Insurance Journal West 2015-09-21 by Insurance Journal

WEST EDITION Palms Deathtraps for Workers NAPSLO, Tech Disruption in E&S Time to Privatize Flood Insurance

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Inside This Issue

On The Cover

Special Report:

6-Part Test for Classifying Employees, Independent Contractors

September 21, 2015 • Vol. 93 No. 18 • West

W12

NATIONAL COVERAGE

WEST COVERAGE

IDEA EXCHANGE

Commercial Insurance Prices Up But Barely: Survey

W2 Lawsuit over Beer Cup at Idaho Arena Moves Forward, Fraud Claims Dropped

28 Growing Your Property Casualty Agency: Alan Shulman

66% of Small Businesses Lack Business Interruption Coverage

14 Closer Look: Don’t Get Trucked By Transit Coverage

W2 Judge OKs $415M Settlement in Worker Suit Against Silicon Valley Giants

14 Women Truckers Outperform Men; Easing Labor Shortage

W4 Flood Zone Expansion Could Raise Insurance Costs for Some Coloradans

Special Report: Will Uber Employee Status Ruling in California Impact Its Business Model?

18 Special Report: 6-Part Test for Classifying Employees, Independent Contractors 22 Special Report: Top Workers’ Compensation Writers 24 Spotlight: Construction Defect Analysis

30 Tech Talk: Building Relationships vs. Pushing Transactions 32 Closing Quote: A Blemish on the Beauty Industry

Why Now Is Time to Privatize Flood Insurance: A Candid Conversation with Hiscox USA CEO Walter

W8 L.A. County’s 100K Shady Palms Potential Deathtraps for Workers W12 NAPSLO Panel: Tech Disruption May be Good for E&S Market

DEPARTMENTS 10 10 11 32

Declarations Figures Business Moves MyNewMarkets

26 E&O Insights: Big Trucks Can Cause Big E&O Claims

4 | INSURANCE JOURNAL-WEST September 21, 2015

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NATIONAL COVERAGE

Opening Note How Big Is Cyber Risk?

yber risk is costing the global economy $445 billion annually, $108 billion of which comes from the U.S., according to a new report. The report from insurer Allianz Global Corporate & Specialty also predicts cyber insurance premiums will grow globally from $2 billion per year today to more than $20 billion over the next decade. “Cyber risk is now a major threat to businesses,” Allianz said in the report. “Companies increasingly face new exposures, including first-and third party damage, business interruption and regulatory consequences.” AGCS said the problem has become severe only in the last 15 years, though it has a particularly severe impact on the world’s top economies. Out of the $445 billion annual global cost, $200 billion-plus of that number comes from the world’s largest economies — the U.S., China, Japan and Germany. The top 10 global economies account for more than 50 percent of cyber crime costs, according to the report. AGCS said that cyber risk remains the most underestimated by businesses. But as companies increase their awareness there remains rapid growth potential in the area for property/casualty insurance carriers. But as premiums grow, carriers must adapt to ‘Within the next five to 10 counter the cyber risks as years, [business interruption] they evolve and change. will be seen as a key risk and AGCS said that cyber risks of the future will become major element of the cyber more complex than they insurance landscape.’ are now. Corporate data breaches and privacy concerns drew much of the initial attention, but future cyber issues will stem from intellectual property theft, cyber extortion, and the impact of business interruption after a cyber attack, AGCS noted. “Within the next five to 10 years, [business interruption] will be seen as a key risk and major element of the cyber insurance landscape,” said Paul Schiavone, AGCS regional head of financial lines in North America, in prepared remarks. Some recommendations from the report: • Businesses need to spot key vulnerable assets and also address areas such as employee vulnerabilities. • Businesses should create a cyber security culture. • M&A activity and changes in corporate structures can impact cyber security and the holding of third party data. • Cyber coverage must evolve to become both broader and deeper. Such policies should address business interruption and close gaps between traditional coverage and cyber policies. • Cyber exclusions in P/C policies should become more common. But standalone cyber insurance will keep evolving as the main source of comprehensive cover, addressing demand from industries including telecommunications, retail, energy Andrea Wells Editor-in-Chief and transport sectors. 6 | INSURANCE JOURNAL-NATIONAL September 21, 2015

Publisher Mark Wells | mwells@wellsmedia.com EDITORIAL Chief Content Officer Andrew Simpson | asimpson@insurancejournal.com Editor-in-Chief Andrea Wells | awells@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Amy O’Connor | aoconnor@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 Columnists Curtis M. Pearsall, Alan Shulman, Tom Wetzel Contributing Writers Margery A. Beck, Sean Brownyard, Steven J. Groeschen, Dwight M. Kealy, Janet McConnaughey, Rebecca Roberts SALES Chief Marketing Officer Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com Sales Manager Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com Allison Steinkamp (800) 897-9965 x172 | asteinkamp@insurancejournal.com Midwest Lisa Whalen (800) 897-9965 x180 | lwhalen@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com East (NY, PA and CT only) Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com Southeast & East (except for NY, PA and CT) Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Kelly De La Mora (800) 897-9965 x125 | kdelamora@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 DESIGN/WEB Chief Technology Officer/Chief Innovation Officer Joshua Carlson | jcarlson@insurancejournal.com V.P. of Design Guy Boccia | gboccia@insurancejournal.com Audience Development Elizabeth Duffy | eduffy@wellsmedia.com Marketing Director Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Tim Layer | tlayer@wellsmedia.com IJ ACADEMY OF INSURANCE V.P. of Education Chris Boggs | cboggs@ijacademy.com Sales Executive Romeo Valdez | rvaldez@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chief Executive Officer Mitch Dunford | mdunford@wellsmedia.com Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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News & Markets Commercial Insurance Prices Up But Barely: Survey

ommercial insurance prices increased in aggregate at a modest pace (one percent) during the second quarter of 2015, continuing a trend of ever smaller increases. That’s according to the latest Commercial Lines Insurance Pricing Survey (CLIPS) conducted by professional services company Towers Watson comparing prices during the second quarter of 2015 to those charged for the same coverage during the same quarter of 2014. Price increases for most lines surveyed were in the low single digits, having moderated further during the second quarter. Directors and officers, and commercial property reported small price decreases, while workers’ compensation pricing was nearly flat; in fact, results show a very slight decrease. Commercial auto showed the largest increases, followed by employment practice liability. Price increases for

small and mid-market accounts continued, also following a moderating trend, and prices for large accounts declined slightly. Carriers reported an improvement of 1 percent in loss ratios in accident-year-todate 2015 relative to the same period in 2014, as earned price increases offset low claim cost inflation reported for many lines. This compares to flat loss ratio movement indicated between 2013 and 2014, though loss ratios for 2015 are still developing. “Price increases continue their downward trend, as strong underwriting results allow for some room in pricing,” said Alejandra Nolibos, a director with Towers Watson’s Property/Casualty Insurance practice. “However, there are indications that workers’ compensation pricing may have moved into negative territory for the first time since 2010 and that pricing is also down for large accounts — a segment that is typically quick to be affected by compe-

tition. Should the benign loss trends that have marked the last several years return to longer-term levels, some of the recent underwriting success in long-tailed lines may be eliminated.” CLIPS data are based on both new and renewal business figures obtained directly from carriers underwriting the business. Data were contributed by 43 participating insurers representing approximately 20 percent of the U.S. commercial insurance market. In its latest Global Insurance Market Quarterly Briefing, broker Marsh found commercial insurance rates continued to decline globally in the 2015 second quarter, driven by a continued abundance of global capacity and a lack of large insured loss activity. As of Q2, there had been nine consecutive quarters of overall rate declines, Marsh said. Globally, natural catastrophe losses are at historic lows, which is helping profitability but also reducing the drive for rate increases, according to Marsh.

66% of Small Businesses Lack Business Interruption Coverage

early 75 percent of small businesses say they don’t have a disaster recovery plan in place. For companies with fewer than 50 employees, just one in five — or 18 percent — have one, according to a new Nationwide-sponsored survey. Those low numbers also reflect a lack of relevant insurance coverage, with 66 percent of respondents not having business interruption insurance. Nationwide commissioned the survey from Harris Interactive, which polled 500 U.S small business owners online in June with fewer than 300 employees. Mark Pizzi, president and chief operating officer of Nationwide Direct and Member Solutions, said that small businesses’ lack of planning in terms of disaster recovery is unfortunate and potentially quite costly. 8 | INSURANCE JOURNAL-NATIONAL September 21, 2015

“Small businesses are least likely to have disaster recovery insurance. And yet they are the ones most affected by a disaster. That’s why it’s essential for small businesses to have a disaster recovery plan,” Pizzi said. Among the small business owner survey findings: • More than half of respondents said it would take them at least three months to recover from a disaster. • 38 percent — more than a third — of small business owners believe it isn’t important for their businesses to have a disaster recovery plan. • 26 percent — one in four — said that they believed there was a slim chance that a natural disaster would occur in their area. • 37 percent said climate change and El Niño made it less likely that natural disas-

ters would impact their business. • 69 percent said they have an evacuation plan at home. • For businesses without a disaster recovery plan, 34 percent said it was a low priority. • If a disaster hit, 44 percent said they don’t have access to generators if disaster hit. www.insurancejournal.com

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FIGURES

DECLARATIONS Hiring Miss Cleo

“Miss Cleo does have quite the folk hero cast to her, and it was an interesting choice by General Mills to bring her back to promote cereal. But it shows their disregard for the intellectual property rights of others.”

— Joel Dichter, a lawyer for the Fort Lauderdale, Fla.-based Psychic Readers, which is suing General Mills for copyright infringement for hiring the psychic to promote its cereal.

$3.3 Million

The amount of money a jury in Florida awarded a man who sued after he was mistaken for a bank robber by a teller at a Bank of America and kicked in the head by police. The award was later overturned by an Appeals Court that said citizens can’t be held responsible if they support a suspected crime, even if they are wrong, if they did so in good faith. The Florida Supreme Court is now deciding whether to restore the award, order a new trial or agree with the appeals court and rule the man will get nothing.

Unenforceable Ordinances

“Because current state law does not prohibit discrimination on the basis of sexual orientation or gender identity, it is my opinion that Act 137 renders the five ordinances unenforceable in this respect.”

$300 Million

The amount of a lawsuit filed by the city of Chicago against the former operator of its red light cameras, alleging the program was built on bribery. The suit alleges Redflex executives teamed up with former city official John Bills to orchestrate cash payments, vacations and other items to him. It is alleged that Bills coached Redflex on how to beat its competitors, orchestrated key votes at City Hall, and manipulated field tests to favor the company.

— Arkansas Attorney General Leslie Rutledge, in a nonbinding opinion, wrote that five local measures prohibiting discrimination based on sexual orientation or gender identity cannot be enforced because of a new Arkansas law barring such protections. The ordinances prohibiting such discrimination are in place in Little Rock, Hot Springs, Eureka Springs, Pulaski County and Fayetteville.

Like a Waterfall

“Water starts coming in the basement wall, then a piece of plaster breaks. … Then we heard a big crash and the window breaks. Then the water starts coming in like a waterfall.”

— Dave Decker, pastor of Trinity Baptist Church in Sioux Falls, S.D., describes the damage to church property after more than half a foot of rain fell on parts of the city in late August.

Baltimore Settlement

14.8%

The percentage decrease in overall workers’ compensation loss costs filed in Oklahoma by the National Council on Compensation Insurance (NCCI) for 2016. This will be the third straight year rates have decreased, according to the Oklahoma Insurance Department. The total of the three consecutive decreases is 37.2 percent.

Is the total number of Montana counties the U.S. Department of Agriculture declared natural disaster areas due to crop losses caused by drought in July and August. 10 | INSURANCE JOURNAL-NATIONAL September 21, 2015

“This settlement represents an opportunity to bring closure to the Gray family, the community and the city.”

1,930

The number of speeding tickets issued by Connecticut troopers during the 2015 Labor Day weekend. The troopers patrolled highways and roads in Connecticut for enforcement operations from Sept. 4 through Sept. 7. During that time, the state police arrested 45 people for driving under the influence, issued 98 seatbelt violations, and cited drivers for 4,132 other moving violations. They also investigated 336 crashes during the four-day period, including 58 that involved injuries and three that resulted in fatalities.

— Baltimore Mayor Stephanie Rawlings-Blake on the $6.4 million wrongful death settlement the city officials reached with the family of Freddie Gray, who died after being critically injured in police custody in April. His death sparked rioting that shook the city for days. Six Baltimore police officers face criminal charges stemming from Gray’s death.

Haggen V. Albertsons

“Had Haggen known Albertsons’ true intentions, Haggen would never have purchased the Stores, nor would the FTC have permitted such a purchase.”

A lawsuit by a Washington-based grocer says Albertsons gave it misleading and incomplete retail-pricing data, causing it to unknowingly inflate prices, as well as illegally accessed Haggen’s confidential data to get the upper hand.

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News & Markets Lawsuit over Beer Cup at Idaho Arena Moves Forward, Fraud Claims Dropped

n Idaho judge has tossed out portions of a lawsuit against the owner of a Boise area, where a handful of hockey fans contend they were victims of a beer scam. Ada County Judge Deborah A. Bail nixed plaintiff’s claim of fraud and misrepresentation in early September. The lawsuit was filed in Boise’s 4th District Court in 2014. It contends that Block 22 LLC, which does business as CenturyLink Arena, defrauded customers by fooling them into thinking that a tall, narrow cup of beer sold for $7 was substantially bigger than a shorter, wider cup sold for $4. The case will now move forward on claims that CenturyLink violated

Judge OKs $415M Settlement in Worker Suit Against Silicon Valley Giants By Dan Levine

U.S. judge has granted final approval to a $415 million settlement that ends a high profile lawsuit in which workers accused Apple, Google and two other Silicon Valley companies of conspiring to hold down salaries. The plaintiffs alleged that Apple Inc., Google Inc., Intel Corp. and Adobe Systems Inc. agreed to avoid poaching each other’s employees, thus limiting job mobility and, as a result, keeping a lid on salaries. In a ruling earlier this month, U.S. District Judge Lucy Koh in San Jose, California, found the deal was fair to the thousands of plaintiff workers in the class action. W2 | INSURANCE JOURNAL-WEST September 21, 2015

Idaho Court Allows Boy Scout Suit to Move Forward

Attorneys representing those workers had asked for about $81 million in fees. However, Koh decided such an award would be an inappropriate “windfall” for the lawyers, and awarded about $40 million instead. The antitrust class action lawsuit was filed in 2011. It has been closely watched because of the possibility that big damages might be awarded and for the opportunity to peek into the world of some elite U.S. tech firms. The case was based largely on emails in which Apple co-founder Steve Jobs, former Google Chief Executive Officer Eric Schmidt and some of their rivals detailed plans to avoid poaching each other’s prized engineers. The case is In Re: High-Tech Employee Antitrust Litigation, U.S. District Court, Northern District of California 11-cv-2509. Copyright 2015 Reuters.

daho’s highest court has ruled that the 16 men who say they were sexually abused as youngsters by scout leaders in Idaho filed their lawsuit on time against the Boy Scouts of America and the Church of Jesus Christ of Latter-day Saints. The lawsuit is still pending in federal district court. All but one of the plaintiffs identified as John Does allege they were sexually abused while attending scouting functions during the 1970s and 1980s. The men are suing for constructive fraud, meaning a type of fraud that doesn’t require proving malicious intent but does involve a breach of the relation of trust and confidence. The plaintiffs argue that scout and church officials knew scout volunteers were dangerous, but chose not to disclose that information. Instead, each scout leader was described as a “great guy” and a “friend to whom you can always turn for advice,” according to court documents. After attorneys for the church and Boy Scouts challenged the statute of limitations on the fraud claim, U.S. District Court Judge B. Lynn Winmill requested Idaho’s Supreme Court justices to determine if the plaintiffs filed the lawsuit within the appropriate timeframe under Idaho law. The Boy Scouts said in a statement it was thankful for the Idaho court’s decision to consider the issue. “The Boy Scouts of America extends our deepest sympathies to victims of any kind of abuse. In the more than three decades since these incidents took place we have continued to develop and enhance our efforts to protect youth,” the statement read. Copyright 2015 Associated Press. www.insurancejournal.com

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News & Markets Flood Zone Expansion Could Raise Insurance Costs for Some Coloradans By Dan Elliott

ew research shows floods like the one that ransacked northern Colorado two years ago, killing 10 people, might be more common than previously thought. And that could require more homeowners to get flood insurance and trigger more stringent construction rules. The September 2013 flood caused $3 billion in damage to neighborhoods, highways, farms and oilfields. Nearly 2,000 homes were damaged or destroyed, many in small mountain towns. Early, rough estimates of the flood indicated it was a 1-in-500 event, meaning the chances of such a deluge in any one year are 1 in 500. But recently completed studies of the Big Thompson River, St. Vrain Creek and other hard-hit waterways show it was mostly a 1-in-100 event, said Kevin Houck, chief of watershed and flood protection for the Colorado Water Conservation Board. If a 1-in-100 flood can cause that much havoc, then homes, roads and other infrastructure are more vulnerable than previously believed, he said. “That’s kind of an alarming realization,” Houck said. A 1-in-100 flood is sometimes called a 100-year flood, but experts say that’s a misnomer. The ratio refers to the chances of such a flood occurring in any single year, based on historical data. A 1-in-100 flood could happen more than once a century. The Federal Emergency Management Agency is reviewing the new Colorado data and will likely use it to revise its maps designating flood plains — areas that are most prone to flooding, said Ryan Pietramali, FEMA’s regional chief of risk analysis. The maps are important because anyone who has a federally insured mortgage and who lives in a FEMA-designated 1-in-100 flood plain must buy federal flood insurance. If the new maps show a bigger flood plain, more people would have to buy W4 | INSURANCE JOURNAL-WEST September 21, 2015

coverage, which averages about $1,300 a year for homes in high-risk areas. Flood plain maps have been redrawn across the country after other natural disasters, including along the Mississippi River after Hurricane Katrina in 2005 and in some mid-Atlantic states after Hurricane Floyd in 1999. Many local governments also use FEMA’s maps to determine what building requirements must be met for new construction, such as how high the floor must be to (AP Photo/The Greeley Tribune, Joshua Polson) avoid flooding. “If the maps changed and your area city of Longmont is drawing up plans to was now in a flood plain, the flood plain rebuild St. Vrain Creek through the city requirements would kick in,” said Terry to handle the new, increased estimate of Gilbert, director of community develophow much water the creek would carry in ment for Larimer County, which saw heavy a 1-in-100 flood. The first phase of the $100 flooding along the Big Thompson and million project is expected to start next Little Thompson rivers in 2013. year, with a goal of preserving the creek’s Houck said the reason for the revised natural look, said David Hollingsworth, expectations isn’t climate change or the city’s flood plain manager. weather patterns but improved data. The The Water Conservation Board released previous expectations were based on 30- or the first of its studies of the 2013 floods 40-year old studies that used methods now this summer, covering six rivers and creeks considered obsolete. They also had less that flow into the South Platte River, history to draw from. including the Big Thompson and St. Vrain. The number of flood insurance policies A study of the South Platte as far as the in Colorado has risen from 22,000 at the Nebraska state line is expected later this time of the 2013 flood to 24,000 today. year. “I think hopefully that people are recog The research shows some small areas nizing the risk,” said Matt Buddie, a FEMA were in fact hit by a 1-in-500 flood, notably flood plain management specialist. Lyons, in the Boulder County foothills, It’s too early to know how many more and some portions of the South Platte, homeowners might have to buy the insurHouck said. But those were exceptions. ance if flood zones are redrawn. New “I would say the best way to characterFEMA maps could be three years away ize this storm is a very unusually widebecause the agency must review the state spread 100-year event with some small data and then give residents and local offipockets of a 500-year event thrown in cials a chance to comment and appeal. there,” he said. Some communities aren’t waiting. The Copyright 2015 Associated Press. www.insurancejournal.com

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News & Markets Why Now Is Time to Privatize Flood Insurance: A Candid Conversation with Hiscox USA CEO Walter By Andrew G. Simpson

But he questions whether that’s the case. “The question is have we really signed up to take the risk? When Congress he private insurance industry is ready passed the program it was designed to and anxious to take on flood risk, be self-funding but we’re uncomfortable and politicians should reform the federal with what that really means,” Walter says. program now to take advantage of this “I don’t have a problem with that. I still interest, according to the U.S. executive of think that the private sector can more effia leading specialty insurer. ciently allocate that risk because we do it “I think there is a moment here. I think with hurricanes and we do it really well. there is a moment where the right pieces We can make that choice.” are in place,” Ben Walter, president and Congress recently returned from its CEO of insurer Hiscox USA, said in a August recess, and while there are prorecent conversation about flood risk with posals and efforts to move flood insurance Wells Media. “There’s a combination of a pricing to actuarial levels and encourage lot of fiscal pressure and the right pieces private sector involvement, there are also are in place on the private side to be able calls for the government to discontinue to respond to the opportunity. But it takes the limited role the private insurers now an enormous amount of political will.” have under the Write Your-Own (WYO) In Walter’s view, among the factors program to write and service policies. favoring privatization now are plenty of The Biggert-Waters Act of 2012 was an capital in the industry, advances in risk attempt by Congress to modeling, and address the NFIP’s debt Washington pol‘I think there is a moment by eliminating certain iticians who talk here. I think there is a premium subsidies and about limiting the phasing-in premium cost of government. moment where the right pieces are in place.’ increases so that prices Another is that more closely reflect the the National Flood risk of flood-prone properties. However, Insurance Program (NFIP) is currently $24 Congress backtracked on those changes billion in debt. two years later after consumers protested, “The point here is, it’s time to take the passing the Homeowners Flood Insurance private sector involvement in flood insurance Affordability Act (HFIAA) that rolled back seriously and figure out what we need to do key provisions of Biggert-Waters. to make that happen,” Walter says. According to the insurance executive, Political Realities moving to a more private system is a polit In a discussion with Wells Media’s Andy ical challenge because it would require polSimpson, Walter further discussed what icymakers to openly indicate how much he sees as the realities and the politics of the risk should be borne by property of flood insurance, urging policymakers owners and how much, if any, should be to learn from earthquake and terrorism subsidized by the government. experiences and make the tough political It may also require mandating that peochoices needed to let privatization happen. ple in flood prone areas buy insurance, he According to Walter, politicians can difargues. fer over whether flood is a risk that should Keeping the flood insurance subsibe shared by the public or privatized. dies would be fine if in fact that is what “I have a strong view that it should be Congress and the public want, he offers.

W6 | INSURANCE JOURNAL-WEST September 21, 2015

Ben Walter, Hiscox USA

privatized and that the market can efficiently respond to that, but that is a philosophical debate that we can have,” he says. But that’s not quite what’s been going on. “What’s unfortunate about flood is that we’ve chosen to do it, but not really do it. We haven’t done it in an actuarially sound way, where the government really is just the risk-taker of last resort,” Walter says. In his view, the current flood insurance set-up contrasts with what has been done with terrorism insurance under the the Terrorism Risk Insurance Act (TRIA), where the government truly is the risk-taker of last resort. “That’s really not what’s happened with flood because you don’t force any kind of actuarially sound rates,” he says. The 2012 Biggert-Waters Act attempted to install more actuarially-sound pricing but it didn’t last. “[A]s soon as people saw rate hikes in an election year, everybody backed off, and they repealed it. There is no political will to have this thing [flood insurance] be actuarially sound. That’s simply because continued on page W14 www.insurancejournal.com

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News & Markets

L.A. County’s 100K Shady Palms Potential Deathtraps for Workers By Don Jergler

Department of Public Health, came to the conclusion that more effort should go into warning people about the dangers posed by here may be nothing more synonymous palm trees. with Los Angeles County than the tall, In mid-August rescue workers found waving palm trees that line so many busy Angel Ferreira-Zamora, a 41-year-old tree boulevards and beachfronts. trimer from Oak View, Yet the towering icons of ‘These deaths are Calif., after he was reportSouthern California have a dark side. Palm trees have preventable, there ed being trapped in a palm tree. But it was too late. been a deadly trap for numer- are clear cut ways Ventura County Medical ous unfortunate workers over the years, and now one to trim these fronds Examiner’s office found that debris from the tree public health official and an without having to fell on Ferreira-Zamora and association are trying to get get under them.’ compressed him. He was the word out and save some still in a harness when found, and he had lives. not fallen, authorities said. Compression It was less than two months ago when asphyxia is the listed cause of death. Robert Harrison, MD, a professor of med “Palm fronds are a silent hazard,” said icine at UC San Francisco and chief of Harrison, who issued a warning to everyone the Occupational Health Surveillance involved in the business via a blog on the and Evaluation program at the California

W8 | INSURANCE JOURNAL-WEST September 21, 2015

Centers for Disease Control and Prevention website late last month. Palms are plentiful throughout the Western U.S., as well as in balmy locales like Florida. There’s a high concentration of them in Southern California, where a variety of palm trees have been planted for more than 100 years. Some estimates put the number of palm trees in Los Angeles County alone at more than 100,000. Someone has to trim all those trees for the safety of those below, for aesthetic appeal and to keep the street from being utterly blocked after a windstorm. Those who live in Los Angeles can attest to the number of palm fronds that cover streets and sidewalks after a strong blow. A palm frond is relatively light, and by themselves are quite harmless. A palm tree continued on page W10 www.insurancejournal.com

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News & Markets continued from page W8 has many layers of fronds. Enough, in fact, to build into a lot of deadly weight. “As they get mature and the fronds naturally dry, they drop their foliage,” Harrison said. “They look deceptively benign.” Several workers have been killed trimming palm fronds in L.A. County. The death of Ferreira-Zamora followed two years with no reported deaths in the county. In 2012 three fatalities were reported in the county, according to The California Fatality Assessment and Control Evaluation, a program in the Occupational Health Branch designed to identify and study fatal occupational injuries. The California FACE program is funded by the National Institute for Occupational Safety and Health. Beside Ferreira, workers killed in palm trimming incidents in the U.S. this year so far include Miguel Martinez, who was killed in Riverside, Calif., on July 30, and Michael J. Szymanski, who was killed in Atlantic Beach, Fla., on July 24, according to statistics through mid-August from the Occupational Safety & Health Administration. Additionally, dozens of other tree trimmer deaths were listed this year, OSHA stats show. Another man who has been working to get the message out about the dangers palm trees pose to trimmers is Jose Mercado, founder of the Hispanic Arborist Association, an Azusa, Calif.-based group that provides safety information and education to Hispanic workers in the tree trimming and tree care industry. Hispanics make up a large portion of the nation’s landscaping and tree trimming workforce, according to Mercado, who put together a palm tree safety video for tree trimming companies and their workers. Mercado’s main message in the video is that these deaths are preventable with a

W10 | INSURANCE JOURNAL-WEST September 21, 2015

little risk management. He’s trying to promote a safer, though slightly more involved way, to trim palm trees that involve climbing up on the outside of the fronds and trimming the tree top down. The video his group created is being used by the FACE program to educate those in the tree trimming industry about the safer practices. The biggest danger posed by a palm tree comes from rings upon rings of interlocked fronds that die off and fall down upon the rings below in a process called “sloughing.” Perhaps a dozen to 30 fronds may occupy one ring, and there could be 15 to 20 feet of rings stacked on top of one another. Each frond weighs only a few pounds, but together the entangled mess may

amount to hundreds or thousands of pounds of dead fronds, Mercado said. This isn’t much of a danger to workers trimming palm trees that line a street where a bucket truck can be brought in and safely raise a worker to the level of the fronds yet not beneath them. However, there are myriad hard-to-get-to places that require a worker to scale the tree to get to the fronds, Mercado said. Traditionally a worker scales a palm tree using a lanyard affixed to the waist and climbing spikes, also called gaffs, attached to the shoes. When a worker begins removing a lower layer, it could trigger an avalanche of palms. Several bleak outcomes will likely result. A worker whose spiked shoes are dug firmly in to the trunk can get bent back to where his head meets his heels in a spine-shattering incident. Or the worker could get knocked to the ground, and suffer a severe injury or die from the fall. Either scenario poses the danger of mechanical suffocation from the weight of the combined palms that can fall on a worker, crush his chest and render him unable to breathe. In some cases the number of dead fronds in the tree ring are so numerous that when the rescue workers arrive they cannot immediately locate the injured worker. “In one case they had to use thermal imaging,” Harrison said Harrison said he had been noticing reports of deaths of palm tree trimmers for a while in states with a large number of palms, like Arizona and Nevada. But the latest death was enough for him to begin sounding the alarm. “The fatality that occurred in Southern California was deja vu all over again,” Harrison said. “These deaths are preventable, there are clear cut ways to trim these fronds without having to get under them.”

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News & Markets NAPSLO Panel: Tech Disruption May be Good for E&S Market By Don Jergler

or maybe an advantage for wholesalers and retailers, “now it’s table stakes.” “ However, Miller and others agreed that here are no rules. If you can figure out the wholesale industry in particular would how to quantify a risk and define it, continue to be a “people business” despite then you can insure it.” the encroachment of technologies. Hank Haldeman, president of the board Miller later remarked that technoloof directors for the National Association of gies, for example, can deliver increasingly Professional Surplus Lines Offices, soundsophisticated data, which is becoming ed a bit like a bodhisattva when speaking ever-more important for the industry. Yet, in San Diego in mid-September at the even good data has its limits. annual NAPSLO conference. “You can’t substitute But the point data for good judgement,” that Haldeman, ‘You actually can’t disrupt Miller said. executive vice pres- a happy customer.’ Davis pointed out that ident and director new technologies are putting the insurof The Sullivan Group, was trying to make ance business into places where there is no is that the excess and surplus market will existing data, such as driverless cars. remain a wide open frontier for entrepre “That’s the beauty of the E&S industry,” neurs for years to come despite technology he said. “We create solutions even when disruption — and because of it. there’s not a lot of data.” Haldeman was speaking on the Next Of course no tech-centric conversation Generation panel discussion at the conferwould be complete without Google. ence hosted by NAPSLO, a Kansas City, Dow asked panelists what they thought Mo.-based professional trade association about the “Googleization of insurance,” representing the surplus lines industry whether it was real and if so to what end and the wholesale insurance distribution it could impact insurance. system. The panel was moderated by David Dow, senior vice president of AmWINS Insurance Brokerage of California. Haldeman’s fellow panelists included: Art Davis, president of excess and surplus lines for Colony Insurance Co.; Mike Miller, president and chief operating officer of Scottsdale Insurance Co.; and Ben Sloop, president of AmWINS’ access division. The panel discussion largely focused on technology and whether it would hurt or help the E&S business. “Technology continues to be a huge impact on the business,” said Miller, who noted that where before technology was an option

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“There is a huge portion of insurance that will be Googelized,” Haldeman said. But, while Google is making insurance more convenient to purchase, such as with its Google Compare launched in March, it’s that same convenience provided to customers that will drive business owners to stay with agents who can spare them from having to figure out online what risks they need to insure and what coverage gaps they may have. “And I don’t think that will change,” Haldeman added. Sloop used the travel industry to illustrate his belief that those who do not provide a unique service may succumb like travel businesses did when Expedia and Orbitz came into existence, but said that businesses in need of personalized advice will always turn to a person. “Ultimately these businesses are going to want an adviser in that process,” Sloop said. Google may not even want to get into commercial lines, said Miller, who wondered whether the tech giant would be reluctant to be in the business of “rolling the dice” by ensuring big, long-tail risks. “I just wonder if that’s really where they want to go — worrying about these losses in the future and if they priced it right,” Miller said. Davis sees new technologies more as an opportunity for the E&S market than a threat. Uber, for example, has come in and delivered a new means of transportation and a new earnings pipeline for some, so insurance must do the same by creating better products and delivering them in a better way, he said. “You actually can’t disrupt a happy customer,” Davis said. www.insurancejournal.com

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News & Markets continued from page W6 people have a benefit and taking away a benefit from people is hard, just like cutting Social Security or cutting Medicare, or any entitlement cuts. It’s basically an entitlement,” according to Walter. Given the political realities, he suggests any move to risk-based pricing would have to be done gradually, along some sort of glidepath. If this were to happen, he says, there would likely be two results. “One is you will see more private sector participation and actuarially sound rates, which they are not today,” he says. “Number two — and this is the really hidden, ugly part of this — is you’ll see less development in floodplains. Why do people build in floodplains? Because it’s subsidized. Why do people over-invest in housing? Because it’s subsidized.” He says in addition to real estate interests, others factors including geographic, socioeconomic and even racial politics influence how flood insurance is addressed. “We do have to accept that there is a socioeconomic and therefore, likely even, and on the uglier side, a racial component to this because outside of on the water in Florida, low lying areas tend to be less

expensive and therefore more populated by minorities or those who are socio-economically disadvantaged,” he says. He maintains that turning over the flood program to private insurers promises to reduce the politics. “[P]rivatizing the flood program would be much, much better because the insurance industry does this for a living. It’s not politicized. It’s actuarial,” he says. “It’s us trying to get a reasonable return on our

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money, whereas you know that flood maps are a political animal because of who gets a subsidy and who doesn’t.” Why Now? He says there are several reasons he thinks now is the time to consider privatization. “First of all, obviously, you have an era of fiscal discipline in Washington. You have some people in power who are professing that. We’ll see if they execute on it, but they’re professing it, number one,” the Hiscox executive says. Number two is the record levels of capital in the global insurance and reinsurance industry. “There’s a lot of money out there to take the risk and absorb the transition. It would be a hard thing to transition the program immediately after one of the biggest floods we’ve ever seen. It’s at a time when there’s calm and there’s a good amount of capital built up in the industry. It’s a good time to do it,” Walter says. Also, he said there are now very sophisticated modeling and risk transfer options. “They’re much more advanced. We can really control what our aggregates are. If you can control your aggregates and there’s enough capital in the industry, that’s when you want to make a transition happen,” he says. continued on page W16 www.insurancejournal.com

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News & Markets continued from page W14 flood insurance while simultaneously mov He said a privatized system could ing the premiums to risk-based levels. He include a role for government and even for points to the way earthquake insurance is certain subsidies as has been done with handled as the way to not do it. health insurance under the Affordable “Here’s what I’ve never understood. I’m Care Act. coming out and saying, ‘I don’t get this.’ If “My point is the thing should be adminyou live on the beach in istered by the private secFlorida and you borrow tor and actuarially sound ‘What’s unfortunate money to buy your house, rates should be set by the about flood is that the bank and/or Fannie private sector. In my view we’ve chosen to do it, and Freddie, whoever’s as much risk as possible but not really do it.’ taking the risk, will should be pushed to the require you to carry hurriprivate sector because cane insurance on that property. Because we’re prepared to take it,” he says, adding if a hurricane blows it over, they have no the government needs to decide how much collateral left, right? of the risk it would retain. “In California, you can buy a house on There are three areas in particular the San Andreas Fault and the bank and/or where he thinks the private sector could Fannie and Freddie does not require you to do a better job than the government: have earthquake insurance. I don’t get that. “I think pricing, modeling, and claims “What’s interesting is, with the NFIP, administration. I think having the best the government is explicitly taking a risk insurers in the world administer claims and just not charging enough for it, right? rather than FEMA administering the In California and in other earthquake claims is a better thing.” zones what’s going on is the government’s taking the risk. It’s just that nobody Mandatory Coverage admits it.” He acknowledges there is a major chal The answer, he believes, is to require lenge trying to get more people to buy

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flood insurance. “I think you should have to carry it. Frankly, the reason that earthquake insurance doesn’t work is it’s the same challenges that were in the private individual health insurance marketplace before Obamacare. If not everyone has to have it, then it’s adversely selective. If everyone participates, there’s a market. If only certain people participate selectively there’s no insurance market,” Walter says. But is this even doable politically? Wouldn’t that be like raising taxes? “That’s exactly what it’s like.You’re a hundred percent right.” But he said the reality is that taxpayers pay for it now “but they don’t blame politicians for the fact that they do. Let’s be honest about what this is. That really is the challenge.” Why Not? He said the reason that not many private insurers are in the flood insurance market now is because private carriers can’t compete with the subsidized rates under the NFIP. “It’s cheaper to get it through the NFIP than it is to charge what you’d have to charge to make any money on it,” he says. That’s not the only obstacle to private sector entry. The other is political uncertainty. Insurers are worried they will be forced to underwrite at an actuarial loss because it’s politically popular to do so. “Unless you have assurances that that’s not the case, that will keep people out of the market,” Walter stresses. He said he thinks private industry is “desperate to put capital to work” and would do so in the flood arena if restrictions were lifted. But he’s not holding his breath. “I’m not optimistic about the government creating the right conditions for private sector involvement,” he concludes. “I’m very optimistic about the private sector getting involved if those restrictions could be taken off.” If that were to happen, Hiscox is ready to dive in. www.insurancejournal.com

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Business Moves RT Specialty, A.J. Renner & Associates R-T Specialty LLC (RT Specialty), the wholesale brokerage unit of Ryan Specialty Group LLC, has acquired A.J. Renner & Associates, an Illinois-based wholesale insurance broker specializing in the life science arena. Following the close of the transaction, the core of the life science team of A.J. Renner will be joining RT Specialty. A.J. Renner & Associates is the trade name used by Vista Insurance Partners of Illinois Inc. The company was founded in 1985 as an excess and surplus lines broker specializing in insurance products for life science, pharmaceuticals, nutraceuticals, clinical trials, medical devices, healthcare and long-term care. A.J. Renner also offers exclusive programs for product liability in the generic and specialty pharmaceutical industry. Terms of the transaction were not disclosed. NFP, Insurance Management Associates NFP, a New York City-based provider of employee benefits, property/casualty insurance, retirement and wealth management services, has acquired Insurance Management Associates (IMA) in Voorhees, N.J. Terms of the transaction were not disclosed. Founded in 1962, IMA is a commercial property/casualty insurance broker. The firm’s principals, Scott Stegall and Lisa Levin Stegall, will each assume the role of vice president of NFP Property & Casualty and will report to Terrence Scali, CEO, NFP Property & Casualty. NFP Property & Casualty’s current Mount Laurel, N.J., location will merge with the Voorhees office. The Andrew Agency, Crowder & Holloway The Andrew Agency, an independent insurance agency based in Richmond, Va., has acquired Crowder & Holloway in South Hill, Va. Terms of the transaction were not disclosed. Founded in 1936, Crowder & Holloway www.insurancejournal.com

is an insurance broker providing personal and commercial insurance services to clients throughout Virginia and North Carolina. The agency’s South Hill office will continue to operate under the Crowder & Holloway name, and two employees from Crowder & Holloway will join The Andrew Agency as part of the transaction. Integro, HealthCare Risk Specialists Integro has acquired HealthCare Risk Specialists in West Hartford, Conn. Financial details of the transaction have not been disclosed. HealthCare Risk Specialists provides custom-designed as well as traditional professional liability insurance services to physicians and physician groups across the U.S. HealthCare Risk Specialists’ founder David Rossi will remain with the firm in a consulting capacity and Matthew LeBlanc, managing principal, will assume leadership of the business unit. HealthCare Risk Specialists brokers and colleagues will join Integro and remain in their West Hartford office, which becomes Integro’s first office in Connecticut. AssuredPartners, Insurance & Benefits Group AssuredPartners Inc. has acquired Insurance & Benefits Group LLC (IBG), headquartered in Sedalia, Mo. IBG’s 31 employees will continue to operate from its three Missouri locations — Sedalia, Lee’s Summit and Warrensburg — under the local leadership of IBG President Randy Russell. IBG provides the entire gamut of property/casualty products and services to all types of businesses, municipalities, and educational and nonprofit institutions. The agency also assists clients with health and welfare plans, retirement planning, personal insurance and specialty programs. Headquartered in Lake Mary, Fla., and led by Jim Henderson and Tom Riley.

Advanced E&S Group Advanced E&S Group, a Florida-based managing general agency has opened a new branch operation in Dallas,Texas. April Moeser, branch manager and Lisa Sherman, underwriter, will work with Texas retail agents and expand Advanced E&S’s restaurant program presence in this market. Moeser will manage distribution, underwriting, marketing, producer relationships and general operations in the state. Prior to joining the Advanced E&S Group, Moeser served as regional manager for RCA Insurance Group focusing on hospitality. Arthur J. Gallagher, National Administration Co. Arthur J. Gallagher & Co., has acquired program administrator, National Administration Co., based in Chesterfield, Mo. Terms of the transaction were not disclosed. Founded in 1987, National Administration Co. (NAC) is a national program administrator that offers affinity group and association products and services throughout the United States. Dale Turvey and his team will continue to operate from their Chesterfield location under the direction of Kevin Garvin, head of Gallagher’s North American affinity operations.

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 11

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Trucking Don’t Get Trucked By Transit Coverage

Changing Regulation and Enforcement Can Get Your Client T-Boned

ake a drive down any highway in America and you won’t have to go too far before seeing a patrol car pulling over a big rig. Often the officer has stopped the vehicle simply to ensure the driver is following all the necessary protocols. Which ones? These days it can be tough to keep track. For example, did By Rebecca Roberts you know that a vehicle weighing more than 10,001 pounds is considered a motor carrier by the Federal Motor Carrier Safety Administration (FMCSA)? That means it is governed by similar regulations as vehicles weighing more than twice its size. Consider the variety of regulations related to registering a vehicle with the Department of Transportation or the authorization required for a driver to cross state lines. These are just some of the additional complexities that transportation companies need to understand. Failure to comply with many of these regulations can have significant financial

implications such as a sizable fine for each violation. In addition, a lack of compliance can result in a significant operational impact should the enforcement officer place the vehicle or driver “out of service.” While a complete listing of the extensive FMCSA regulations is provided on their website (www. fmcsa.dot.gov), motor carriers are often looking to their insurance broker and agent for assistance in understanding these regulations and navigating the changing risk climate. Because of the complicated nature of these regulations, it is recommended that brokers and agents consult a seasoned transportation wholesaler who can offer the depth of expertise and market relationships that are required to place these difficult pieces of business.

Women Truckers Outperform Men; Easing Labor Shortage

emale truckers are sliding into long-haul cabs as companies seek to end a U.S. driver shortage, and they’re proving to be better behind the wheel than men. Whether measuring accidents, inspections or compliance issues, women drivers are outperforming males, according to Werner Enterprises Inc. Chief Operating Officer Derek Leathers. He expects women to make up about 10 percent of the freight hauler’s 9,000 drivers by year’s end. That’s almost twice the national average. Trucking companies see women as a large untapped labor pool that may ease a driver shortfall that’s expected to grow to 400,000 by 2017. More women have taken the wheel, according to the American Trucking Associations. They accounted for 5.8 percent of the 3.4 million U.S. truck drivers last year, compared with 4.6 percent in 2010. National safety figures don’t get broken down by gender, the group said. (Bloomberg)

14 | INSURANCE JOURNAL-NATIONAL September 21, 2015

Education Another important resource to consult is the Motor Carrier Insurance Education Foundation, a nonprofit organization designed for and dedicated to providing education to insurance professionals. The curriculum focuses on the operation, government oversight and risk management needs specific to the transportation industry. In addition, the Foundation has developed and filed the industry’s first and only motor carrier-specific insurance designation, “Transportation Risk Specialist” (www.transportationriskspecialist.com). This designation offers professionals engaged in serving the transportation industry an opportunity to be officially recognized for their unique expertise. In the last year, only 137 professionals received this designation. The knowledge and expertise is out there — you just have to know where to look. Roberts is the managing director and transportation underwriting manager for the Indianapolis office of Burns & Wilcox, an independent insurance wholesaler. She is also recognized as a Transportation Risk Specialist (TRS) by the Motor Carrier Insurance Education Foundation.

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Worker Classification Will Uber Employee Status Ruling in California Impact Its Business Model? By Don Jergler

California Labor Commission ruling in June that an Uber driver is an employee and not a contractor opens the door to more scrutiny over the rideshare giant’s business model, but that was just the proverbial tip of the iceberg in a series of challenges that didn’t go the right way in the last few months for the rideshare provider. In early September U.S. District Judge Edward Chen in San Francisco ruled California drivers could sue as a group on the question of whether they are employees or contractors, and over their demand for payment of tips that were not passed on to them. The judge ruled Uber drivers are entitled to class action status in litigation over whether they are independent contractors or employees. Three drivers sued Uber in a federal court in San Francisco, contending they are employees and entitled to reimbursement for expenses, including gas and vehicle maintenance. The drivers currently pay those costs themselves. Drivers’ attorneys must submit more evidence to sue as a group for reimbursement of other expenses. The Labor Commission’s ruling in June only pertains to one particular case, in which the ruling was on an appeal by Uber of a labor commis-

sioner’s award of about $4,000 in expenses to San Francisco-based driver Barbara Ann Berwick, who filed her claim in September. She worked as an Uber driver for just over two months last year. “The California Labor Commissioner’s decisions in a Berwick wage claim applies to the claimant, that employer and the facts presented in that particular case,” DIR spokeswoman Erika Monterroza said. “The Labor Commissioner’s evaluation of whether someone is an independent contractor or an employee is done case-by-case based on the facts before her.” This case is similar to other ongoing employee classification cases. In another case earlier in June, Uber lost a bid to force arbitration in a federal lawsuit brought in San Francisco by its drivers. Earlier this year, the same U.S. District Court rejected Uber’s bid to classify its drivers as independent contractors, saying a jury would rule on their status. In Florida, a state agency ruled earlier this year that Uber drivers are employees. In New York, taxi-enforcement agents seized almost 500 Uber cars for illegal street pickups, over half of all its seizures for illegal-pickup violations, the city’s Taxi and Limousine Commission said. In a response to the media reports out in the Labor

16 | INSURANCE JOURNAL-NATIONAL September 21, 2015

Commissioner matter, Uber emphasized that the ruling does not apply to all drivers, only one, and that commission’s ruling is non-binding. “Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee. Five other states have also come to the same conclusion,” Uber stated in an email response to a request for comment. “It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.” Harry Campbell, a Newport Beach, Calif., blogger for Forbes who goes by the handle “The Rideshare Guy,” said many of the followers of his blog and his website dedicated to ridesharing do not want to be considered Uber employees. But they also don’t like the current model in place, he said. “It shows the ‘Uber is kind of current model getting the best is not clear cut,” of both worlds.’ Campbell said. As it stands now Uber does have some control over when a driver works. Drivers must accept 90 percent of ride requests, so they must keep themselves available for rides anytime their app is on and they must accept all rides, even short rides in which a driver earns little to nothing, Campbell said. “Uber is kind of getting the best of both worlds,” he said. “They’re able to expect some of that employee control, but they’re not having to pay any of the costs.” On what’s considered a minimum fare ride, which is $4, a California driver only nets $2.40 after Uber takes its $1 safety fee and 20 percent cut. www.insurancejournal.com

It’s difficult to earn money on these short rides, and it has become more problematic for Uber drivers as the service has gained popularity and drivers are starting to see of these short ride requests, he said. As for the California decision, it may only represent one driver, but Campbell believes it could “speak to the ongoing lawsuits.” “I think it holds more importance than this one driver,” he said of the commission’s decision. A recent study from consumer finance site NerdWallet shows Uber drivers in six major U.S. cities would receive paid holidays and healthcare benefits worth an average of $5,500 a year, plus thousands of dollars more in mileage reimbursement, if the San Francisco-based firm provided them with the same benefits as its full-time employees. The NerdWallet study outlined the benefits costs for those employees in paid holidays, health insurance, mileage reimbursement and auto insurance. Based on Uber’s stated average hourly wage for full-time drivers, the change in employment status adds up to $1,264.32 for nine paid holidays each year. Health insurance costs vary by area, but in Los Angeles it’s $2,859 per year, while in New York it’s www.insurancejournal.com

‘It shows the current model is not clear cut.’ $3,585 per year, according to NerdWallet. To calculate estimated mileage reimbursement the study uses driving totals from Berwick in the Labor Commission matter, which if extrapolated to full year would add up to 38,808 miles. An employee driving those miles would get $22,315 in reimbursement. Auto insurance rates also vary by locale, but in Los Angeles it’s $1,175.61 and in New York it’s $1,614.71, the study shows. Aside from the implications of the class-action suit, should the Labor Commissioner’s decision be upheld, some believe more rideshare drivers could be motivated to seek status as full-time employees. Jeffrey Chu, the author of the NerdWallet study, believes the figures in the study are enough to entice some drivers to consider upping their rideshare driving each week. “If Uber provided full-time benefits, that would motivate more drivers to become full-time,” Chu said. Uber has argued that many rideshare drivers don’t want to be full-time, because they drive to augment their existing income

and they don’t want to give up their flexibility and independence. According to a poll by Uber of its own drivers: 85 percent of respondents cited more flexibility in their schedule and balance their work with life and family as a major reason to work with Uber; 50 percent of U.S. Uber driver-partners drive on average fewer than 10 hours per week; and 65 percent of driver-partners changed the number of hours they worked by more than 25 percent from one week to the next. Linda T. Pierce, an attorney and area executive vice president with global brokerage Arthur J. Gallagher in Glendale, Calif., views workers’ comp as a major consideration for Uber going forward if the Berwick decision is upheld and other drivers seek the same status. Pierce believes workers’ comp judges overseeing disputes involving Uber drivers could use the Labor Commissioner’s ruling as guidance. “It would likely be a test a workers’ comp judge would use,” Pierce said. “I think that’s a real possibility.” The Berwick case fits an existing mold in which for years people have been classified as an independent contractor and have brought a case to get workers’ comp benefits, unemployment benefits or disability benefits. “There’s all sorts of different agencies that are pitfalls for California entities that

‘If they get claims put in, they run the risk of being audited by their carrier and being assessed a huge premium.’ use independent contractors,” Pierce said. As soon as enough Uber drivers are hurt on the job and they begin seeking workers’ comp benefits, that’s when trouble may arise between Uber and its insurer, she added. “If they get claims put in, they run the risk of being audited by their carrier and being assessed a huge premium,” Pierce said, adding that there’s also danger the carrier would just rescind the policy. Reuters contributed to this report.

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 17

SPECIAL REPORT

Worker Classification Labor Department’s 6-Part Test for Classifying Employees, Independent Contractors

he U.S. Department of Labor has issued a blog post with new guidance on classifying workers as employees or independent contractors under the federal Fair Labor Standards Act (FSLA), an issue that has attracted renewed attention in the on-demand economy. Misclassification of employees as independent contractors is increasing, “in part reflecting larger restructuring of business organizations,” wrote David Weil, the administrator of the DOL’s Wage and Hour Division, in his blog post entitled, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.” He said that misclassification, in addition to denying workers statutory protections, results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. “Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws,” he wrote. The 15-page DOL memo reviews the six-part “economic realities” test of the relationship between a worker and employee that should be used when classifying. This multi-factor test (see excerpts and discussion below) focuses on whether the worker is economically dependent on the employer and thus an employee, or in business for him or herself and thus an independent contractor. The issue of classifying workers has taken on new importance in an economy where companies like Uber, Lyft and FedEx have built business models that classify their drivers as independent contractors, but some of those drivers contend they are employees.

Those classified as employees are entitled to the protections provided by FSLA including minimum wage, overtime compensation, unemployment insurance and workers’ compensation. Independent contractors are not covered by the FSLA. According to the DOL, Congress intended that the FSLA be interpreted broadly to classify workers as employees and courts have generally followed a liberal interpretation favoring the employee classification. According to Weil, the economic realities of the relationship, and not the label an employer gives it, are determinative. While most misclassified employees are labeled “independent contractors,” DOL said it has seen an increasing number of instances where employees are labeled “owners,” “partners,” or “members of a limited liability company.” In these cases, the economic realities analysis must still be applied to determine whether the workers are employees, according to DOL. State Views While the DOL is trying to answer questions surrounding workers, states are sending mixed messages on the issue. The California Labor Commission in June ruled that a San Francisco-based driver for the ride-hailing service Uber is an employee, not a contractor. Uber is “involved in every aspect of the operation,” said the commissioner in that case. Uber disputes that characterization and defends its business model, claiming its drivers are independent contractors, not employees, and that it is “nothing more than a neutral technology platform.” Uber faces a federal lawsuit over the issue in which a jury will decide. In mid-July, New York’s top taxi regulator sided with ride-hailing car services such as Uber, calling their drivers freelance workers rather than employees. “We have

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wholeheartedly supported driver flexibility as independent contractors when we allow them, much to the consternation of the industry, to drive for several bases,” Meera Joshi, chairwoman of the New York City Taxi and Limousine Commission, said in an interview on Bloomberg Television. The controversy has caused some to suggest that a new classification is needed, something between the employee and the independent contractor. DOL and Economic Realities Test The following contains edited text and excerpts from the DOL memo along with Weil’s examples of cases illustrating the six factors in the “economic realities” test used by officials and courts to determine if someone is an employee under the FSLA. When determining whether a worker is an employee or independent contractor, all of the factors of the “economics realities” test must be considered in each case, and no one factor is determinative of whether a worker is an employee. However, the factors themselves “should not be applied in a mechanical fashion, but with an understanding that the factors are indicators of the broader concept of economic dependence,” according to Weil. The six factors or questions in the “economic realities” test include the following: Is the Work an Integral Part of the Employer’s Business? Courts have found the “integral” factor to be compelling, according to Weil. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business. Example: For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service. In contrast, the same www.insurancejournal.com

construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? A worker in business for him or herself faces the possibility to not only make a profit, but also to experience a loss. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job. On the other hand, the worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors — both of whom are likely to earn more if they work more and if there is more work available. Also, it is important not to overlook whether there is an opportunity for loss, as a worker truly in business for him or herself faces the possibility of experiencing a loss. Example: A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. In contrast, a worker provides cleaning continued on page 20

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 19

SPECIAL REPORT

Worker Classification

continued from page 19 services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.

How Does the Worker’s Relative Investment Compare to the Employer’s Investment? An independent contractor typically makes investments that support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market. Even if the worker has made an investment, it should not be considered in isolation; it is the relative investments that matter. Looking not just to the nature of the investment, but also comparing the worker’s investment to the employer’s investment helps determine whether the worker is an independent business. If so, the worker’s investment should not be relatively minor compared with that of the employer. If the worker’s investment is relatively minor, that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer. Example: A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company.

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor. Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work. Example: A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform. In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor. Is the Relationship between the Worker and the Employer Permanent or Indefinite? Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.

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Even if the working relationship lasts weeks or months instead of years, there is likely some permanence or indefiniteness to it as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer. A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative. Example: An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship. Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship. What is the Nature and Degree of the Employer’s Control? As with the other economic realities factors, the employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business. And the worker’s control over meaningful aspects of the work must be more than theoretical — the worker must actually exercise it. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee. www.insurancejournal.com

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SPECIAL REPORT

Workers’ Compensation Workers’ Comp Premiums Increase By 5.3% in First Half of 2015 By Steven J. Groeschen

emotech’s review of second quarter 2015 data, as recently reported by insurers to the National Association of Insurance Commissioners, shows that workers’ compensation insurers reported a 5.3 percent increase in direct written premiums during the first six months of 2015 versus the same period in 2014. Workers’ compensation direct written premiums have now increased for five straight years. This growth has been driven mainly by rate increases and other insurer pricing actions in addition to moderate payroll growth. Written premiums at mid-year 2015 of $26.9 billion are at an all-time high and are a significant increase from the midyear 2010 low of $18.8 billion. Top 25 Writers The top 25 workers’ compensation insurers, ranked by the highest dollar amount of direct written premium growth, reported a 23.2 percent increase during the first six months of 2015 versus the same period in 2014. This increase is impressive since 10 of the insurers in this year’s top 25 group were also in last year’s top 25 group. For all other workers’ compensation insurers combined, reported premium decreased by 0.1 percent. AmTrust Group continues to grow, with four of its insurers in the top 25 group. These same insurers were in last year’s top 25 group. In a recent conference call, AmTrust attributed its growth to successfully targeting small businesses in key states and to rate increases. Berkshire Hathaway also has four insurers in the top 25 group. None of these were in last year’s top 25 group. Berkshire Hathaway recently acquired several of these insurers and has targeted growth in workers’ compensation and other commercial lines of business. Texas Mutual Insurance Co. has been in the top 25 group for five consecutive years. Five of the top 25 insurers wrote more than 80 percent of their total workers’ com-

pensation premium in California: Insurance Co. of the West, Security National Insurance Co., Fire and Casualty Insurance Co., Republic Underwriters Insurance Co. and Torus National Insurance Co. However, the Workers Compensation Insurance Rating Bureau of California recommended a 10 percent reduction in advisory pure premium rates effective July 1, 2015, mainly due to cost savings from reforms effective in 2013 and better than expected payroll growth. Although insurers do not have to adopt this recommendation, there may be a leveling off or reversal of the industry premium growth observed in California since 2009. Most of the other top 25 insurers are members of large national and international insurance groups. Some of the growth reported by these insurers may be associated with renewals of business formerly written by other companies within the group. For instance, Torus National Insurance Co., which is a member of Enstar Group, is renewing select business previously written by a company recently acquired by Enstar. Medical costs continue to represent a majority of workers’ compensation losses. The impact of the Affordable Care Act on future healthcare system costs remains

uncertain. Escalating prescription drug costs and aging of the workforce may result in new or increased claim costs. Concurrently, interest rates continue to be at historically low levels; investments are generating less investment income which might help to offset these claim cost

Written premiums at midyear 2015 of $26.9 billion are at an all-time high. increases. Therefore insurers must continue to focus on underwriting profitability for this line of business. Premium is often described as the trading of a small certain loss for a large uncertain loss. For workers’ comp, there is great uncertainty since this loss is often paid out over many years. It may be decades before we can tell whether these top 25 insurers grew profits as well as premiums. Groeschen is the chief consulting actuary and risk analyst of Demotech Inc., a Columbus, Ohio based financial analysis firm specializing in evaluation of the financial stability of regional and specialty insurers. Email: sgroeschen@demotech.com. Website: www.demotech.com.

Industry Workers’ Compensation Direct Written Premium 2006-2015

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Industry Historical Workersâ&#x20AC;&#x2122; Compensation Direct Premium Written (DPW) Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

DPW Through 6/30

Growth (Loss)

% Change

$1,312,506,421 ($533,596,191) ($2,319,632,764) ($2,515,315,417) ($944,610,372) $1,792,902,004 $1,894,400,911 $1,760,075,272 $1,266,876,577 $1,345,536,625

5.5% -2.1% -9.4% -11.3% -4.8% 9.5% 9.2% 7.8% 5.2% 5.3%

$25,199,217,083 $24,665,620,892 $22,345,988,128 $19,830,672,711 $18,886,062,339 $20,678,964,343 $22,573,365,254 $24,333,440,526 $25,600,317,103 $26,945,853,728

DPW Through 12/31

Growth (Loss)

$47,062,687,116 $46,174,410,617 $41,503,801,603 $37,200,666,400 $36,400,230,610 $39,892,611,743 $43,900,675,422 $47,030,573,132 $49,313,007,692 --

$1,256,294,716 ($888,276,499) ($4,670,609,014) ($4,303,135,203) ($800,435,790) $3,492,381,133 $4,008,063,679 $3,129,897,710 $2,282,434,560 --

% Change 2.7% -1.9% -10.1% -10.4% -2.2% 9.6% 10.0% 7.1% 4.9% --

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 2015 data, estimated to be more than 95 percent of the companies that report quarterly. It excludes several large state funds (e.g. California, New York, Pennsylvania) which have not always reported second quarter data.

Top 25 Workersâ&#x20AC;&#x2122; Compensation Direct Premium Growth Rank Company Name Group Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Wesco Insurance Co. Employers Preferred Insurance Co. Insurance Co. of the West Security National Insurance Co. Travelers Property Casualty Co. of America Starr Indemnity & Liability Co. Zurich American Insurance Co. National Union Fire Insurance Co. Redwood Fire & Casualty Insurance Co. Berk Hathaway Homestate Insurance Co. Employers Assurance Co. Insurance Co. of the State of PA Technology Insurance Co. United Wisconsin Insurance Co. Republic Underwriters Insurance Co. Old Republic Insurance Co. NorGUARD Insurance Co. Liberty Insurance Corp. American Zurich Insurance Co. Rochdale Insurance Co. Torus National Insurance Co. New York Marine & General Insurance Co. Ohio Security Insurance Co. National Liability & Fire Insurance Co. Texas Mutual Insurance Co.

AmTrust Group Employers Insurance Group ICW Group AmTrust Group Travelers Group Starr Group Zurich Insurance Group American International Group Berkshire Hathaway Group Berkshire Hathaway Group Employers Insurance Group American International Group AmTrust Group BCBS of MI Group Delek Group Old Republic Group Berkshire Hathaway Group Liberty Mutual Group Zurich Insurance Group AmTrust Group Enstar Group NY Marine & General Group Liberty Mutual Group Berkshire Hathaway Group N/A Top 25 All others Total

Year to Date 6/30/2015

Year to Date 6/30/2014

$360,226,399 $206,661,061 $394,276,380 $331,953,295 $861,609,415 $164,945,575 $920,157,132 $286,911,147 $80,742,971 $160,876,665 $123,577,451 $304,084,362 $502,774,195 $117,894,990 $104,830,700 $282,824,159 $189,993,874 $313,014,870 $540,820,137 $167,713,684 $45,536,502 $70,461,458 $63,345,165 $34,417,902 $584,190,100 $7,213,839,589 $19,732,014,139 $26,945,853,728

$258,529,368 $107,590,831 $310,552,786 $251,561,312 $784,855,031 $89,743,465 $848,620,832 $218,030,812 $17,888,095 $101,126,559 $64,342,545 $252,244,461 $453,074,171 $71,085,061 $62,056,782 $242,317,133 $150,398,968 $275,778,319 $507,721,051 $136,039,572 $14,068,742 $40,431,637 $33,733,470 $4,893,223 $556,713,562 $5,853,397,788 $19,746,919,315 $25,600,317,103

Growth (Loss) % Change $101,697,031 $99,070,230 $83,723,594 $80,391,983 $76,754,384 $75,202,110 $71,536,300 $68,880,335 $62,854,876 $59,750,106 $59,234,906 $51,839,901 $49,700,024 $46,809,929 $42,773,918 $40,507,026 $39,594,906 $37,236,551 $33,099,086 $31,674,112 $31,467,760 $30,029,821 $29,611,695 $29,524,679 $27,476,538 $1,360,441,801 ($14,905,176) $1,345,536,625

39.3% 92.1% 27.0% 32.0% 9.8% 83.8% 8.4% 31.6% 351.4% 59.1% 92.1% 20.6% 11.0% 65.9% 68.9% 16.7% 26.3% 13.5% 6.5% 23.3% 223.7% 74.3% 87.8% 603.4% 4.9% 23.2% -0.1% 5.3%

Data Source: The National Association of Insuranceurance 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 2015 data, estimated to be more than 95 percent of the companies that report quarterly. It excludes several large state funds (e.g. California, New York, Pennsylvania) which have not always reported second quarter data. www.insurancejournal.com

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 23

SPOTLIGHT

Residential Contractors Construction Defect Analysis for Occurrence and Manifestation Occurrence Form Policies

he commercial general liability (CGL) policy is the standard insurance policy used for construction liability risks. Because of this, a question often arises as to whether or not the policy that’s in force when the work was done will pay for By Dwight M. Kealy construction defects. To answer the question, we need to look at how different policy forms and jurisdictions handle construction defects. The CGL policy is sold to contractors in three different forms: • The Occurrence Form is designed to cover occurrences that take place during the policy period. • The Manifestation Occurrence Form is designed to cover occurrences that first manifest during the policy period. • The Claims Made Form is designed to cover claims that are reported during the policy period. To explain the form differences, imagine that my grandparents go to the same coffee shop every day for 20 years. They like this coffee shop because they use these special blue metallic cups that make your lips tingle when you have your first few sips of coffee. Every year the coffee shop has an annual occurrence form CGL policy with $1 million per occurrence and per aggregate limits. After 20 years, my grandparents learn that it is not necessarily a good idea to drink coffee every day out of a metallic cup that makes your lips tingle. It turns out that the metal is dangerous and my grandparents are now experiencing various lip and throat cancers arising out of their contact with the metal cups for the past 20 years. The occurrence form policy states that it will pay bodily injury or property damage that occurs during the policy period. When did the bodily injury to my grandparents

occur in the example above? I imagine that their attorney will think the bodily injury occurrence took place at least once during each of the past 20 years. The attorney would have 20 million reasons to find that an occurrence took place during each of the past 20 policy periods because if it occurred during a policy period, the policy should pay. The insurance company might have thought that the most they would pay for any one occurrence is $1 million. It is true that the most they would pay for any one occurrence during any one year is $1 million, but we have 20 annual policies each with $1 million limits. All together, that would be $20 million worth of coverage available for the 20 occurrences that took place over 20 different policy terms. Unlike the occurrence form policy, the claims made and manifestation occurrence policies would each only pay $1 million in the above situation. The claims made form pays for claims that are made during a policy period. It would only pay $1 million because the claim for damages would only be paid by the one claims made form policy in force when the claim was made. The manifestation occurrence policy would only pay $1 million because it only covers occurrences that first manifest during a policy period. Sometimes “manifest” is defined as “to become apparent to a common observer.” Sometimes “manifest” is defined as the time when an occurrence is reported to the insurance company. However manifest is defined, it is clear that it can only “first” manifest once. Even if the occurrence occurred over multiple policy years, it could only “first” manifest itself during one policy. The manifest occurrence form in force when the occurrence first manifests would be the only policy obligated to pay for the occurrence.

ask whether a construction defect is ever, by itself, an occurrence. The ISO CGL policy defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” (CG 00 01 04 13, ISO Properties Inc., 2012, Section V, Paragraph 13). The occurrence, claims made, and manifestation occurrence policies all require “bodily injury” or “property damage” that was caused by an “occurrence.” A construction defect is a problem with the design or construction of a structure resulting from a failure to design or construct in a reasonable workmanlike manner. For example, if I build a concrete wall without the appropriate rebar and it looks likely that the wall will fall over during the first breeze, we might say that the absence of the rebar is a construction defect. But, before the wind blows and the wall falls down, do we have an occurrence? States have answered whether a construc-

Construction Defect Coverage When analyzing the coverage forms for construction defect coverage, we have to

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tion defect is an occurrence in three different ways. 1) If the damage was the result of the intentional act of construction, it is not an occurrence. The first school asks if the damage was the result of an intentional act. If it was the result of an intentional act, it was not an accident. If it was not an accident, it does not meet the definition of an occurrence. This position favors insurance companies and makes it difficult for a policyholder to find coverage for a construction defect because the act of construction is an intentional act. (For example, see Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co. (Pa. 2006). 908 A.2d 888). 2) If the damage is the unintended result of faulty workmanship, it is an occurrence. The second school focuses on whether or not the damage was unintended. If it was unintended, it sounds like it was an accident. If it was an accident, then it sounds like an occurrence. This position favors coverage for the policyholders. (For example, see United States Fire Insurance Co. v. J.S.U.B., Inc.(Fla 2007). 979 So. 2d 871). 3) Whether or not there was an occurrence depends on what property is damaged. The third school holds that if there is damage to a property other than to the contractor’s work, there is an occurrence. If the damage is to the contractor’s own work, there is no occurrence. (For example, see French v. Assurance Co. of America, (4th Cir. 2006) 448 F.3d 693). You may recognize this from the CGL policy’s exclusions for the insured’s product and work. However, policyholders are usually not required to prove the absence of exclusions. They only need to prove the occurrence. The insurance company then has the duty to defend, pay, or prove any applicable exclusions. This school inappropriately forces the policyholder to prove not only that an occurrence took place, but that it was not excluded. www.insurancejournal.com

I offer information on all three schools because of the fluid nature of construction defect litigation. States can change from one school of thought to another with the passing of a law or new court decision. If a jurisdiction follows the first school, the construction defect will probably not be an occurrence because construction is an intentional act, intentional acts are not accidents, and therefore are not occurrences. If a jurisdiction follows the second school, the construction defect probably will be an occurrence because the damage was unintended and if it was unintended, it can be an occurrence. If a jurisdiction follows the third school, the construction defect will only be an occurrence if the damage is to property other than the property worked on by the policyholder. Digging Deeper into the Definition When analyzing coverage for construction defects under a manifestation occurrence policy, we need to dig deeper into the definition of a construction defect. A construction defect can be either a patent defect or a latent defect. A patent defect is one that is readily discoverable or “apparent by a reasonable inspection” (CA Code of Civil Procedures § 337.1e). A latent defect is one that is not readily discoverable or apparent by a reasonable inspection. The manifestation occurrence form is designed to cover only “bodily injury” or “property damage” that first manifests and appears during the policy period. Since a latent defect is one that, by definition, is not readily discoverable or “apparent by a reasonable inspection,” the manifestation occurrence form would not provide coverage for latent defect occurrences even in a jurisdiction that views construction defects as occurrences. The only construction

defects for which the manifestation occurrence policy would provide coverage would be for patent defects because only patent defects would have the ability to manifest and appear during the policy period. Even if a policyholder is able to prove that the construction defect was an occurrence triggering coverage, the insurance company will have the opportunity to prove that coverage should be denied because of an applicable exclusion. The most common exclusions cited for construction defects are the CGL policy’s exclusions for: • J) that particular part of real property on which you or your subcontractor was performing operations; • K) your product; and • L) your work. These exclusions suggest that what the CGL policy is intending to cover is not a contractor’s defective product or work, but the damage resulting from a contractor’s defective work. Repairing defective materials or poor workmanship is a commercial risk not passed on to a liability insurer (F&H Construction v. ITT Hartford Ins. Co. (2004) 188 Cal.App.4th 364, 372). Kealy is an attorney and licensed insurance broker. He is a Certified Insurance Counselor and faculty member with the National Alliance for Insurance Education & Research where he teaches classes on commercial insurance. He is principal of his own law firm in Murrieta, Calif.

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 25

CLOSER LOOK

Trucking E&O Insights: Big Trucks Can Cause Big E&O Claims

ravel most any highway and it will appear that the trucking industry is healthy. Moreover, many insurance professionals are optimistic about the future of the trucking market. While this potentially provides insurance agencies with some significant opportunities, it is vital for agencies to recognize that trucking is not just any type of an account. With significant business opportunities comes sigBy Curtis M. Pearsall nificant potential for big claims. Ask most errors and omissions (E&O) liability carriers and they can readily identify some E&O claims well in the $5 million-plus area. If your agency’s appetite includes adding trucking risks, it makes sense to brushup on the exposures this class of business presents, while performing the necessary preparation and homework required. Know the Risks When one thinks of trucking, the auto exposure comes to mind. However, other exposures this class presents include property — real and personal — as well as liability, inland marine, crime, workers’ compensation, etc. In addition, not all trucking accounts look the same. For this reason, a great starting point to understand this class, and your specific risk, is using one of the industry’s many exposure analysis checklists. These checklists not only provide a tremendous amount of information on the overall profile of the class of business, but also provide a thorough review of the exposures by line of business. It is important that agents possess the knowledge and know what questions to ask to truly understand the risk and any uniqueness it presents. For example, does the account do repair work, welding, spray painting, etc.? If so, how are the various combustibles stored? Do they have fuel pumps on location?

Because truckers depend heavily on fuel, they may have a contingent exposure if one of their suppliers suffers a loss. In addition, many of the larger trucking risks have become extremely advanced in their use of technology to manage their fleets, so inquiries regarding this exposure should be conducted. Documentation is Key As noted by the following claim, solid documentation (or lack of it) could make the difference if an E&O claim developed. claim will come down to a Many of the This E&O claim was filed swearing contest between larger truckagainst the agency based the parties as to what each on the allegation that the intended. ing risks have agency negligently deleted become extremely What should the agency the wrong vehicle from the done differently or betadvanced in their have trucker’s commercial auto ter? use of technology policy. Several months folThe lesson learned from lowing the coverage change, to manage their this claim is that when the agency’s client was agencies are dealing with fleets, so inquiinvolved in a serious motor large accounts, ries regarding this high-volume, vehicle accident. The carrier the recordkeeping needs to denied the claim because the exposure should be flawless. In addition, the vehicle was not listed on the be conducted. agency must be extremely trucker’s commercial auto effective in properly compolicy. municating coverage changes to the client, The trucker maintained a large fleet of as well as communicating the status of a commercial trucks (more than 30), so covclient’s coverage at any given time. erage changes were commonplace and the agency was regularly involved with issuing Understand the Exposure insurance cards. In this case, the trucking There are several other exposures this client had sent an email that suggested that type of risk presents. It is important to the agency should remove a truck from the deal with a carrier that has a history in this commercial auto policy. The trucker now class of business and understands the class. states that the email was simply to advise Oftentimes, these carriers will provide that the company did not need an insuradditional services such as loss prevention ance card for the vehicle and that the agento minimize the exposure and the potential cy was not instructed to remove the vehifor loss. It is possible, too, that these carricle. At this point, it appears that the E&O ers have developed policy forms specifically

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designed for the exposures present. Theft is a major issue when it comes to the inland marine exposure, so it is crucial to completely understand the exposure. There will likely be a need for some type of business income coverage as well, depending on the risk. For smaller trucking risks, the issue may involve extra expense coverage to help pay the additional expenses required to do business when a covered loss damages or destroys insured property.

Bottom line, not all trucking risks are Pearsall is president of Pearsall Associates Inc., a the same, so it is vital to understand the risk management consulting firm specializing helpclass of business and the specific exposures ing agents protect themselves. He is also a special of your account. Using the available tools consultant to the Utica National Agents E&O prowill go a long way toward USA12043.qxd 1/4/08ensuring 2:26 that PM big Page 1 gram. Email: curtis@pearsallassociates.com. Phone: trucks donâ&#x20AC;&#x2122;t become a big E&O headache. 315-768- 1534. Blog: www.agentseotips.com.

Offer Various Limit Options Trucking risks present significant severity potential. To address this, offer these risks a variety of limit options, including multiple umbrella options. This forces the customer to choose what limit he or she wants and, as a result, the limits that are declined. This approach will be a solid defense should a major claim occur and the insured alleges you had not provided the proper coverage. When providing an umbrella, be sure to satisfy the underlying limit requirements. While this may sound like common sense, this issue (a gap between the underlying and the umbrella) has been the cause of many E&O claims. www.insurancejournal.com

September 21, 2015 INSURANCE JOURNAL-NATIONAL | 27

IDEA EXCHANGE

Growing Your Property Casualty Agency Which of These Competitors Should You Worry About?

ust like everything else in the world, insurance sales competitors change with the times. Some are well-financed operations with a strong retail presence or online superpowers. Others are more traditional in nature but hungry and aggressive. Then there’s the flip side where former rivals disappear from the scene via retirement, By Alan Shulman merger and sale. Yesterday’s rivals were typically the independent agent down the street, the captive in the mall, and the odd carrier that sold direct. Today’s competitors are virtually everywhere, online and off. Plus, new players seek to disrupt the agency business as we know it, making it more important than ever for you to continuously eyeball key contenders. To better understand and compete against your most formidable rivals, identify them by type. Here are seven categories to get you started. Location. Nearby competitors are the easiest of all to identify. The location issue matters most when you do a significant amount of business in your own neighborhood. If you derive most of your volume elsewhere, and expect to continue doing so, then these rivals are less important than in years past. Social Media. This vast, endlessly evolving, medium is ripe with competitors. They range from jumbo national marketers to brand new licensees with a pocketful of social accounts. Keep an eye on who is posting what within your marketing territory, and their impact (likes, favorites, retweets,

etc.) with Perch. It’s a free app that provides weekly reports on the social marketing activities of rivals. Specialty. Which programs, agencies and insurers do you encounter most often when prospecting and selling a targeted policy type or within a specialized niche? Is it wiser to continue butting heads with them or to move on to fresh targets that are easier to write? Same Carrier. When you and a rival both represent the same carrier, buyers may have difficulty distinguishing one agency from

the other since the policies you both may sell are identical. Professional knowledge and ethics, marketing and sales skills, and your relationship with the company’s people are your core distinctions. Agency Networks. These networks offer producers the ability to expand their carrier representation, to gain marketing support, and more. Rival offices that aggressively

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activate these advantages are definitely worth watching. Sponsored Rivals. Private label solicitations abound in the P/C industry. All it takes is an organization’s list, and a willing insurance provider, to solicit sponsored policies. Wholesale clubs, auto manufacturers, online vendors, retailers, employers, and others are active in this arena. And today’s tech-based media makes it easier than ever. Experimental Rivals. Since endless dollars are continuously spent on P/C insurance, it’s to be expected that new plans and players will enter the marketplace. Today’s media, technology and imagination converge to encourage this activity. Ideas such as “free insurance” with the purchase of a new car, social “peer-to-peer” insurance, and Google’s recent entry are in play; others have yet to be devised. Keep an eye on these potential industry disrupters, but never let them distract you from the marketing and sales actions you need to perform today. You may truly believe that you care more for your insureds, are more professional, and provide better service than your rivals, but as core policies become commoditized, consumers care less about these distinctions. To survive, you must willingly embrace the new media and technologies as power tools and enhance your sales skills — all while continuously looking over your shoulder. Shulman, CPCU, is the publisher of Agency Ideas, a subscription-only sales and marketing newsletter. He is also the author of the many tools posted on the Agency Ideas Instant Download Store. Phone: 800-724-1435. Email: alan@agencyideas.com. Website: www.agencyideas.com

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We live it.

Terry Horvath, truck driver and Great American policyholder

Jeff Enneking, Great American claims specialist and former body shop manager

With specialty insurance expertise like this, it’s hard to tell our people from our policyholders. In hundreds of niche industries, Great American’s expertise is built on the knowledge and experience of people who know our insureds’ business as well as our own. People like Jeff who started working in his grandpa’s body shop at a young age. His passion for vehicles has been built year after year—in shops and on the job. That’s expertise you and policyholders like Terry can count on when looking for a company that provides protection for specialty business risks.

www.GAIG.com/TruckingWeLiveIt

Agriculture • Annuities • Environmental • Equine • Excess & Umbrella • Fidelity & Surety • Financial Institutions • Inland & Ocean Marine Non-Profits • Professional Liability • Transportation • Workers’ Compensation Coverage is underwritten by Great American Alliance Insurance Company, Great American Assurance Company, Great American Insurance Company and Great American Insurance Company of New York, licensed insurers in 50 states and DC and Great American Security Insurance Company, an authorized insurer in all 50 states and DC except Vermont. The following registered service marks are owned by Great American Insurance Company: the Great American Insurance Group eagle logo and the word marks Great American®, Great American Insurance Group® and We Live It®. © 2014-2015 Great American Insurance Company. 301 E Fourth Street, Cincinnati, OH 45202.

IDEA EXCHANGE

Tech Talk Building Relationships vs. Pushing Transactions By Tom Wetzel

ost agents work hard to maintain strong relationships with clients, however, all too often business gets in the way. Agents need to take steps, digitally speaking, to stay connected continually with the right messages rather than wait for a claim or renewal discussion to demonstrate value. In practice, however, many agents send mixed signals, on their websites, in email messaging and on mobile applications and social media. “Everything you do online needs to look and feel the same — it’s your brand,” says Brian Appleton, a co-author of the just-released Jason Cass book, “Customer Service Is Just Foreplay.” “Think of McDonald’s,” he says. “Why do people buy from McDonald’s? Consistency. Everything from their cups and napkins to their golden fries and Big Mac with special sauce brings about an emotion that says you can trust them. You know what you are getting, whether you go to one in Chicago or Los Angeles.” Appleton says that most agencies give prospects and clients conflicting messages about who they are online. Even worse, some agencies are doing nothing at all. “This breaks down the trust these individuals feel when doing business with you. How people ‘feel’ and how much they ‘trust’ their agent always play key roles in their purchase decisions and this will never change,” Appleton says. Jim Schubert, president of Southern States Insurance in Alpharetta, Ga., uses the example of Starbucks to support the need for agents to project a consistent message. “Starbucks presents a unified message in their stores and online,” Schubert says. “Customers know they will have the same experience, whether they are online and regardless

of which store they’re in. For agents, we can’t present a disjointed experience. If we do, that’s a huge disservice to our clients and prospects.” When an agent’s focus is primarily on the point of sale, the moment when a customer receives a premium notice — that process falls into the category of transactional marketing. The online quote plays into that process. Find a product, click the request for quote, compare prices, and make a purchase. Most consumers like “simple” and the ability to use their smartphone to research and buy products and services. Buying the right insurance, of course, is more complicated than buying a loaf of bread, yet the one-and-two-click culture works against that idea. At the same time, digital reality underscores the importance for agents to offer at least some services through a smartphone. On the other hand, the focus of relationship marketing is not the transaction but in establishing trust. In this process, an insurance buyer does business with an agent because they expect to receive positive value — not just the product itself but also in-depth information — and help in finding the best coverage and assistance with other

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issues. The agent also takes every opportunity to help clients feel confident about their purchasing decision. “We’re always asking questions online to both clients and prospects,” Schubert says. “We have a blog plug-in on our website asking readers what they want to learn about. We also always ask for comments and I make sure all our employees include our social media sites in their email signatures so people can interact with us there, too.” Providing clients and prospects with multiple touchpoints is critical for agents in building relationships, according to Ron Berg, executive director for the Agents Council for Technology at the Independent Insurance Agents & Brokers of America Inc. “It’s just as important, however, to make those touchpoints meaningful,” he says. “It’s not just the number of touchpoints but also their quality. Agents need to find their ‘sweet spot’ balancing quality and frequency.” Wetzel heads his own insurance marketing firm that specializes in social media programs for agents through its Social Media Content Roadmap. Email: twetzel@wetzelandassociates.com. Website: www. wetzelandassociates.com.

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Market Detail: Northbrook Insurance Associates Inc. (www.northbrook-ins.com) offers business insurance coverages in Wisconsin. Coverage can include any of the following: businessowners policies; general and professional liability; commercial auto insurance; commercial property insurance; employee benefits; errors and omissions insurance. Commissions split with other agents. Available limits: As needed Carrier: Unable to disclose States: Wis. Only Contact: Robert Butzke at 800-948-8570 or e-mail: bobb@northbrook-ins.com

Market Detail: Builders & Tradesmen’s Insurance Services Inc.’s (www.btisinc.com) Victory Workers’ Comp coverage offers instant online price indication; fast quote turnaround times and no broker, access, volume or membership fees. Multiple payment options, including monthly reporting and zero down with 12 month EFT. Available limits: As needed Carrier: AmTrust Group Insurance Carriers States: All states except Alaska, N.D., Ohio, Wash., and Wyo. Contact: Customer service at 877-627-1244

Event Weather Insurance Market Detail: BUA (www.buainsurance.com) through its subsidiary Weather Insurance Agency, provides weather insurance to organizers of fairs, festivals and outdoor concerts. Coverage available for retailers who offer consumer promotions based on weather events, as well as companies producing film, television and commercials to guarantee that bad weather does not send production costs skyrocketing. Coverage also available for cities, towns and associations from unexpected snow removal costs. Available limits: As needed Carrier: Unable to disclose non-admitted States: All states Contact: Customer service at 888-772-5005

Advertisers Index

Readers, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/

American Reliable www.assurantspecialtyproperty.com 21 Applied Underwriters www.auw.com 2, 3, 36 Burns & Wilcox Ltd. www.burnsandwilcox.com 7 Century National www.cnico.com W3 City of Hope www.cityofhope.org 33 First American Specialty Insurance Company www.firstam.com W7 Gorst & Compass Insurance www.gorstcompass.com W13 Great American Insurance Group www.gaig.com 29 IBA Kern www.ibakern.com W16 IICF www.iicf.org W15 Insurance Technologies Corp. www.getitc.com 31 Insurance XDate www.insurancexdate.com SC7; SE3; E3 M.J. Hall & Company www.mjhallandcompany.com W14

Monarch E&S Insurance Services www.monarchexcess.com W5 National General Insurance www.nationalgeneral.com 9 Pacific Gateway Insurance Services www.pgiainsurance.com W11 PersonalUmbrella.Com www.personalumbrella.com 5 Philadelphia Insurance Companies www.phly.com 15 PSIC - Pacific Specialty Insurance Co. www.psic-onespot.com 35 South & Western www.southandwestern.com SC1 State Compensation Insurance Fund www.statefundca.com W1 State Fund First www.statefundfirst.com W9 Texas Mutual www.texasmutual.com SC3, SC5 The Hartford www.privatecompanyinsurance.com 12, 13 United Fire Group www.ufgsolutions.com M5 Universal Service Agency, Inc. www.universalbonds.com 27

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Woodworking Companies Market Detail: Wood Products Manufacturers Association (www. wpma.org) offers a safety group dividend plan is in partnership

with an A-rated carrier that specializes in coverages for woodworking companies. The group can potentially receive dividends of up to 10 percent of eligible policy premiums earned during the year. Available limits: Minimum $2,000, maximum $25 million Carrier: Unable to disclose, admitted States: All states except La. Contact: Philip Bibeau at 978-874-5445 or woodprod@wpma.org

Church Insurance Market Detail: Weiss Insurance Agencies (weissins.com) specializes in church insurance coverage throughout Illinois. Access to eight different carriers. Available coverage includes GL, property, workers’ comp, and vehicles. Available limits: As needed Carrier: Unable to disclose, admitted States: Illinois only Contact: Raymond Weiss at 630-584-1717 or e-mail: rjweiss@wiagroup.com

Paintball & Airsoft Insurance Market Detail: Cossio Insurance Agency (www.cossioinsurance. com) has been insuring paintball fields since 1996, from the smallest to the largest. Aggregate limits up to $3 million and no age limit. Available limits: As needed Carrier: Various, admitted and non-admitted States: All states Contact: Larry Cossio at info@cossioinsurance.com. www.insurancejournal.com

City of Hope’s NatioNal iNsuraNCe iNdustry CouNCil

Spirit of Life Gala ®

November 7, 2015 Join us in Scottsdale, Arizona, at City of Hope’s National Insurance Industry Council’s 2015 Spirit of Life® Gala honoring Michael Miller of Scottsdale Insurance Group for his philanthropic achievements and his commitment to helping City of Hope transform the future of health.

Michael d. Miller President and Chief Operating Officer Scottsdale Insurance Company

to register, learn more or for general donations, visit cityofhope.org/niic or contact Ariana Castellanos at 866-905-HOPE or acastellanos@coh.org

IDEA EXCHANGE

Closing Quote

A Blemish on the Beauty Industry

S By Sean Brownyard

tolen wages. Twelve-hour days, six days a week. Ethnic discrimination. Verbal abuse. Noxious fumes. Birth defects. Lax regulatory enforcement. Who would have thought that describes a day in the life of a nail technician? In May of this year, The New York Times published two articles describing the sometimes dangerous work and cruel treatment of the people employed by discount nail salons in the New York metropolitan area. The articles allege workers at some salons were withheld wages, paid as little as $30 per day or required to pay a fee to take the job in the first place. A follow-up piece explores the incidences of cancer, miscarriages, birth defects and other health concerns experienced by nail technicians (and their children). These revelations are more than a concern for those who work in or patronize salons. Insurance agents and brokers have a role in this story, too. Under new regulations in New York state, salons face stiff penalties for lacking proper insurance. I believe it is only a matter of time before other states, municipalities or cities follow suit. In New York state, the regulatory response was swift. Days after these articles were published, New York Gov. Andrew Cuomo established a task force to shut down

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salons with egregious violations and seek wages for unpaid workers. On June 19, the New York Senate approved a bill that would allow the Department of State to fine or shut down salons operating without a state license, bond or liability insurance. Salons are provided a three-day notice and can appeal. The owners of unlicensed salons can be charged with misdemeanors, the penalty for which is six months in jail and a $2,500 fine. Before this law took effect, running an unlicensed salon was not a criminal offense. At the same time, the bill requires financial regulators to ensure the availability of insurance and bond to salons. The law seeks to provide better support for workers on a number of fronts. Salons that have been found to compel prostitution or be involved in sex trafficking can be denied a state license. Unlicensed nail technicians are now allowed to register with the state as trainees so they can work while they study. It calls for better personal protective equipment to minimize exposure to fumes and dust. Furthermore, salons are now required to post a workers’ Bill of Rights, which is available in 12 languages. Based on my professional knowledge of nail salons, I believe the NYT articles describe a small fraction of a thriving industry, one which is comprised largely of ethical salon owners and workers who are treated and paid fairly. But New York’s salon laws have implications for salons everywhere. The two stories stirred the moral sensibilities of everyone who has ever received a manicure or pedicure. This is an opportunity for brokers to prove their This is an opportunity value to these insureds. for brokers to prove Brokers should remind their value to salons salons of the risk management best practices for by providing risk salons, including: management advice. • Display the business license prominently. • Require employees to wear protective equipment. • Keep the salon clean, organized and tidy; be sure to clean up any spills to prevent slip and fall incidents. • Ensure nail technicians work reasonable hours. • Install and use appropriate ventilation systems. At renewal time, brokers should take care to review salons’ risk management practices and evaluate their coverage for any gaps. With increased scrutiny on nail salons all over the country, there is no room for error. Brownyard is executive program manager of SASSI, the Salon and Spa Specialty Insurance agency. Email: sbrownyard@brownyard.com. Phone: 631-666-5050. Website: www.sassiagency.com.

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Expect big things in workersâ&#x20AC;&#x2122; compensation. Expect to save a third of your clients 30% or more. Most classes approved, nationwide. For information call (877) 234-4450 or visit auw.com/us. ÂŠ2015 Applied Underwriters, Inc., a Berkshire Hathaway company. Rated A+ (Superior) by A.M. Best. Insurance plans protected U.S. Patent No. 7,908,157.