioral attributes for segmenting the market. Consumer behaviors may shed light on where opportunities exist, but needs provide richer insights into what it takes to actually win share. While the need for a strong brand is the most potent differentiator of consumer segments, other important factors include the propensity to shop, preference for a personal relationship and access to a local agent. Low price, it turns out, is a more modest differentiator. Consumer Segments There are several distinct auto insurance consumer segments. Among these are active shoppers (who actively research options and shop around frequently) and lowprice experts (who make decisions based on the ability to get the lowest price). Others include the “uninvolveds” (who are largely indifferent toward insurance), independent advice seekers (who prefer advice from a local independent agent), and affinity-oriented brand buyers (who want well-known brands and aren’t looking for assistance from a local agent). To maximize marketing impact, carriers must consider what to say to target consumers, how to say it, where to say it, and when to say it. Catlin is a principal at management consulting firm McKinsey & Co. Ray is an associate principal in the firm’s insurance practice.

www.insurancejournal.com

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