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Contents June 19, 2017 • Vol. 95 No. 12 • West

West W1 California Division of Workers’ Comp Suspends Psychiatrist for Fraud

W6 CALIFORNIA HIGH COURT TO ADDRESS

OCCURRENCE CAUSED BY ACCIDENT

8 U.S. P/C Insurance Industry Keeps Quiet on Trump Exit from Paris Climate Accord 12 Survey of Agents Reveals Underwriting Disconnect in Commercial Lines

W2 Arizona City Receives $1M for Flood Control Project W2 Doughnut Delivery Drone Takes Flight in Colorado

16 Special Report: Tech Targets Construction Risk Management

W2 California Business Owner Nabbed in $32M Workers’ Comp Fraud Scheme

20 High Agency Valuations Not Going Away: MarshBerry Exec

Idea Exchange

National

U.S. P/C INSURANCE INDUSTRY KEEPS QUIET ON TRUMP EXIT FROM PARIS CLIMATE ACCORD

W6 Legal Matters: California High Court to Address Occurrence Caused by Accident

22 Growing Number of Municipal Suits Over Opioids Face Uphill Battle 23 Closer Look: Medical Professional Market in Good Health 24 Special Report: Easing Regs, Speed of New Infrastructure Projects Raises Underwriting Concerns

26 The Wedge: CRM or Organic Growth Technology? 28 Why the WannaCry Breach Brings Good News 30 5 Tips for Selling Umbrella Insurance 32 Minding Your Business: Agency of the Future 34 Closing Quote: The Promise of Insurtech

Departments W4 People 11 Declarations 11 Figures

32 AGENCY OF THE FUTURE 4 | INSURANCE JOURNAL | WEST JUNE 19, 2017

14 Business Moves 19 MyNewMarkets INSURANCEJOURNAL.COM

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OPENING NOTE

Write the Editor: awells@insurancejournal.com

Work Comp Income Benefits Fall Short

A Publisher Mark Wells mwells@wellsmedia.com

EDITORIAL

SALES

Editor-in-Chief Andrea Wells awells@insurancejournal.com

West Sales Dena Kaplan (800) 897-9965 X115 dkaplan@insurancejournal.com

East Editor Elizabeth Blosfield eblosfield@insurancejournal.com

Romeo Valdez (800) 897-9965 X172 rvaldez@insurancejournal.com

Chief Content Officer Andrew Simpson asimpson@insurancejournal.com

Southeast Editor/MyNewMarkets 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 L.S. Howard lhoward@insurancejournal.com

Chief Marketing Officer Julie Tinney (800) 897-9965 X148 jtinney@insurancejournal.com

South Central Sales Mindy Trammell (800) 897-9965 X149 mtrammell@insurancejournal.com Southeast and East Sales (except for NY, PA and CT) Howard Simkin (800) 897-9965 X162 hsimkin@insurancejournal.com Midwest Sales Lisa Whalen (800) 897-9965 X180 lwhalen@insurancejournal.com East Sales (NY, PA and CT only) Dave Molchan (800) 897-9965 X145 dmolchan@insurancejournal.com

Advertising Coordinator Columnists Erin Burns (619) 584-1100 X120 Catherine Oak, Bill Schoeffler, Randy eburns@insurancejournal.com Schwantz Insurance Markets Manager Contributing Writers Kristine Honey (619) 584-1100 X132 Evan Bundschuh, Aaron Cargain, khoney@insurancejournal.com

Joe Cellura, Tad Devlin, Brendan Farrington, Kevin McPoyle, Frank Social Media Manager Medina, Nate Raymond Ly Short (619) 890-7735 Lshort@insurancejournal.com IJ ACADEMY OF INSURANCE Director Classifieds, Jobs, Patrick Wraight Agencies Wanted/For Sale pwraight@ijacademy.com Sr. Sales & Marketing Coordinator Kelly De La Mora (800) 897-9965 X125 Associate Director kdelamora@insurancejournal.com Barbara Whiffen bwhiffen@ijacademy.com DESIGN/WEB Chief Technology Officer/ ADMINISTRATION Chief Innovation Officer Chief Financial Officer Joshua Carlson Mark Wooster jcarlson@insurancejournal.com mwooster@wellsmedia.com V.P. of Design MARKETING Guy Boccia Marketing Director gboccia@insurancejournal.com Derence Walk dwalk@insurancejournal.com Senior Web Developer Chris Thompson Marketing Administrator cthompson@insurancejournal.com Gayle Wells gwells@insurancejournal.com Web Developer Jeff Cardrant NEW MEDIA jcardrant@insurancejournal.com New Media Producer Bobbie Dodge Web Developer bdodge@insurancejournal.com Terrance Woest twoest@wellsmedia.com Videographer/Editor Ashley Waldrop awaldrop@insurancejournal.com

CIRCULATION

Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com

6 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

dequacy of income benefits is one of the long-standing concerns about the performance of workers’ compensation systems. However, there is little known about whether income benefits (also called wage-loss or indemnity benefits) provide adequate financial support for injured workers. According to a new study based on Michigan data, the total earnings and income benefits an average worker received within 10 years after an injury stack up to just 88 percent of what a worker would have earned if not injured. The study — published by the Workers Compensation Research Institute (WCRI) — highlights a dimension of worker outcomes that may be useful for policymakers and stakeholders when measuring the adequacy of income benefits that workers receive after an injury. The WCRI study asks: • How does the total income that workers receive after an injury from benefits and earnings compare with what workers could have earned without an injury? • Does the adequacy measure differ by subgroups with different duration of disability? • How many workers experience large declines in total income after an injury and how does this compare with what is observed for comparable workers without an injury. The study, Adequacy of Workers’ Compensation Income Benefits in Michigan, found that: • Within 10 years after an injury, the earnings and income benefits an average worker received were projected to be 88 percent of what a worker would have earned if not injured. However, these aggregate results hide important differences across different types of workers. • Workers with one to 12 months of temporary disability benefits had total income that was projected to replace 91 to 95 percent of earnings had they not been injured. Workers with permanent partial disability and/ or lump-sum payments had total income that FOR QUESTIONS was projected, within 10 years post-injury, to REGARDING SUBSCRIPTIONS: Call: 855-814-9547 replace 69 percent of earnings had they not Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: been injured. insurancejournal.com/subscribe Post-injury employment patterns may conInsurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media tribute to the estimates of adequacy presented Group, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 above. WCRI is an independent, not-for-profit per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this pubresearch organization in Cambridge, Mass. lication is derived from sources believed reliable and is subject

After 10 years, the earnings and income benefits an average worker received were projected to be 88% of what a worker would have earned if not injured.

Andrea Wells Editor-in-Chief

to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2016 Wells Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-9967 ARTICLE REPRINTS: For reprints of articles in this issue, contact: Kelly De La Mora at 1-800-897-9965 ext. 125 or kdelamora@wellsmedia.com Visit insurancejournal.com/reprints/ for more information.

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National

U.S. P/C Insurance Industry Keeps Quiet on Trump Exit from Paris Climate Accord By Andrew Simpson

he U.S. property/casualty insurance industry, which has been facing rising claims bills for extreme weather events, mostly reacted with silence to President Donald Trump’s decision to withdraw the country from the Paris climate change accord. The American Insurance Association (AIA), Reinsurance Association of America (RAA) and Insurance Information Institute (III), the major communications organization for the industry, declined to comment. The Property Casualty Insurers of America Association (PCI) issued a statement by Dave Snyder, vice president for international policy, that did not mention 8 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

the actual Paris agreement or the U.S. withdrawal: “Insurers are experiencing increasing losses due to extreme weather events. Considering this, it is particularly important for societies, individuals and communities to focus on reducing their risk of loss from such events through adaptation and mitigation.” But on Twitter, Anthony Kuczinski, president and CEO of Munich Reinsurance America, called the Paris agreement a “very important step in mitigating global warming and its risks” and labeled the withdrawal by the U.S. a “serious blow” to mitigating global warming. Swiss Re, one of several companies like Munich Re that has been out in front in efforts to combat climate change, said

that more than 20 studies it has done since 2009 across the globe have found that annualized losses from 1 percent to 12 percent of gross domestic product (GDP) result from climate risks. “Swiss Re very much regrets President Trump’s decision to withdraw from the historic Paris climate accord,” the insurer’s social media post said. It called the Paris agreement a “key enabler to adopt pre-emptive actions” to combat climate change.

‘We Are Still In’

According to Ceres, a business and public interest group advocating for sustainability and action against climate change, The Hartford, Munich Re America, Swiss

continued on page 10 INSURANCEJOURNAL.COM

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NATIONAL | News & Markets continued from page 8 Re and Allianz have in the past publicly expressed support for the Paris agreement. Ceres also noted that Allianz and The Hartford are among the more than 1,000 executives and firms signing a new “We Are Still In” initiative pledging to meet the goals of the Paris agreement. “Over 1,100 businesses, as well as nearly 300 institutional investors with over $17 trillion in assets, urged President Trump to keep America in the Paris Agreement,” Ceres said. “In the wake of the deeply unfortunate announcement of a withdrawal from that agreement, Ceres expects to see corporate and investor demands for — and commitments to — climate action to only grow stronger.”

State Regulators

The National Association of Insurance Commissioners (NAIC), representing state insurance regulators, declined to comment. However, several insurance regulators reacted individually. California Insurance Commissioner Dave Jones called Trump’s decision “one of the worst abdications of United States leadership” and vowed to continue to require insurers in his state to disclose publicly their investments in oil, gas and coal and encourage them to divest from thermal coal. Washington Insurance Commissioner Mike Kreidler criticized the pullout as “short-sighted” and vowed to continue to require insurers that do business in Washington to report their climate risk annually. “Trump’s efforts to undermine our environment carry a steep price that will be paid for generations to come,” Kreidler warned.

Talking Climate Change

Despite the politics, insurance and reinsurance carriers and executives have addressed climate change over the years, including in 2014 when 66 insurance executives signed The Geneva Association’s statement of principles acknowledging the role insurance can play to tackle climate-related risks. Those signing included CEOs of U.S.-based carriers AIG, Berkshire Hathaway and ACE (now Chubb), as well as leaders of foreign insurance companies. 10 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

The report, “Insurer Climate Risk Disclosure Survey Report and Scorecard,” evaluated the quality of responses from insurance companies in the annual National Association of Insurance Commissioners Climate Risk Disclosure Survey. Twenty-two of the insurers studied — including 13 based in the U.S. — earned a “high quality” rating. The results showed marked improvement from responses analyzed in a report issued two years ago, according to Max Messervy, one of the authors of the report and the insurance program manager at Ceres. Frank Nutter, president of RAA, has stressed the need for the industry to follow climate change science, even as it attempts to avoid the divisive politics in the U.S. He noted that European reinsurers like Munich Re, Swiss Re, Zurich and Allianz have been outspoken about their views. “There is a clear divide between what largely are European-based companies and the U.S. companies in how they perceive climate change,” he said. A commercial lines claims expert for Nationwide Insurance said the company has experienced a 26 percent increase in average severity over the three-year period of 2014 to 2016, compared with the seven-year period between 2007 and 2013. It has also recorded a 14 percent increase in unique commercial catastrophe events when comparing those same time periods. When asked whether this was climate change at work, the executive said, “I don’t know that I’m in a position to comment on that, but certainly there’s no question that the winters that we’ve seen in the Midwest and east of the Mississippi are much warmer than we have seen in many years. Anytime we see that type of warm weather, especially the Midwest and East, it’s going to make for some very disruptive weather patterns, which are very difficult to forecast.” Even if many aren’t talking about Paris, more insurers are disclosing their climate risks. A 2016 report by Ceres credited Allianz, Swiss Re, Erie, Nationwide, The Hartford and Munich Re as carriers with climate risk management best practices.

Heritage View

Some analysts have viewed the Paris agreement as opening up opportunities for insurers to develop new products and to work with governments in developing countries on new insurance programs. “This opens up an unprecedented opportunity for the industry to start a very positive, open dialogue with the government toward development of sound, scalable and sustainable insurance programs, as part of which a significant amount of innovation can happen,” said Mayram Golnaraghi, a climate risk expert with the think tank The Geneva Association. Golnaraghi said by 2020, the reinsurance sector will not only be providing a wider range of risk-transfer solutions, but also will be supporting emission reduction efforts and transitioning to a low-carbon economy through its investment strategies and actively managing its carbon footprint. But in speaking on climate change, President Trump cited Heritage Foundation research on the Paris agreement, including the claim that compliance could “ultimately shrink America’s GDP by $2.5 trillion over a 10 year period.” The Heritage Foundation claims the Paris climate accord would cost as many as 400,000 jobs, reduce family income by $20,000 and raise household electricity costs by up to 20 percent — without delivering any practical environmental benefit. Meanwhile, the Wall Street Journal applauded Trump’s move in an editorial, calling the Paris accord “a pledge of phony progress.” INSURANCEJOURNAL.COM

West

California Division of Workers’ Comp Suspends Psychiatrist for Fraud

alifornia’s Division of Workers’ Compensation has suspended Pasadena psychiatrist Jason HuiTek Yang from participating in the state’s workers’ comp system following his conviction in Riverside County Superior Court for his involvement in an insurance fraud conspiracy that referred patients for unnecessary care to justify workers’ comp billing. INSURANCEJOURNAL.COM

Yang has more than 2,000 active workers’ comp liens with an estimated total claim value of more than $13.7 million. Assembly Bill 1244 requires the DWC administrative director to suspend any medical provider, physician or practitioner from participating in the workers’ comp system in cases in which one or more of the following is true: The provider has been convicted of

a crime involving fraud or abuse of the Medi-Cal or Medicare programs or the workers’ comp system, fraud or abuse of a patient, or related types of misconduct. The provider has been suspended due to fraud or abuse from the Medicare or Medicaid programs. The provider’s license or certificate to provide health care has been surrendered or revoked. JUNE 19, 2017 INSURANCE JOURNAL | WEST | W1

WEST | News & Markets

Arizona City Receives $1M for Flood Control Project

lagstaff, Ariz., officials say $1 million provided by the federal government will be used for design work and related preparations for the Rio de Flag flood control project. Officials say the funding from the Army Corps of Engineers will allow the city to acquire land for the project and proceed with final design and

other steps. According to city officials, Rio de Flag is a “critical infrastructure project” needed to reduce the risk of significant flooding and avoid damage to 1,500 structures. Officials also say completion of the project would eliminate requirements for flood insurance. Copyright 2017 Associated Press.

Doughnut Delivery Drone Takes Flight in Colorado

oughnuts were delivered earlier this month by drone to Denver’s mayor and the city’s police and fire departments in an event that provided a glimpse into what companies hope will be a quick, inexpensive way to get merchandise to customers. Denver’s LaMar’s Donuts hired Austin, Texas-based company Drone Dispatch to deliver four boxes of doughnuts using piloted drones flown from parking lots within a block of the delivery targets. LaMar’s spokesman Tami Osifodunrin said Federal Aviation Administration regulations prohibit commercial drone pilots from losing sight of drones. FAA officials said they were investigating to ensure the deliveries followed federal rules governing commercial drone use in populated areas. The FAA has rules that govern drone altitude, proximity to airports, and flying over people who are not part of the crew flying the drone. The organizers said they took care to comply with regulations. “We’re doing it completely legal, we have very, very short deliveries from the drone where we have a safe takeoff W2 | INSURANCE JOURNAL | WEST JUNE 19, 2017

location and the landing area is a Drone Dispatch team member who’s receiving the box of doughnuts,” said Chris Bonnet, CEO of Drone Dispatch. The drones took off from parking lots near the Denver City and County Building, the police department, the fire department and an alleyway near a pedestrian mall. Amazon and other companies have been testing autonomous drones for deliveries, while drone maker Flirtey last year began limited deliveries for 7-Eleven in Reno, Nevada. The doughnuts were delivered as part of a week of celebrating a tradition that dates to World War I, where Salvation Army volunteers made doughnuts for soldiers on the front lines. National Doughnut Day is celebrated the first Friday of every June. Copyright 2017 Associated Press.

California Business Owner Nabbed in $32M Workers’ Comp Fraud Scheme

etectives with the California Department of Insurance arrested Gina Marie Gregori, 55, of Lafayette, for allegedly underreporting payroll and duping insurers out of $32 million. Gregori was charged with 19 felony counts and is being held on $5.2 million bail at the San Francisco County Jail. Over a seven-year period Gregori, owner of GMG Janitorial, GMG Billings, and Apex Janitorial Solutions, allegedly falsified documents and underreported payroll to her workers’ comp insurance company, according to CDI detectives. A CDI investigation allegedly showed Gregori was keeping two sets of books, using a payroll processing service to report to Employment Development Department and pay her employees, and keeping a fraudulent set of books that she provided to insurers and insurance auditors, which showed a significantly lower payroll amount. GMG is a large janitorial company operating throughout the Bay area and Southern California, reportedly employing more than 200 employees from July 2009 through December 2016. The investigation was led by CDI with assistance from the San Francisco County District Attorney’s Office, which is prosecuting the case. INSURANCEJOURNAL.COM

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WEST | PEOPLE

Olive Chang

Samantha Dutra

Topa Insurance Co. has named Olive Chang assistant vice president of reinsurance and programs. Chang will be located in the Calabasas, Calif., office. Her duties include managing reinsurance and programs operation. Chang joined Topa in 2015. She was previously the business leader and country head of Thailand for Aon Benfield. Prior to that, she was a senior vice president with Guy Carpenter. Topa is a wholly owned subsidiary of Topa Insurance Group. Lafayette, Calif.-based Stone Creek Insurance Agency has named Samantha Dutra a commercial account manager. Dutra will work to build Stone Creek’s commercial department. Dutra comes from EPIC Brokers, where she was an account manager. She has also held positions with Legacy Risk and Insurance Services and Arthur J. Gallagher Insurance Brokers. Stone Creek is a brokerage that specializes in property coverage in the Western U.S. JLT Re North America Inc. has named Tony Manzitto executive vice president in Los Angeles, Calif. Manzitto will focus on the expansion of JLT Re’s structured products team. Manzitto most recently was chief underwriting officer and chief operating officer at Topa Insurance Group. He was with Swiss Re prior to that. JLT Re is part of the Jardine Lloyd Thompson Group plc. Rancho Cordova, Calif.-based Western Insurance Agents Association promoted Kou Brockhouse and Steven Pettersen to vice president. Both were member services specialists before being promoted to directors of business development at WIAA. Brockhouse oversees the personal lines department. Pettersen oversees the commercial lines department. WIAA represents more than 20,000 insurance professionals in California, Nevada, Arizona and New Mexico. Worldwide Facilities has opened a new location in Utah and has named Kyle Domire to lead the office. Domire most recently was with Burns & Wilcox

W4 | INSURANCE JOURNAL | WEST JUNE 19, 2017

as a senior broker. Worldwide Facilities is a wholesale insurance broker and managing general agent. Knight Insurance Group in California has named Vance Ownbey its managing director overseeing programs, underwriting, new business and product development. Ownbey previously was chief financial officer, chief technical officer, treasurer and managing director at Knight. He has held several other executive level positions with other firms. Knight is part of privately held Hankey Group of Cos., a Los Angeles-based financial services group. San Francisco-based CAL Insurance & Associates Inc. has named John M. Ryan director of employee benefits advisory. Ryan was a senior director in employee benefits consulting for NFP prior to CAL. He was with Northwestern Mutual before that. CAL Insurance is an independent insurance agency in San Francisco. Reno Nev.-based Employers has named Scott R. Grinna as vice president of enterprise program management. Grinna has experience in IT and program management. Grinna joins Employers from West Bend Mutual Insurance Co., where he was an assistant vice president. Employers is a holding company. RIC Insurance General Agency has named Mandi Strange a business development manager focused on the Western region. Strange will work primarily with retail insurance agents in Washington, Oregon and Idaho. She was previously with Energi Holdings and Tower Group Cos. RIC is a wholesale insurance brokerage and managing general agency. John Finston has joined Drinker Biddle & Reath LLP as a partner. Finston will work from the firm’s San Francisco office. Finston most recently was deputy commissioner and general counsel for the California Department of Insurance, Finston was chair of SNR Denton’s insurance regulatory practice group prior to his public service. Drinker Biddle & Reath LLP is a national law firm with more than 635 lawyers. INSURANCEJOURNAL.COM

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Idea Exchange

Legal Matters

California High Court to Address Occurrence Caused by Accident injured by the willful acts of individuals supervised by an insured.

The Underlying Action

By Tad Devlin

and Aaron Cargain

he California Supreme Court is set to address the issue of whether there is an “occurrence” under an employer’s commercial general liability policy when an injured third party brings a claim against an employer for the negligent hiring, retentionor supervision of an employee who sexually abused a student. The Ninth Circuit Court of Appeals, in certifying the issue, explained it is unsettled under California law, and is of exceptional importance to injured parties, employers, and insurance companies doing business in California. The Ninth Circuit further noted a deep division of the federal district courts of California exists given the absence of a controlling decision. The ruling could extend beyond the employment context, potentially affecting many allegedly W6 | INSURANCE JOURNAL | WEST JUNE 19, 2017

Ledesma & Meyer Construction Company Inc., Joseph Ledesma, and Kris Meyer (collectively “L&M”) entered into a construction contract with the San Bernardino County Unified School District (the “District”) to complete construction work at a middle school. The contract specified L&M would defend and indemnify the district from all claims resulting from L&M’s negligence, errors, acts or omissions. L&M hired Darold Hecht as assistant superintendent of the project. L&M received notice of a tort claim filed against the district arising out of allegations Hecht sexually abused a 13-year-old student. Plaintiff Jane Doe’s complaint alleged Ledesma, who hired Hecht, had knowledge Hecht was a registered sex offender previously convicted twice of sexual abuse. The district tendered its defense to L&M pursuant to the contract. Doe’s complaint named L&M, the district, Hecht, Joseph Ledesma, Kris Meyer and others as defendants. Doe’s complaint alleged claims for negligence; negligent hiring, retention and/or supervision; violation of the California education code; violation of California civil and penal codes; intentional infliction of emotional distress; violation of 42 U.S.C. § 1983; and battery.

The Coverage Dispute

L&M and the district tendered their defense to Liberty Surplus Insurance Corp. and Liberty Insurance Underwriters Inc. (collectively “Liberty”). Liberty defended L&M under a reservation of rights, and denied a defense to the district on the ground it was not an insured. L&M defended and indemnified the district against Doe’s claims pursuant to the con-

tract. Liberty filed a declaratory relief action in the Central District of California, seeking an order it was under no obligation to defend or indemnify L&M or the district in the underlying action. L&M filed a counterclaim, and argued the policy at issue required Liberty to defend and indemnify L&M and the district.

In relevant part, the Liberty policy insuring agreement provided Liberty would pay sums it became legally obligated to pay as damages because of bodily injury. The insuring agreement also provided Liberty would have no duty to defend L&M against any suit seeking damages for bodily injury to which the insurance did not apply. The insurance applied to “bodily injury” if caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The parties filed cross-motions for summary judgment, and the district court entered summary judgment in Liberty’s favor. Relying on Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 211 P.3d 1083 (Cal. 2009), it found L&M’s negligent hiring, retention, and supervision of Hecht was too attenuated from the injury-causing conduct committed by Hecht to constitute an “occurrence” — defined as an accident — under the policy.

continued on page W8

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WEST | Idea Exchange continued from page W6 The Ninth Circuit Court of Appeals’ Basis for Certification

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The Ninth Circuit noted L.A. Checker Cab Co-op., Inc. v. First Specialty Insurance Co., an unpublished California Court of Appeal decision, in which the court ruled the alleged negligent supervision of a cab driver who intentionally shot a passenger did not constitute an “occurrence” under the insurance policy. The Ninth Circuit also recognized the “deep division” at the district court level as to what constitutes an “occurrence” under an insurance policy. It explained certification to the California Supreme Court was particularly appropriate to determine the “consequential matter of state law.”

‘… the Liberty policy insuring agreement provided Liberty would pay sums it became legally obligated to pay as damages because of bodily injury.’

Liquor Liability

The Ninth Circuit explained that the California Supreme Court, in Minkler v. Safeco Ins. Co. (Cal. 2010), signaled the unsettled nature of whether such intentional abuse constitutes an “occurrence” under a liability policy that defined “occurrence” as an “accident.” Although the California Supreme Court declined to address the issue in Minkler, it referenced Delgado v. Interinsurance Exchange of Automobile Club of Southern California (Cal. 2009) and Hogan v. Midland National Ins. Co. (Cal. 1970), which contemplate the definitions of “occurrence” and “accident” as used in insurance policies. The California Supreme Court’s opinion in Delgado may be instructive on the issue of whether there was an “occurrence” under the Liberty policy in Ledesma. Delgado provides in the context of liability insurance, an “accident” is an “unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause… It is the unexpected, undesigned, and unforeseen nature of the injury-causing event that determines

whether there is an ‘accident’ within the policy’s coverage… A deliberate act causing an injury is not an accident.” The word “accident” in the coverage clause of a liability policy refers to the conduct of the insured for which liability is sought to be imposed on the insured. In Hogan, the California Supreme Court explained that an all-inclusive definition of the word “accident” cannot be given where the occurrence is unexpected, unforeseen, or undesigned regardless of whether it comes from a known or unknown cause. The Ninth Circuit explained that while Delgado and Hogan provide general guidance on the issue of whether deliberate conduct constitutes an “accident” under a liability policy, neither address the issue of whether claims of negligence in hiring, retaining and/or supervising an employee who commits a sexual assault fall within a policy’s coverage for an “occurrence,” which is defined as an “accident.”

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Conclusion and Takeaways

Applying the standards articulated in Delgado and Hogan, the parties will likely focus both on Hecht’s acts as well as L&M’s hiring of Hecht for the purpose of arguing their respective positions as to whether there was an “occurrence,” defined as an “accident,” and thus coverage under the Liberty policy. If the California Supreme Court determines Hecht’s acts were both intentional and the “occurrence,” it could conclude there is no basis for coverage. However, it could also reach the conclusion that L&M’s hiring of Hecht constituted the “occurrence” — the “accident” — which could ultimately result in a determination coverage should have been extended. The California Supreme Court’s decision will have a far-reaching impact on California law. Insurers, employers, and insureds should monitor the decision in this matter, and obtain advice from insurance counsel regarding the potential implications from this decision. Devlin is a partner in the San Francisco office of Kaufman Dolowich & Voluck. Cargain is an attorney in the same office. Devlin focuses his practice in the areas of commercial and insurance litigation. Cargain’s practice emphasis includes representing clients in insurance coverage and bad faith, professional liability, real estate, personal injury, and property damage disputes.

10/2/15 4:10 PM

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Figures

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The amount of time Alabama doctor Xiulu Ruan will spend in prison for running two clinics that were found to be “pill mills.” Prosecutors said Ruan and his colleague regularly wrote prescriptions for large quantities of addictive medications including fentanyl without a legitimate medical purpose through their clinics Physician’s Pain Specialists of Alabama and C&R Pharmacy. The case was tied to the U.S. probe of fentanyl manufacturer Insys Therapeutics, which also gave the doctors illegal kickbacks for prescribing its pain drug, Subsys.

366

The number of days Lasandra Laverne Edwards, 54, of Monroe, La., will spend in prison for insurance fraud. She must also pay $9,100 restitution, according to the U.S. Attorney’s Office. Edwards pleaded guilty to fraudulently filing a claim on her rental insurance policy alleging that more than $100,000 worth of personal property was destroyed when her house caught fire in December 2013. However, at a bankruptcy hearing on Dec. 10, 2013, one day before she filed the claim, Edwards affirmed a $1,000 value for her furniture and clothes.

600

$1.9 MILLION

INSURANCEJOURNAL.COM

Wells Fargo Flap

“Instead of allowing victims to have their day in court and permit an independent judge or jury to arrive at a verdict following an open and fair trial, Wells Fargo wrongly pushed customers seeking justice into forced arbitration.” — California Treasurer John Chiang is among those speaking

in favor of legislation to allow state residents to sue financial institutions for fraud, rather than letting banks force customers to settle disputes in arbitration.

Opioid Risks

“These companies continue to mislead the public.”

— Ohio Attorney General Mike DeWine, announcing a lawsuit

that accuses five major drug manufacturers of misrepresenting the risks of prescription opioid painkillers such as OxyContin and Percocet. The companies named in the suit are Purdue Pharma LP, Johnson & Johnson’s Janssen Pharmaceuticals Inc. unit, a unit of Endo International Plc., Teva Pharmaceutical Industries Ltd.’s Cephalon unit and Allergan Plc. Ohio has one of the highest drug overdose rates in the country.

Why Not Last?

“Forty-four other states have done this, but Louisiana is last in everything, so why not be last in regulating Uber, too?” — Louisiana State Rep. Kenny Havard, who pulled a bill that

The amount of a settlement Chicago-based Rosebud Restaurants has agreed to in a federal lawsuit accusing it of discriminating against some black job applicants. Under the settlement, Rosebud Restaurants must also establish a program to hire African-Americans. The U.S. Equal Employment Opportunity Commission filed the lawsuit in 2013, alleging Rosebud refused to hire African-Americans at a number of its locations, and alleging managers used racial slurs.

would have implemented statewide regulations for transportation network companies (TNCs) like Uber and Lyft, after New Orleans lawmakers blocked the measure in the Senate. Representatives from New Orleans said their city could lose $2 million annually if the agreements it has with Uber and Lyft were superseded by Havard’s legislation. The city currently charges riders a $0.50 fee under a 2015 agreement, the highest in the country.

InsuranceJournal.com

Poll How many ways does your agency or brokerage use customer data?

14.14% To cross-sell or round out

$241,000

The average number of wildfires in Wyoming each year. This year is expected to be slightly below average.

Declarations

The amount a Delaware woman was ordered to pay after she crashed a car into a popular Dewey Beach restaurant, igniting a fire that burned the eatery down. She has also been ordered to serve two years of probation. Media outlets report that 37-year-old Michelle Small of Wyoming, Del., was sentenced after pleading guilty in April to driving under the influence and criminal mischief.

accounts (27 votes)

accounts to carriers (16 votes)

savings ideas to customers (21 votes)

9.95% To market to new prospects (19 votes) 11.52% To assess retention (22 votes) 6.81% To direct social media efforts (13 votes) 5.76% To evaluate employees (11 votes) 8.38% To evaluate carriers (16 votes) 12.04% To improve customer experience (23 votes) 8.38% To better assess risk and present 10.99% To recommend risk management and 12.03% To do more for clients (23 votes) Total Votes: 191

JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 11

NATIONAL | News & Markets

Survey of Agents Reveals Underwriting Disconnect in Commercial Lines

ndependent agents want to talk about underwriting, and they’re urging their carriers to listen. Preliminary results from the 2017 Channel Harvest Research survey indicate agents want to see companies put greater emphasis on how and what they’ll underwrite. The 10th anniversary issue of the study, Agents’ Views on How Carriers Can Compete & Win, examines agents’ views on property/ casualty carriers and marketplace issues. More than 2,000 agents provided opinions for the survey, which was sponsored by Insurance Journal. When asked what’s most important in a carrier, commercial lines agents put all four underwriting attributes at the top of their list: 95 percent said “underwriting appetite,” “underwriting responsiveness” and “underwriting flexibility” are important or very important, while 94 percent said “underwriting expertise” is important or very important. Yet there’s a significant gap between expectations and performance, as only two-thirds

of agents said their favorite carriers are better than average when it comes to underwriting expertise and responsiveness. And 57 percent said their favorites are better than average when it comes to underwriting appetite and flexibility.

and the fact that business risks are continually evolving.”

Year-over-Year Comparison

While all four underwriting factors were just as important to agents in last year’s survey, there’s been a decrease in sat-

Underwriting Satisfaction with Top Carriers Underwriting Responsiveness Underwriting Expertise Underwriting Flexibility Underwriting Appetite “Agents tend to be more satisfied with their top carriers’ underwriting expertise than their ability to take on certain risks and willingness to bend on terms and conditions,” said Regis Coccia, research director of Channel Harvest. “This could very well be a consequence of a soft market

12 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

2017 2016 65% 69% 66% 72% 57% 59% 57% 65% isfaction across all four areas: responsiveness; expertise; flexibility; and appetite. “The numbers suggest agents feel they’re at a disadvantage and struggling with incomplete information when it comes to understanding what their carrier will write, and how much,” said Coccia.

“The fact that agents rate their carriers higher on claims and customer service than underwriting indicates there’s a greater anxiety at the start of the policy cycle, even before quoting begins.” The Channel Harvest survey also compares agents’ expectations versus carrier performance in areas such as pricing, customer service, claims survey and technology.

There’s a significant gap between expectations and performance, as only two-thirds of agents said their favorite carriers are better than average when it comes to underwriting expertise and responsiveness. Some 2,100 agency personnel working in personal and commercial lines responded to this year’s survey, co-sponsored by Insurance Journal and conducted in March. Respondents ranging from principals to producers to CSRs answered nearly 200 questions about personal lines and commercial lines carriers. Share this article

with a colleague.

IJMAG.COM/619TU For more information and to purchase the 50-pluspage report as well as accompanying raw data, contact Bob Fritze, Channel Harvest sales director, at 201-213-5447 or bob@channelharvest. INSURANCEJOURNAL.COM

NATIONAL | Business Moves USI operates out of 140 local offices and serves every state.

Element Risk Management, Rhodes Insurance Agency

Lacher & Associates, Brunner Insurance

Lacher & Associates of Souderton, Pa., has acquired Brunner Insurance of Richlandtown, Pa. Founded by Gus Brunner in 1960, Brunner Insurance specializes in providing insurance for families and businesses. In 1995, Brunner transitioned the agency to Don Moyer, who has been the principal since then. “This union creates an opportunity for us to expand our footprint and help us meet one of our strategic goals of growth through acquisition,” said Chad Lacher, partner at Lacher & Associates. Lacher & Associates is a boutique consulting firm specializing in risk management and benefits for individuals and businesses. Moyer and his team will continue to work with clients from their Richlandtown office following the acquisition.

USI, Hartman Employee Benefits

USI Insurance Services has

acquired Hartman Employee Benefits Inc. from The Hartman Group. Hartman Employee Benefits and its employees will remain at the Williamsport and State College, Pa., locations. Terms of the transaction were not disclosed. Hartman Employee Benefits’ solutions include brokerage consulting, benefits administration technology and services, group and individual health insurance, voluntary employee benefits, and group insurance. The Hartman Group, which was founded by W. Howard Hartman in 1932 in Williamsport, consisted of The Hartman Agency Inc., Hartman Employee Benefits Inc. and Hartman Financial Services operating out of offices in Williamsport, State College and Duncannon. USI is an insurance brokerage and consulting firm that delivers property and casualty, employee benefits, personal risk and retirement solutions throughout the U.S. Headquartered in Valhalla, N.Y.,

14 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

West Chester, Pa.-based Element Risk Management has finalized the acquisition of Rhodes Insurance Agency Inc., also located in West Chester. The acquisition is expected to strengthen Element Risk’s footprint in Chester County and Southeastern Pennsylvania. Rhodes Insurance will continue operations in West Chester following the acquisition. All staff were retained. Element Risk Management is a privately-held insurance firm with locations throughout the Mid-Atlantic region. Its focus is on insurance placement and risk management for personal and business clients throughout the U.S.

Arthur J. Gallagher & Co., Williams-Manny Insurance Group

Arthur J. Gallagher & Co. has acquired Williams-Manny Insurance Group of Rockford, Ill. Terms of the transaction were not disclosed. Founded in Rockford in 1896, Williams-Manny Insurance Group is a retail insurance broker and employee benefits consultant to corporate and individual clients throughout northern Illinois, with an emphasis on construction, manufacturing, higher education and nonprofit accounts. Dan Ross, Tim Knauf, Randy Cooper, Dave Townsend, and their partners and associates will continue to operate out of their Rockford, Wheaton and Freeport, Ill., offices. Arthur J. Gallagher & Co., an

international insurance brokerage and risk management services firm, is headquartered in Rolling Meadows, Ill.

The Andrew Agency, Wood Insurance

The Andrew Agency, a Richmond, Va.-headquartered insurance broker, has acquired Wood Insurance. Terms of the transaction were not disclosed. Wood Insurance specializes in commercial and personal lines property and casualty insurance. With this acquisition, The Andrew Agency will expand its property and casualty division in Virginia and increase its personal lines client base. Employees of Wood Insurance will join The Andrew Agency team and will operate under The Andrew Agency name. “As we continue to grow, we are seeking specialized agencies throughout the MidAtlantic region,” said Ryan Andrew, president of The Andrew Agency.

NFP, Bigbie, Hensley & Janway Insurance Agency Insurance broker and consultant NFP has acquired Oklahoma City-based Bigbie, Hensley & Janway Insurance Agency Inc. (BHJ). BHJ provides benefits products and services with an emphasis on small group employers and the individual health care market. Andy Bigbie and Matt Hensley, principals of the firm, will join as directors of NFP. New York-based NFP Corp. provides employee benefits, property/casualty, retirement and individual private client solutions.

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NATIONAL | Special Report | Construction

Wearables, Sensors, Robots and More By Andrea Wells

ater sensors that detect leaks before a lot of damage is done, wearables that track workers’ whereabouts and video cameras that monitor sites — the building industry is gradually adopting these and other technologies to help it improve safety and operations. In the near future, construction firms are likely to be deploying robot bricklayers for simple jobs, fitting workers with exoskeletons that reduce physical strain, and training laborers by simulating building scenarios using virtual reality, according to insurance specialists in the field. The construction industry is counting on technology to help it address its labor shortage and the safety of its workers, as well as improve its property risk manage16 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

ment and overall efficiency. Contractors are continually looking for new and better ways of doing work, according to Linda Stueber, Nationwide’s vice president of construction for standard commercial. In her 25-plus years working in construction, previously as construction and operations leader for Travelers Southern and Midwest regions for Travelers, Stueber has found contractors to be early adopters of technology. She points to the wearables as an example of a technology she believes the industry was quick to adopt and which shows great promise to improve both safety and productivity. Construction industry wearables include high-tech vests and helmets that have lights or vibrate to alert employees of

potentially dangerous changes in surroundings. Wearables can monitor employee movements and alert coworkers of danger, as well as monitor fatigue, body temperature and repetitive motion. “There are many reasons a contractor would use wearables but an important reason is to track where your employees are located. That can be very beneficial from a safety perspective,” Stueber said. Jim Marquet, managing director at The Graham Company, an independent insurance brokerage and consulting firm based in Philadelphia, said wearables are helping to curb falls and injuries from being hit or struck by heavy equipment, which are a main loss issue on construction sites. This technology is helping to prevent the “nightmare scenario” of the general contractor that has a worker on the job site who is injured and then left unattended. “As it relates to falls, there is new wearable technology that provides the ability for a general contractor or a trade contractor to track the location of employees in real time to identify where they are. If they’ve fallen or if something’s fallen on them the sensor has the ability to report that (accident) in real time,” Marquet said. INSURANCEJOURNAL.COM

The ability to track where workers are at any time helps protect workers from entering into areas of a construction site deemed unsafe as well. “Plus, in an event of an investigation after the fact it’s easy to identify who was in a given area and really track what they are doing,” he said. Steve Lako, vice president of loss control at Allied World, specializing in working with construction companies, says wearables can keep workers from going into unsafe areas. Even when workers are trained properly with site walk-throughs and safety training meetings, there’s always a chance that someone might wander into an unsafe area or hot zones. “We are seeing a real benefit from a safety standpoint,” Lako said. “For instance, you can map out all the critical safety zones of a project and store it in some type of software app or building information management system. With that information you can then, through wearables, have warning signals given to your employees when they enter into different hot zones or safety zones. Those warnings can be in the way of an audible device, or lighted signal.” Wearables also play a role in monitoring the vital signs of employees. GPS technology in wearable vests can locate the injured worker, which may be critical for emergency response. Not all the technology is wearable. Building firms also see promise in using site sensors to protect workers. Companies like SmartSite and Pillar Technologies have developed site sensors that can be deployed across a construction site to monitor temperature, noise levels, dust particulates and volatile organic compounds to help limit workers’ exposure to these dangers. The sensors collect data that can analyzed so that owners can mitigate exposure levels and stay compliant with OSHA regulations.

High Tech Sensors

In addition to being used to protect workers, technology is being used to protect property. Water and fire sensors along with video guards are proving to be popular risk management tools on construction sites. INSURANCEJOURNAL.COM

Technical Risk Underwriters (TRU), a specialty underwriter of insurance products for complex property and construction risks based in Austin, Texas, worked with Fedora Security, a Texas-based security solutions provider, to develop an ultrasonic device that detects after-hours water flow in water main and sprinkler pipes and alerts a security monitoring station in real time when a sensor is triggered. In addition to waterflow monitoring, TRU is relying on Fedora for electronic surveillance using video analytics. The technology does not require a guard to view a monitor but instead the software triggers an alert when it detects a certain kind of movement within a predefined perimeter including flames from a fire. “A very important issue for us is protecting a property after hours,” said Mike Pilla, CEO of TRU, a division of RSG Underwriting Managers. “There’s been five $50 million fires (on construction sites) during the first half of this year alone that are deemed as suspicious fires that happened after hours.” While most large construction sites employ watchman/guards, more needs to be done to provide sufficient protection, according to Pilla. “We’ve learned watchmen on big construction sites are relatively ineffective.” TRU has video evidence it says backs up that claim. “We have video of real examples of watchman failing,” said Michael Souery, chief operating officer and chief analytics officer of TRU. “We have quite a few (construction) sites where the insured chooses to have both watchman and the electronic surveillance and in all incidents, the electronic security is the one intercept-

ing the intrusions rather than the guard. We’ve witnessed a case where the operator (electronic surveillance) remotely challenged the intruders who ran away passing a parked car where the guard appeared to be sleeping and missing all the action.” It’s a common situation, Souery added. “You can’t rely totally on the guard. Even if they are doing their job well it’s not feasible to have a guard walk every 20 minutes around a large site which could be two or three blocks long.” This is why Souery and Pilla say a combination of technology and human intervention is the best bet to managing fire and water risk on construction sites today. They feel so strongly about its effectiveness that TRU mandates use of Fedora’s Modular Integrated Protection & Surveillance Solutions (MIPSS) technology, that detects and alerts for intrusion, vandalism, theft, fire and flood at construction sites, on all construction accounts of a certain size. “Imagine a site shutting down on a Friday night then a plumbing fixture fails on the fourth floor. The contractor shows up on Monday morning to find three or four floors of a building damaged,” Pilla said. “Oftentimes those are seven figure losses. Technology could have detected the water and mitigated the severity of the loss.” Pilla says that he’s not aware of any other broker using Fedora’s technology today. “It’s something they’ve done exclusively for us.”

Robots, Exoskeletons and Virtual Reality

Robots show promise for the future, although thus far there hasn’t been much real use for them. One highly publicized construction robot is SAM100 (Semi-Automated Mason). SAM is a robotic bricklayer launched in 2015 at World of Concrete. The enhanced version of the robot, Sam100 OS 2.0, which debuted in January 2017 at World of Concrete, is a much faster big brother of SAM100. SAM was created by New York-based Construction Robotics, and can lay up to

continued on page 18 JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 17

NATIONAL | Special Report | Construction

continued from page 17

3,000 bricks per day, with the help of its conveyor belt, robotic arm, and concrete pump. By comparison, a human can lay about 500 bricks per day. While SAM doesn’t come cheap (about $500,000), it’s seen as a potentially transformative tool in revolutionizing future building sites. Robotic bricklayers aren’t yet seen as a realistic option to human masons, according to The Graham Company’s Marquet. “Right now, the use of that technology is very limited,” Marquet said. A robot bricklayer can only lay bricks on straight runs, unlike a quality mason who can handle more complex jobs. “It can’t do the difficult parts of a job. Frankly, a real mason is probably more productive than a machine,” Marquet said. Even so, Marquet is aware that each year is likely to bring about advances in robotics. Nationwide’s Stueber does see one advantage to SAM: it could reduce injuries. “Bricklaying is some of the hardest and dirtiest work you can do on a construction job site and it’s prone to a lot of material handling injuries, too,” she said. “You don’t have to worry about back injuries on a robot.”

18 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

Exoskeletons may also be found on future construction sites. Exoskeletons? Think “Aliens” and Sigourney Weaver circa 1985. Exoskeletons are wearable devices that work in tandem with the human user and are powered by a combination of technologies and mechanical equipment. Today, exoskeletons and power-assist suits are being developed for industrial use so workers can lift and carry objects or use heavy tools for longer periods of time without putting undue stress and strain on the body. Allied World’s Lako hasn’t yet seen an exoskeleton on a construction site but that doesn’t mean they aren’t coming. One example where an exoskeleton might be used in construction is helping workers extend the time they can safely operate heavy machinery such as a jackhammer, he said. “If you add an exoskeleton to a human for jackhammer use theoretically that worker could go from being able to operate the jackhammer much longer without the fatigue typically associated with its use,” Lako said. Virtual reality safety training programs offer another way to manage construction risk. Suffolk Construction, the largest U.S. construction company, which is based in Boston, Mass., envisions a virtual reality program where workers could walk through a jobsite and be presented with a scenario in which the worker must point out all the possible hidden dangers, such as live wires, misplaced ladders or a worker cutting a small piece of steel without wearing his protective goggles. Or if a real accident occurs on the job, the scenario could be recreated virtually to teach workers how to avoid the same mistake twice. “I’ve seen it being used in crane safety (programs) to simulate hazardous areas – you can simulate a scenario and test actual procedures used in that process,” Lako said. Right now, only the large firms use virtual reality but it’s another area that could lead to safer construction sites. But there is no guarantee a particular technology will be widely adopted by

any industry. Remember Google Glass? It was once the next big thing and, while it remains in use in some industrial applications, it has not achieved widespread adoption.

Strongest Impact

In Lako’s view, the strongest impact on safety has not come from expensive technologies but from everyday mobile devices like smart phones. Insureds are using mobile devices to identify hazards in real time and share with others. “It’s taking the idea of safety management and putting it in the hands of all employees not just a designated safety person a job site,” he said. “It’s part of a whole overall idea that everyone is responsible for a safety culture. The only way to be truly safe is to have everyone engaged. Mobile devices are making that possible,” said Lako. One downside to new developments in technology is a false sense of security that comes with implementing these high-tech tools on construction sites, especially as it relates to safety and risk management, said The Graham Company’s Marquet. “I think the downside of it is to think that technology is some kind of panacea. ‘If we just have these sensors everything will be OK,’” he said. “The fact of the matter is that the human element will continue and as long as we have people building buildings — which is going to be forever — that will be an important part of it.” Overall, the construction industry has become more sophisticated and more aware of how to improve its culture of safety, noted Robert Harris, vice president at Nashville’s The Crichton Group, middle Tennessee’s largest independent insurance agency. That focus on safety has led to better performance as well. “2016 was a record year for contractors in the Nashville area and 2017 is going to be another record year,” he said. There’s no reason to expect a slowdown. “The biggest issue for contractors continues to be labor shortages.” Perhaps technology will help. Share

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NATIONAL | MyNewMarkets

Equine Mortality and Major Medical

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Crane & Rigging Contractors

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NATIONAL | News & Markets

High Agency Valuations Not Going Away, MarshBerry Exec Tells Conference By Don Jergler

aluations of insurance agencies are as high as they have ever been, and there does not appear to be any lessening of interest among suitors, according to an industry mergers and acquisitions (M&A) consultant. John Wepler, chairman and CEO of MarshBerrry, described an “explosive M&A market,” as he talked about the state of the industry at a May 25 conference that his firm held for about 500 agency executives in Las Vegas. “Private equity has literally taken over the insurance brokerage business,” Wepler said. Their interest in buying brokerages has helped drive up valuations, he added. “I will tell you today valuations are at the highest point they’ve ever been,” he said, adding that there is virtually “no oxygen” left at the top. According to him, 2016 agency valuations were on average 10.12 times earnings

before interest, taxes, depreciation and amortization (EBITDA). His answer to anyone who thinks the high valuations and interest in agencies are going away at some point? “I don’t think it’s a fad,” he said. “There’s $114 billion in capital on the sidelines trying to get in.” Wepler also touched on another topic of interest to the brokerage community: insuretech. “It’s going to be a massive, massive disruption,” he said. “The insurance industry is ripe for innovation and disruption. I think you can expect disruption in every single type and size of account in your book of business.” MarshBerry’s conference drew more than 500 insurance brokerage executives. A panel at the conference was moderated by Phil Trem, MarshBerry’s senior vice president. Panelists were: Melissa Cerny, area president of Arthur J. Gallagher & Co.; Ron Filice, president and CEO of Filice Insurance Agency; Eric Leavitt, CEO of Leavitt Group Enterprises Inc.; and Rod Socklov, executive vice president of ADB Insurance and Financial Services Inc. The panelists shared how they MarshBerry’s conference in Las Vegas in late May drew more than 500 improved effiinsurance brokerage executives. A panel at the conference was modciency and reveerated by Phil Trem, MarshBerry’s senior vice president. Panelists were: nue and the chalMelissa Cerny, area president of Arthur J. Gallagher & Co.; Ron Filice, lenges they’ve president and CEO of Filice Insurance Agency; Eric Leavitt, CEO of Leavitt faced. Group Enterprises Inc.; and Rod Socklov, executive vice president of ADB Leavitt said Insurance and Financial Services Inc. that 10 years

20 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

ago, Leavitt’s managers decided that they needed to “wring out” some of the costs that were piling up. One of the biggest changes was to create a centralized service center for small personal and commercial accounts and automate the process. The center now offers service six days a week, 15 hours per day and has 70 people on staff, he said. “After 10 years now, it’s tremendously successful for us,” Leavitt said. Socklov talked about bringing added value to clients. “The services that we’re now providing, that’s the differentiator,” Socklov said. “It’s not just about the rate anymore.” Cerny, on the other hand, said she has come to loathe the idea of creating “value-added” services. INSURANCEJOURNAL.COM

“It just becomes a commodity,” she said. She explained that brokers don’t know how to tell the story to clients about the value they are getting above and beyond normal services, and therefore the value-added proposition loses its value in helping to achieve client addition and retention. “I just think we do it wrong a lot of time in our business,” Cerny added. Leavitt, who said he feels that human capital management is one of the most crucial aspects of running his business, said it’s tough for the insurance industry to attract new people because it doesn’t have a reputation as being glamorous work. One of Leavitt’s methods of bringing quality people into all-important sales positions is to look for people with sales experience and help them understand the insurance business rather than the other way around. “It requires this kind of evergreen scheme of new people constantly coming in,” Leavitt said. Cerny said her human capital management strategy has been to bring in people straight out of college at about $15 an hour and then help them build a career. Many start out in an assistant position and are then moved to marketing, and then into an account manager role, and so on up the ladder. “We fire a lot of people in the first six months,” Cerny said. “Last six months, we almost never lose anyone.” Filice added that, in retrospect, he should have fired more people. “I kept a lot of people for many years that I shouldn’t have,” he said, adding that he finds that it’s tough to recruit new people that meet his “PHD” criteria. He wasn’t referring to the advanced college degrees — PhDs — but those who are “Poor, hungry, driven.” “I can’t find many PHDs,” he added. “In the health insurance business, it’s really, really difficult.” Talent recruitment remains among the top concerns insurance brokers face, according to a poll of executives taken during the conference. “Talent recruitment” was offered by INSURANCEJOURNAL.COM

57 percent of executives as an answer to “What is the top challenge the industry faces in the next three to five years?” Nearly one-in-four executives responded that technology is the biggest challenge they expected.

Meanwhile 15 percent of executives surveyed cited lack of new business production as the primary challenge.

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NATIONAL | News & Markets

Growing Number of Municipal Suits Over Opioids Face Uphill Battle By Nate Raymond

growing number of U.S. states, counties and cities are filing lawsuits accusing drug companies of deceptively marketing opioid painkillers to downplay their addictiveness. But some lawyers say the industry’s highly regulated nature could pose a hurdle to their success. Ohio, in early June, became the latest and largest state or local government to bring an opioid lawsuit, suing Purdue Pharma LP, Johnson & Johnson’s Janssen Pharmaceuticals Inc. unit, Endo International Plc, Teva Pharmaceutical Industries Ltd’s and Allergan Plc. The lawsuit seeks to recover money the state and its residents spent on unnecessary opioid prescriptions, as well as costs associated with addiction treatment. The companies have denied the allegations. Mississippi, counties in New York and California, and Chicago have filed similar lawsuits against the opioid makers, and plaintiffs lawyers say more are on the way. Some of those lawyers think the number of lawsuits could eventually snowball, resulting in an outcome similar to the $206 billion settlement tobacco companies reached with 46 states in 1998. But some defense lawyers note that opioids, unlike cigarettes, are regulated by the U.S. Food and Drug Administration (FDA). 22 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

In their view, judges and juries could defer to the agency’s approval of the companies’ opioid products as safe and effective for treating chronic pain and of the drugs’ warning labels that disclosed addiction-related risks. Jodi Avergun, a former chief of staff of the U.S. Drug Enforcement Administration and now a defense lawyer with Cadwalader, Wickersham & Taft, said the FDA’s role approving the drugs was a “fundamental weakness” of the lawsuits. “At the end of the day, they’re fairly difficult cases for the plaintiffs to win,” Avergun said. In 2015, the judge overseeing the lawsuit by California’s Santa Clara and Orange counties halted the case out of concern it would interfere with FDA studies related to the risks of long-term opioid treatment. The stay was recently partially lifted to allow for settlement talks, among other things. Teva became the first company in the case to settle, paying $1.6 million. Assistant County Counsel Danny Chou said the deal’s size reflected Teva’s small opioid market share. Talks with other defendants are ongoing, and the county will file a revised lawsuit if no settlement is reached, he said. Carl Tobias, a professor at Richmond School of Law, said FDA-approved warning labels and the role of doctors in prescribing medication can insulate pharmaceutical

companies from liability for failing to warn of a drug’s risks. But he noted Ohio’s lawsuit claimed the companies used advertising in medical journals and marketing presentations to downplay the risks. Ohio Attorney General DeWine argued the drugmakers’ deception continued “despite the warnings in the small print of their very own drug labels and package inserts which clearly contradict their marketing.” “You can give a great warning but undercut it, and that can go to the fraud point,” Tobias said. In September, the federal judge overseeing Chicago’s lawsuit allowed the case to proceed after finding the city alleged sufficient facts to back its claim that the companies deceived healthcare providers. Fraudulent marketing was also at issue a decade ago when Purdue paid more than $600 million and pleaded guilty to misbranding the opioid drug OxyContin by falsely touting it as less addictive than rival products. Along with their arguments based on FDA approval, the drug companies are also taking aim at state and local governments’ use of private plaintiffs’ lawyers to bring opioid lawsuits in exchange for a percentage of any settlement or judgment. Five law firms are representing Ohio on a contingency-fee basis. Drugmakers have argued their constitutional due process rights are violated when profit-seeking private lawyers, as opposed to public servants, pursue government cases seeking large damages. The companies scored a victory in 2016 when a judge invalidated one such agreement between former New Hampshire Attorney General Joseph Foster and the law firm Cohen Milstein Sellers & Toll. Now on appeal to the New Hampshire Supreme Court, the ruling blocked the state from filing a lawsuit. A similar bid is underway to invalidate a contingency fee deal between the law firm Simmons Hanly Conroy and New York’s Suffolk County. Paul Hanly, of Simmons Hanly Conroy, said the drug companies were making a “completely frivolous argument” that would not deter opioid litigation.

Medical Liability | Closer Look | NATIONAL

Medical Professional Insurance Market in Good Health for Now: A.M. Best

he U.S. medical professional liability (MPL) insurance sector is stable, with strong capitalization and profitable, albeit declining, operating performance, plus the prospect of positive earnings in the medium term, according to A.M. Best. Stable claims frequency and reserve redundancies should continue to offset soft market pricing, modest increases in claims severity and weak investment markets, according to the report, “Medical Professional Liability Sector: Solid Results Despite Growing Headwinds and Deteriorating Profitability.” Although many financial aspects point to a favorable near-term outlook, MPL carriers face numerous challenges. According to the report, many MPL insurers have capital that they are finding difficult to deploy, as new market opportunities in their core client base continue to migrate from private practice to hospital employment. The state of the MPL market and the roughly $30 billion in capital held by the MPL industry were discussed by Jerry Theodorou, vice president of Conning, the insurance research and asset management firm, at this year’s Medical Professional Liability Symposium. Theodorou said cap-C ital serves as a “cushion” against systemic M losses, but also as a “barrier” against a hardening of the market needed to sustainY CM underwriting discipline. Theodorou said that MPL’s fixed expensMY es, premium decreases and a recent uptick CY in accident-year loss ratios are “eroding MPL’s distinction as a low-expense, CMY low-combined ratio line of business.” K Compounding the problem, he added, is that “MPL book [investment] yields have been down, down, down” in the low interest rate environment.

expenses, resulted in the combined ratio deteriorating to 102.9 from 99.2 in 2015. Despite the decline in profitability, A.M. Best says capitalization in the MPL sector remains solid, as its prospects for positive earnings over the medium term favor the stable outlook. Modest increases in claims severity should continue to be offset by decreasing claims frequency trends and lower levels of reserve redundancies, the analysts predict. However, there are challenges abound. Changes in healthcare delivery, tort reform, the emergence of new medicines and surgical procedures, the migration of solo practicing lion underwriting gain in 2015, reflecting physicians to group and hospital employthe ongoing margin compression. The ment, cyber security, the influx of insureds increase in loss and loss adjustment expens- into the healthcare system, a highly comes incurred, and a decrease in net earned petitive market, and low interest rates all premiums,A&M along with a slight increase 1 12/28/15 contribute toAM the importance of having IJ Personal Umbrella.pdf 10:22 in non-acquisition- related underwriting strong enterprise risk management.

Underwriting Loss

The A.M. Best report states the MPL segment reported an underwriting loss in 2016 of $164 million after 10 years of reported underwriting profitability, and an $82 milANDERS16781.indd 1

INSURANCEJOURNAL.COM

6/5/17 11:26 AM

JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 23

NATIONAL | Special Report | Construction

Easing Regulations, Speed of New Infrastructure Projects Raises Concerns for Underwriters

By Joseph Cellura

“

e’re going to cut a lot of red tape,” President Trump said at a CEO town hall meeting as he unrolled a long, colorful flow chart showing the process required for a state government to obtain the federal permits necessary to build a highway. The chart outlined 16 different approvals, 29 statutes and five executive orders that apply to a single project. He highlighted that infrastructure approvals are a 10- to 20-year process and cost hundreds of millions of dollars. As an insurer who underwrites infrastructure projects, easing regulations and upping project speed raises multiple uncertainties, especially in light of crumbling infrastructure and construction challenges. History tells us that absence of regulation and entrepreneurial privatization is a double-edged sword. Accomplishments, such as the completion of the Brooklyn Bridge in 1883, illustrate the benefits in innovation and technology, while provide as a costly learning experience paid in human lives. According to a 2016 report by the American Road and Transportation Business Association, more than 55,000 (about 10 percent) of U.S. bridges are considered structurally deficient, and twothirds of the country’s major roads are in poor condition. Despite their condition, we see the vulnerability of our roads and trans24 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

portation system due to unforeseen events on a regular basis. A portion of Interstate 85 in Atlanta recently collapsed due to a massive fire, causing havoc for commuters and businesses. The derailment of a New Jersey Transit train crippled the transportation flow through New York’s Penn Station. America’s infrastructure is in the spotlight, and the goal is to expedite the process to fix it. As the red tape is cut, more projects will be pushed through. Like the construction industry, insurers will also be moving quickly, underwriting projects to keep pace with the speed of project approvals. Insurance underwriters will be challenged to evaluate projects with less assurance of the regulatory process that formerly provided additional layers of public safety and compliance review. Insurers are looking at an expedited regulatory process with less engineering review and greater risks. Regulations that supported underwriting decisions and provided consistency for years are changing. Together, architects, engineers and construction industry risk managers, brokers and insurers, will have to consider this new risk picture and how to insure it. Here is more of the insurance perspective:

will want to understand strategy behind the evaluation of union labor vs. non-labor employees and other staffing decisions.

Future of Self-Regulation

The reduced permit and approval process means construction companies will have to do more self-regulating of their own levels of quality control and safety standards. The resources that were used to manage the permit process must be redirected to risk management monitoring and testing. Common sense for an insurance underwriter covering these projects is that less permits and oversight means more risk that something will go wrong, someone will be injured and lawsuits will ensue. Even if the regulators and government approval process eased, the underwriter’s evaluation of the risks will remain the same. Insurers look at the company’s culture of managing risk. Companies that have best practices in place and go beyond regulation will be well-positioned, but will need to

Stretched Workforce

The construction industry is not sitting idle while talks of infrastructure are being debated in Washington. U.S. construction companies are already stretched to complete projects. There is a skilled labor shortage that has caused project delays nationwide. In 2016, the National Association of Home Builders estimated there were 200,000 unfilled construction jobs in the United States, an 81 percent increase in the past two years. Insurance underwriters will be looking at advanced planning, safety standards and training programs for staff, teams and temporary workers that will be on the project. As part of that planning, underwriters INSURANCEJOURNAL.COM

Providing quality

Environmental Insurance maintain high standards of compliance and risk management in a less-regulated environment.

Focus on Public-Private Partnerships

Public-Private Partnerships (P3s) are a growing and promising model to move projects forward. The U.S. was built in part on private financing. One of the greatest examples of this is the Brooklyn Bridge. This P3 project also led to advances in construction safety and building efficiency that have endured for more than a century. Underwriters are focused on the risk transfer from the public entity to the private one, and what it means for the private sector entity to be financially responsible for any issues that arise. If we move at a quicker pace, the P3 approach can expedite project construction by taking public financing delays off the table. A critical challenge with P3s is evaluation of future regulatory risk and the creation of a legislative framework to support P3 delivery on a state level. The private sector is tasked with pricing the risk of construction and long-term operation of infrastructure such as bridges and toll roads without certainty on how the government will regulate those assets in the future. Post

from trusted carriers since 1990.

construction, the P3 entity is operating on a long-term lease while being subject to government compliance. With the slashing of red tape, P3 operators will be looking for regulatory certainty. Insurance will play a key role in providing the assurance over the long-term, and this will drive more opportunities.

Together, architects, engineers and construction industry risk managers, brokers and insurers, will have to carefully consider this new risk picture and how to insure it. A Look to the Road Ahead

The insurance industry will be a close partner in working with construction industry management to meet these challenges. Architects, engineers and construction companies should look to their insurer to help manage the risks, for loss control services and training, and tailored insurance products to address new exposures. Surety bonds will be used to insure project completion. The financial and qualifications review by surety underwriters can be an asset to project sponsors struggling to build resources in a stretched labor force. Having more private sector control could foster advances in technology and project safety. Just like the advancement of decompression techniques led to safer working conditions at depth developed during the building of the Brooklyn Bridge, this new pace of infrastructure building can lead to cutting-edge approaches. These changes come with new risks but also offer great opportunity for the construction industry. The results at the end of the road are no doubt exciting — new bridges, buildings and public spaces. To succeed in this environment, risk management planning must be on the priority list.

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Cellura is president, North American Casualty Division at Allied World. Email: joseph.cellura@awac. com. INSURANCEJOURNAL.COM

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JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 25 BEHL16485.indd 1

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Idea Exchange

The Wedge

CRM or Organic Growth Technology? Why off-the-shelf CRM technology might not get you what you really want - growth!

By Randy Schwantz

magine this conversation with another agency owner:

“Charlie, what are you guys

using as a pipeline tool?” “Well Mike, I had my IT guy look into it and he recommended we go with SalesForce.com, he said it was as good as anything out there.” “Yep, that’s what I’ve heard. Seems like a fast-growing company, they must be doing something right. By the way, how’s the utilization?” “Well, we rolled it out a couple of years ago, people are still getting used to it. A few of our young guns really like it.” Plenty to Choose From

Look, the fact is, there are more than 1,000 pipeline management and CRM tools on the market. There are two that have an enormous marketing budget. Under most circumstances, if you ask your IT department to make a recommendation, they’ll come back with these two options:

SalesForce.com and Microsoft Dynamics. No offense intended to the IT department, but when was the last time they had to run a sales meeting, do sales training, hire a new producer, conduct goal setting, define differentiation or fire a producer? When was the last time they had to make a cold call, beat the incumbent, ask for an introduction or present a renewal? Why does the IT guy get the task instead of the vice president of sales? Mostly because agency owners see off-theshelf CRM as a tool for producers, not a weapon for agency growth. By the way, if you already contracted either of those

products,

you should feel really comfortable as they are both very large firms. It’s analogous to the reason a lot of risk managers go with Marsh. Who’s going to get fired for going with Marsh? Even if the relationship doesn’t work out well, the risk manager can always say: “But, they are the biggest!”

26 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

Analyze the Problem First

The best way to decide on some sort of technology to help you grow your agency is to avoid talking about technology at all until you analyze the real problem. The place to get started is with a well-defined objective; the real outcome you desire? If you answered agency growth, then it only makes sense to determine what is preventing agency growth and seek to find the best way to fix it and then implement the tools, systems and training that will enable it. Start by asking yourself these questions: • Are pipelines empty? • Suffer from low closing ratios? • Do producers rely too much on price/coverage and are they getting rolled by incumbent? • Producers not asking for or getting referrals and introductions? • Many producers seem unmotivated; they hit their peak performance years ago? • Many producers have low confidence and write smaller accounts? • Not enough accounts are getting cross-sold? • Differentiation is too vague. Can you clearly distinguish between your producer’s offering and that of the incumbent agent? • Competitive intel is kept in people’s heads and difficult to obtain consistently? • Goal setting process is hard

to manage and not motivating producers? • Sales meetings are time consuming to prepare for and not getting desired results? • Has it been difficult to find new producers that can and will sell? • Is onboarding new producers difficult? • Are new producers validating their salaries in the allotted time frame? If you suffer from more than two or three of these challenges, will an off-the-shelf CRM tool solve that problem? Probably not. It might even make the problem worse, and here’s why. When something new like this is presented, it’s seen as the holy grail, the big fix. It’s like a new shiny coin; everyone pays attention for a couple of weeks, then they go back to their old habits. All it provided was a distraction from the real problem — a lack of agency growth.

Off-the-Shelf Technology

An off-the-shelf CRM tool might confirm you have empty pipelines, but it won’t help you fill them. An off-the-shelf CRM tool might confirm low closing ratios, but it won’t help you improve them. An off-the-shelf CRM tool might have a user-defined field for listing referral opportunities, but it won’t help your producers get them. Henry Ford said he never INSURANCEJOURNAL.COM

asked his customers what they wanted: “Most would have said they wanted a faster horse” not a motorized vehicle. Steve Jobs didn’t ask either. He just built what he thought his customers would want. Before smart phones, there were dumb phones; all they would do is make a phone call. It did what it was supposed to do… after all, it was just a phone. But Steve Jobs thought through the problem. He somehow knew that people like to take pictures. He knew they like music. He knew they’d prefer to have access to their email and websites wherever they were. He knew that no one wanted to carry a phone, a music player, a camera, a pager

and a computer. So, instead of a dumb phone, dumb music, dumb camera, dumb pager and a dumb computer, he built a smart one. If Steve Jobs or Henry Ford were here today and the insurance business was their focus, there is no doubt they would probably build “smart technology,” not another dumb CRM. They would build a tool to help you drive “organic growth,” not another me-too CRM storage depot. It would be used as a weapon for growth, not a bucket to store business names. They’d already know that most agencies suffer with non-motivated producers, so they’d integrate the goal setting right into the system. They’d somehow know that

agencies struggle to differentiate themselves, so they’d build differentiation into the system. They’d know that sales meetings were lame, (spreadsheet liars’ club meetings), so they would engineer a better way to run them and build it in. They’d know that producers don’t get enough training to improve their prospecting ability and sales skills, so they’d build it in. They’d know that agency owners struggle to hire new producers and onboard them, so they’d build those systems into their technology. Add that to the basic capabilities of the off-the-shelf tools and now you have organic growth technology that seems pretty smart. That would make

it easier to drive growth. The next thing you’d see is Steve Jobs, standing on a stage in Menlo Park, Calif., wearing jeans and a t-shirt, ready to announce a big discovery. “Motivate producers, beat the competition, grow your agency… and you can do it all without breaking a sweat… here it is, organic growth technology.” Everyone in the audience would be wowed, and they would all buy it. Share this

article with a colleague. IJMAG.COM/619KE

Schwantz is founder of The Wedge Group. Phone: 214-446-3209. Email: randy@thewedge.net. Website: http:// thewedge.net/5-Things-Double-NewBusiness

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JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 27

Idea Exchange

Cyber

Why the WannaCry Breach Brings Good News

By Evan Bundschuh

on’t cry over spilled milk, in fact maybe it will teach you to hold the carton tighter. A lesson well learned. This is why, despite the harsh headlines, the ransomware attack that struck the world in May, WannaCry, makes me smile.

28 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

If I was a white hat specialist intending to teach the public a massive lesson (for a greater benefit) this would have been the perfect approach: $300 is just enough to get attention and make a point without inflicting financial damage. I also would have donated the $50,000 to cyber education but that’s beside the fact. Many are reporting this breach in an absolutely frightening manner. Scary? Sure, anything that affects the masses is disturbing. But I see it entirely differently. With the exception of the few organizations that were greatly affected, dare I say, this was a great breach! Here’s why: The tone of reporting on this breach has been one of shock and doom-and-gloom. However there are a number of very positive points that are being overshadowed. For one, despite the low demand of $300, a small percent of those infected actually paid the demand. There are a number of potential reasons for this such

as the discovery of the killswitch and sharing of decryption codes, but the main thing we can hypothesize from this statistic is companies are employing regular backups. For companies to be unwilling to shell out $300, indicates both a lack of intimidation and a sense of security with your own controls. This is great news. Frequent and regular backups are the single most effective security measure against such attacks. On another positive front, this breach has resulted in somewhat of a mass awakening to cyber threats (and importance of security) among the general public. Those that were not treating backups, encryption or system updates seriously have heard the message loud and clear. The topics of backups and encryption are seeping into every day conversations – a change in tone for sure. So in some ways (although it may be wishful thinking) this may deal a blow to ransom attacks, and even cyber attacks in general. About as good of a response as a security specialist could hope for post-breach. Lastly, it is largely expected that this breach will act as a catalyst to fuel adoption of cyber insurance in the small and mid-sized-business community. This is good news for the insurers as well as the companies purchasing cyber insurance, as many smaller companies do in fact need a small push when it comes to incentive for purchasing coverage. I say this with one large caveat. Cyber insurance is a great product and should be more widely adopted, however, buyers should be very careful in understanding the policy’s limits. There are sub-limits and deductibles that apply, combined with conditions precedent to coverage, and INSURANCEJOURNAL.COM

policy exclusions that may result in limited or nonexistent coverage. A recent case of an affected law firm only able to collect $25,000 of a $700,000 loss highlights this point well. A demand which seems like only $300 could actually result in $3,000 or $30,000 of damages when you add in the lost income, forensic investigation and asset restoration. As many have reported, the majority of damages from this breach are expected to come in the form of lost income that some expect are in the millions. You also have to consider that payment of a demand can often result in your company being added to a whitelist, thus creating a soft target that increases the likelihood of being retargeted. Policies with low sub-limits can be maxed out quickly. Coverage terms are also all over the board. Some policies only provide reimbursement of extortion demands but exclude any resulting third-party damages (and contractual penalties) and asset restoration costs. Costs related to asset replacement can balloon quickly when you consider the possibility of having to individually decrypt hundreds or thousands of individual files following a hand over of the data.

ment of that coverage, but when placing cyber insurance, it is critical that the scope of coverage is assessed. With all of the positives addressed, the main fear that has bloomed from this breach is a fear over the future of ransomware, and just how damaging they may evolve to become. Demands have long been expected to rise, but we didn’t see that here – for reasons we can only speculate. Either way, the demands will rise eventually. But it’s not larger demands that I fear most. As is the nature of malicious code, ransomware will only get smarter. What might that look like? This code was rather unintelligent, but as ransomware becomes smarter, it may come with the intelligence to discern between the value and quantity of data in its possession which could pose a real danger. Imagine a “conscious” ransomware – one that was aware it was in possession of hundreds of thousands of medical records, and could set an appropriate ransom demand. Or, equally frightening, ransomware with an ability to infect, lay dormant, prevent backups and launch a future demand. 2:26 PM USA12043.qxd A recent survey 1/4/08 by AIG indicates that Page

most IT professionals believe blanket coordinated attacks are on the near horizon. Attacks that could simultaneously affect tens to hundreds of victims in a particular industry – likely through vulnerabilities contained within software of a common nexus. Combine that coordinated approach with an attack like this and it could spell disaster in more ways than one. Not to mention it would also likely cause surges in insurance premiums on those affected industries. The larger point to be made here though, is, despite the low demand and unintelligent nature that may communicate a false sense of security to the public, it’s important to remember the way these attacks may evolve and improve and just how damaging they can be. Share this arti-

cle with a colleague. IJMAG.COM/619VK Bundschuh is partner and commercial lines head at GB&A, an independent insurance brokerage located in New York focused on insurance programs and risk management solutions for tech companies, financial and professional services, manufacturers and prod1uct-based businesses.

With all of the positives addressed, the main fear that has bloomed from this breach is a fear over the future of ransomware, and just how damaging they may evolve to become. Broader policies, however, not only include coverage for such damages but also contain open definitions that allow for a wider range of claims such as threats to pharm or phish your own clients through impersonation, and defacement of a website. There are also a number of exclusions that have the potential of limiting coverage in poorly structured policies such as exclusions for self-propagating code/viruses. In short, cyber insurance is important with ransomware proving a critical eleINSURANCEJOURNAL.COM

JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 29

Idea Exchange

Umbrellas

5 Tips for Selling Umbrella Insurance

By Frank Medina

hether you’re new to selling insurance or you’re an expert at it, you may have found umbrella insurance is one of the products that lots of people do not understand, and may need more convincing to buy, than say, homeowner’s insurance or auto insurance. Below are some tips to help you successfully sell umbrella insurance.

Just Quote It: One of the reci-

pes for selling is to simply provide a quote for that product or service, even if that was not your main purpose of meeting with the customer. Sales people often make the mistake of discussing products with customers, get them excited over it and then promise to send a quote later. This is counterproductive, as the customer may have lost interest in that time. Instead, quote prices in real time. Automatically providing quotes increases your chance to sell umbrella insurance.

Ask a Probing Question: By

asking questions, you make the customer think. When they

do, you increase your chances of making a speedy sale. Ask questions like: • Would you want to risk all your assets in the event you were found at fault for a claim? • How will your family support themselves if your finances are suddenly hit by a tragic accident in which you are held responsible for damages or bodily injuries? • Will you benefit from the peace of mind that comes with the knowledge that you and your loved ones will not be burdened?

they’re sued for a lot of money and do not have enough liability insurance or an umbrella policy to cover those costs, all their assets, as well as future earnings, could be at risk. Umbrella policies also provide a broader form of coverage and can help cover legal fees, false arrest, libel, and slander. Each carrier may have different policy language on what’s covered in a policy so make sure you know it all before discussing coverages.

Explain the Benefits: People are more likely to buy something if they know what’s in it for them. Take the time to explain the benefits of an

umbrella insurance policy. The main thing of course is that it can protect their finances from expensive lawsuits or other covered events. Nobody expects to be the subject of a lawsuit, but it’s a real possibility in our highly litigious society, so it’s something they should protect themselves against. Make it clear that if

30 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

also their homes, lives and other things. At the end of the day, insurance products are much cheaper because of the discount. By having insurance that covers multiple risk areas, like umbrella insurance does, the customer receives discounts generally for adding this. Considering that a bundle can save 2 to 10 percent on premiums, it is a worthwhile investment. Therefore, highlight to the client how the multiline discount that’s automatically built into umbrella insurance serves the client’s interests.

Ask the Right Questions: Lastly, make sure you ask the client all the right ques-

tions. You must know how many vehicles, homes, boats, motorcycles, are to be covered in the policy. If they own rental property too, it’s a good idea to bring that up and have them cover all of

Highlight Bundle Discount: In order to

encourage customers to buy more products from them, insurers often bundle products together and offer some discounts on the standard premium rates. They price their insurance rates to attract homeowners who need to insure not only their cars, but

that under their policy. Be clear about what is covered. Share

this article with a colleague. IJMAG.COM/619GF

Medina is the founder of Frank Medina Insurance, based in Houston, Texas. Website: www.frankmedinainsurance. com. INSURANCEJOURNAL.COM

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Idea Exchange

Minding Your Business

Agency of the Future Agency Consolidation

By Catherine Oak and

The first trend is the result of small to medium size agencies currently being bought up by large publicly traded firms and private equity backed operations. Private equity has jumped into the insurance industry with both feet. It now accounts for one-third of transactions and is quickly headed to be responsible for half of the agency acquisitions. This consolidation trend has been occurring for some time. One noticeable fallout is that more and more insurance accounts are controlled by agencies that are professionally managed and have a national presence. This might track consumer expectations to have access to an organization that has broad support. Small independent agencies need to focus on personal relations and create ways to service accounts that makes them competitive against larger firms. The days of towns having multiple small independent agencies are waning.

New Agencies

Bill Schoeffler

ogi Berra once said: â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s tough to make predictions, especially about the future.â&#x20AC;? Ignoring that wisdom, what will the insurance agency business model look like in 10 years or 20 years? Right now there are several major trends that are impacting the insurance industry. These include: 1) agency consolidation, 2) ease of starting a new business, 3) the age gap, and 4) insurtech and artificial intelligence. The first three trends will re-shape the existing industry and the agency business model and gently morph it into a revised structure. However, insurtech and artificial intelligence are disruptors that could totally change the way business is done. 32 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

The second trend is a counter to the first trend. Today, the ability to start an agency is as easy as it has ever been due to various options that did not exist 50 years ago. The major change is due to market access. An entrepreneur today can start a new agency and access a wide variety of markets through aggregators or similar venues. This makes the firm viable right away. In the past, a new agency would have to broker business through another agency until they could get enough volume to have their own contract. It would take a long time before the agency would be large enough to support contracts with multiple standard markets. There are still more options for new and small agencies to gain support and secure market access. The traditional route would be to join a cluster or network. Clusters are two or more agencies that share access to markets and perhaps other things like facilities, computer systems, accounting, service staff, etc. This option usually is

available after the agency is already established. Another system is a new franchise agency system, like Brightway and Goosehead. This agency franchise not only provides market access, but also includes back office support, such as accounting and customer service staff. The branding, agency automation system, procedures, etc., are all consistent. Typically, the new franchisee will pay an initial franchise fee (often $25,000 or more) and then the commissions are paid to the franchisee at a lower rate to offset the cost of support. The advantage is that like all other franchises, a new entrepreneur can be up and running right away. Most of these franchises are structured so that the franchisee is a sales person that can own their own business (and book of business) without having the hassle of being in charge of employees or handling market relationships. The downside is that the franchisee needs to conform to the rules and the compensation might be less than if they owned a truly independent agency. Partnerships such as clusters, networks, aggregators and franchises are becoming an incubator for new agencies. A 2015 survey sponsored by Insurance Journal indicated that more than 25 percent of agents INSURANCEJOURNAL.COM

few years, these retiring owners will help fill the seemingly insatiable desire of private equity firms to acquire more agencies. This age gap also means an experience gap. The 20-plus-year seasoned producer or manager will be replaced by a person with less than 10 years of experience. The efficiencies built by experience will be lost while the younger generation comes up to speed.

Technology

work for an agency that is a member of an aggregator or belongs to a cluster. These options also have the benefit of operating a small agency while being part of a larger organization. The Insurance Journal’s list of the Top 20 Partnerships for 2016 show impressive numbers for the combined revenues of the members.

Age Gap

The third trend is an issue faced by all businesses, it is a demographic population gap. Baby boomers are retiring. The first boomers turned 65 in 2011; 10,000 turn 65 every day; the youngest are now 52. Meanwhile, millennials are entering the workforce. The issue is that there is a growing population gap since the generation in-between, generation X, is smaller than both the baby boomers and millennials groups. So, people in their 60s will be replaced by people in their 20s, because there is a lack of people in their 40s. Also, agency ownership issues arise. Baby boomers own 63 percent of the private businesses in the U.S. and 80 to 90 percent of their wealth is tied up in their businesses. It is estimated that 75 percent of baby boomer agency owners plan to transition over the next 10 years; 48 percent in the next five years. At least for a INSURANCEJOURNAL.COM

Finally, there is insurtech, which is the 800-pound guerilla of these trends. Insurtech is the umbrella term now used to cover the usage of technology in the insurance industry. It can be used to describe the overall impact that technology has on the insurance marketplace. Insurtech can include things like smartphone apps, wearable devices, sensors in appliances, access to online consumer data, improved claim tools, individual consumer risk development algorithms, online policy handling, automated compliance processing, etc. This trend is a wild card since all the possibilities are truly unknown at this point. However, the future looks like it will have a huge impact. For example, the wide use of self-driving cars is just a few years away. Since these cars are expected to be much safer due to technology, the liability related to driving with be reduced and perhaps shift from the owner to the car manufacturer. So, personal lines auto policies could be a thing of the past in just a few years. Most “things” that we have will have some sort of technology built in that can monitor performance, how it is used, problems, surroundings, etc. Again, this will also re-shape and shift liability. Insurtech and artificial intelligence is expected to change how information is collected, analyzed, distributed and used. Consumers today getting an auto policy quote can enter their name and address and the system will have access to the car that the consumer owns. There is a ton of information out there waiting to be accessed, analyzed and utilized, and with artificial intelligence it will be done with a computer rather than a person.

Conclusion

For insurance agencies, most likely the next 10 years will be a gentle evolution into a new form. In the long run, perhaps 20 years from now, the role and even the existence of insurance agencies are unknown and very difficult to predict due to the role of technology. At that point we might quote The Grateful Dead and say, “What a long strange trip it’s been.” Share this

article with a colleague. IJMAG.COM/619AE Oak is the founder of the international consulting firm, Oak & Associates, based in Northern California. Schoeffler is an associate of the firm. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. Phone: 707-936-6565. E-mail: catoak@gmail.com.

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JUNE 19, 2017 INSURANCE JOURNAL | NATIONAL | 33

Closing Quote The Promise of Insurtech

By Kevin McPoyle

isruptive technology is poised to shake up our industry. Following tectonic plate shifts in publishing, finance, investing, telecommunications, recorded music, information technology, retail, and even ride hailing services, insurance has been added to the queue. Disruption can be unsettling. While a brave few welcome new challenges and ways of doing things, the great many prefer the certainty that comes when tomorrow looks like a facsimile of yesterday. Change has the capability to be difficult and frightening. Yet, it remains inevitable. The frightening news about insurtech is the insurance industry may look very different in the next few years. The reassuring news is this disruptive technology presents a real opportunity for us to deliver greater value to those we serve. Insurtech represents a striking opportunity for insurers to evolve the business model beyond its present legacy struc-

ture to better serve insureds. While it will shake us out of our comfortable seats, the benefits of innovation outweigh the potential pain. The transformation will not necessarily lead to a destructive disruption of our current business model. Instead, it can lead to creative disruption as we make use of technology and ever-growing streams of data to develop innovative solutions, reduce operating costs and deliver greater value to everyone in the chain. Although any one of us can choose to passively follow along as insurtech transforms our business model, the greatest opportunity is to be found in actively participating. To fully exploit insurtech’s technological advances to move us out of our comfort zone into a new space characterized by exciting opportunity, our industry requires leaders rather than followers. To put leadership into practice, we must first fully accept, without reservation, change is coming. We must also embrace the positive aspects of this change. Next, we must work to understand the foundation of this change is data. While it is easy to take the explosion of data for granted, we should stop for a moment to recognize its extraordinary magnitude. We should not join the chorus of Luddites (a person opposed to technology or innovation) who see the use and processing of this data as being a threat

34 | INSURANCE JOURNAL | NATIONAL JUNE 19, 2017

to privacy. Building in safeguards and training people who act with prudence when putting it to productive use are two steps to help secure this developing future. When we get a complete understanding of the vast quantity of data being collected, we must identify the rising stars among the start-ups and accelerators working to collect, read and act upon this data. In many instances organizations collecting data will be different than those imagining creative ways of acting upon it. Through this exercise we will be able to determine which pioneers to partner with as we reimagine our business to better serve all stakeholders. As in all things, we must be guided by the needs and shifting behavioral patterns of our customers. Insureds participating in a sharing economy exhibit different risk transference needs than those participating in an ownership economy. Consumers for whom immediate gratification is the norm possess different demand criteria than those comfortable with waiting for an application to be delivered by mail. We

should look to insurtech as being a vehicle to meet this need. One of the greatest promises of insurtech is the potential to anticipate and remove risk rather than to make individuals and businesses whole in the wake of unintended consequences. We must be particularly aware and interested in applications and devices seeking to make greater health and wellbeing at the individual, corporate and societal levels a reality. All risk management and insurance companies – both large and small – should consider assigning a person as an insurtech champion within their ranks. While the hours these champions devote to exploring this innovation will not be fully client facing, it is an effective way to ensure this critical cluster of technologies receives full consideration, good and bad. Senior leaders and principals should regularly meet with their insurtech champions so their acquired knowledge can help to drive the corporate planning process. The future, as always, begins tomorrow. The past, as always, ended yesterday. There is little question insurtech will help our industry better meet the needs of tomorrow’s insureds. How much better we meet those needs will depend on our willingness to leave familiar patterns behind, and dive deeper into the promise of the future. McPoyle is president and co-founder of KMRD Partners Inc., a risk management consulting firm and property/casualty insurance broker in Warrington, Limerick, and West Chester, Penn. INSURANCEJOURNAL.COM

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