Insurance Journal West 2013-11-04 by Insurance Journal

NOVEMBER 4, 2013 | VOL. 91, NO. 21

WEST

Crestbrook Ready for Affluent Market Legacy Network Execs in Idaho Sentenced IICF, Cookie Monster Promote Literacy

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Inside This Issue

Special Report:

E&O Dangers for Agents, Plus Exclusive Agency E&O Survey Results

November 4, 2013 • Vol. 91 No. 21 • West

NATIONAL COVERAGE 8

Advisen: Historians May See 2013 as ‘Cyber Tipping-Point’

12 P/C Insurers’ CFOs Point to Hardening Markets: Towers Watson 14 Aon Benfield: U.S. Homeowners Market Offers Growth Opportunities 16 E&O Insights: What Could Go Wrong When Insuring Habitational?

IDEA EXCHANGE 23 How Health Law Could Affect Medical Professional Liability

36 Increasing Retentions: The Hidden Premium Increase

40 The Fight Against Employee Theft

Special Report: Professional Liability E&O Dangers for Agents, Plus Exclusive Agency E&O Survey Results

28 50 Vulnerable E&O Areas in Agencies Today

44 Franchise Opportunities 50 Minding Your Business: Oak & Schoeffler 54 Closing Quote: Technology, Government & Modernization

32 M&A Review: 3Q Activity Picks Up Pace

20 10 Things to Know About Habitational and Dwelling Risks

WEST COVERAGE

DEPARTMENTS

W1 Utah Man Who Topples Rock Faces Questions Over Lawsuit

W8 Two Legacy Network Executives in Idaho Sentenced

W1 Wyoming Traffic Fatalities Decrease in 2013

W10 Oregon Jurors Order Hospital to Pay $2.4 Million

W2 Eyeing Affluent Market, Crestbrook Ready to Launch

W12 IICF, Cookie Monster Promote Early Childhood Literacy

4 | INSURANCE JOURNAL-WEST November 4, 2013

10 Declarations 10 Figures W4 People 11 Business Moves 48 MyNewMarkets

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NATIONAL COVERAGE

Opening Note Climate Inaction

he new report by Ceres, a nonprofit representing businesses and investors on climate issues, highlights the cost to taxpayers of subsidies for flood-prone properties and farmers’ crop insurance and other federal disaster aid and chides policymakers for inaction on climate change. “Taxpayer costs from climate change are getting bigger and bigger. Last year’s extreme weather events alone cost every American more than $300 apiece, or $100 billion altogether — most of it to pay for federal crop, flood, wildfire and disaster relief,” said Ceres president Mindy Lubber. “Yet, our public disaster relief and recovery programs have been slow to recognize that worsening climate impacts will drive up future losses to unsustainable levels. Instead of encouraging behavior that reduces risks from extreme weather events, these programs are encouraging behavior that increases these risks — such as agricultural practices that increase vulnerability to drought and new development in hurricaneand wildfire-prone areas.” The report says taxpayers in hurricane-prone states Disaster relief programs like Florida and Texas are encourage behavior that particularly vulnerable increases risks, Ceres says. because many private insurers have withdrawn, leaving state-run insurance programs on the hook for insured losses from coastal storms. In the past 20 years, the total loss exposure of these state-run insurance plans has risen by 1,550 percent, from about $40 billion in 1990 to more than $600 billion in 2010, according to Ceres. “What’s most troubling about these trends is that so little is being done to control these costs,” said Lubber. The report, “Inaction on Climate Change: The Cost to Taxpayers,” includes a number of recommendations: Improving transparency and accounting of the costs of extreme weather events to disaster relief and recovery programs; Boosting research to understand how climate change will impact these programs; Requiring recipients of federal relief and recovery assistance to adopt more stringent building codes and prohibit development in vulnerable areas; Finding ways to increase the level of private insurance market participation to reduce pressure on government relief and recovery programs. Today only about 50 percent of the damages in the U.S. caused by extreme weather events are privately insured, according to Ceres. Want to learn more about Cere’s recommendations? The report can be found at: http://www.ceres.org/resources/ reports/inaction-on-climate-change-the-cost- Andrea Wells Editor-in-Chief to-taxpayers/view. 6 | INSURANCE JOURNAL-NATIONAL November 4, 2013

EDITORIAL Editor-in-Chief Andrea Wells | awells@insurancejournal.com V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Senior Editor Susanne Sclafane | ssclafane@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Catherine Oak, Curtis Pearsall, Meredith Reeves, Bill Schoeffler Contributing Writers Chad Glenn, Alex Hageli, Doug Karpp, Bruce Schreiner, Peter Taffae SALES V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Ly Nguyen (800) 897-9965 x125 | lnguyen@insurancejournal.com MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns (619) 584-1100 x120 | eburns@insurancejournal.com New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com DESIGN/WEB V.P. of Design Guy Boccia | gboccia@insurancejournal.com V.P of Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com IJ ACADEMY OF INSURANCE Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chairman Mark Wells Chief Executive Officer Mitch Dunford Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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NATIONAL COVERAGE

News & Markets Advisen: Historians May See 2013 as ‘Cyber Tipping-Point’ By Young Ha

istorians may look at the year 2013 as a “cyber tipping-point” — the point at which businesses and governments finally realized the severity of the threats they were facing, according to Advisen, a New York-based commercial insurance research and data analytics firm. Advisen said exposures such as operational disruptions caused by denial of service attacks, lost or stolen data, violation of privacy laws and intellectual property infringement have long been a concern of larger companies. But this year, smaller businesses began to increasingly realize that they were also at risk. Consequently, the research firm said, information security risks became a risk management focus of more organizations — and insurance cemented itself as a part of the cyber risk management strategy for a majority of organizations surveyed by Advisen. Advisen’s newly released annual survey on information security and cyber liability risk management found that, similar to previous years, the vast majority of respondents (89 percent) believe that cyber and information security risks pose “at least a moderate threat” to their organization. Additionally, 54 percent said their organization’s board of directors view cyber risk as a significant threat to their organization, while 64 percent said their C-suite executives view cyber risk as a significant threat. Advisen said this year’s survey had participation

8 | INSURANCE JOURNAL-NATIONAL November 4, 2013

from 329 respondents, with 47 percent classifying themselves as chief risk managers and an additional 39 percent classifying themselves as members of risk management departments. Businesses from an array of industries were represented, with healthcare accounting for the largest industry sector, followed by government and nonprofit, industrials, professional services, consumer discretionary and utilities. The survey was weighted towards larger companies, with 57 percent of respondent companies having revenues in excess of $1 billion. Smaller Firms Targeted Advisen said small and mid-size businesses can no longer assume they will be overlooked as potential targets by cyber-criminals. In fact, smaller companies are increasingly being targeted because they often have less sophisticated security and, in some cases, can act as a conduit to larger companies. Advisen found that while the smallest companies (revenues less than $250 million) had previously viewed cyber risk less seriously than their largest counterparts (revenue greater than $10 billion), this gap is closing. This year’s survey found that in response to a key question — “How would you rate the potential dangers posed to your organization by cyber and information security risks?” — 91 percent of smallest companies said they believe the risks pose at least a moderate danger. This is a 9 percentage point increase from last year. At the other end of the scale, 97 percent of the largest companies said they believe cyber risks pose at least a moderate danger, which was consistent with last year’s figure. Advisen also found in its survey that most organizations recognize the importance of having a data breach response plan. When respondents were asked “Does your organization have a data breach response plan in place in the event of a data

breach?” more than 70 percent responded yes and 10 percent said no, while 18 percent said they did not know. Advisen said research suggests that when a breach occurs, organizations that have implemented data breach response plans prior to the breach fare much better than those that have not. A Risk Management Focus Information security risks are increasingly becoming a risk management focus. Eighty percent said yes while 18 percent responded no when asked if information security risks are a specific risk management focus within their organization. The survey also said 56 percent of organizations have a multi-departmental information security risk management team or committee. The departments or functions that are most likely to have representation in such teams include IT, risk management/ insurance, general counsel’s office, compliance, internal audit, treasury or CFOs office and chief privacy officer. Advisen said small and mid-size businesses also are increasingly concerned with exposures from mobile devices and employee use of personal devices. Advisen noted that cloud computing is gaining in popularity as businesses increasingly perceive the value of storing data in the cloud as outweighing the risks. The percentage of organizations that examine the vulnerabilities from cloud services as part of their data security risk management program has also increased. In this survey, 52 percent of the respondents said their organization purchases cyber liability insurance. (Advisen’s broader research using data based on purchases of different insurance coverages suggests the cyber liability insurance purchase rate can range from less than 10 percent among small companies with less than $100 million in revenues to up to around 20 percent in average among larger corporations. There is also a wide disparity among different industries.) www.insurancejournal.com

sep temb er 16th , 8:4 5 a .m .

the smoke clears and a promIse Is kep t In an Ins tant, A nTH o n y P o u lo uS HEl P S A Cl IEnT SEE HIS Fu T u R E M o R E Cl E A R ly

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

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NATIONAL COVERAGE

Declarations Worker’s Comp Fraud “Thranow cheated both his workers’ compensation insurer and the state of California out of nearly $100,000, and by doing so passed the cost of his fraud onto consumers across the state.” — California Insurance Commissioner Dave Jones praised the conviction of Jeffrey Thranow, 59, owner of Costa Bella Builders, for his part in failing to report employees to his insurance carrier or to the Employment Development Department.

Sandy Fund

Florida Strong

“Now that Sandy money is beginning to flow, all homeowners impacted by the storm should apply for this much-needed funding immediately.” — Sandy aid under the New York State’s “NY Rising” housing reconstruction program. Sen Charles Schumer, D-N.,Y., said on October 18 that the program allocates federal funding to Sandy victims with “unmet needs.”

“We’re in as strong as a position as we have ever been in.” — Jack Nicholson, executive director of the Florida Hurricane Catastrophe Fund, noting the fund has $10 billion in cash available after years of no storms.

Rampant Fraud “Today’s filing of a federal lawsuit reaffirms what our industry has been saying for several years now — that insurance fraud is rampant in Minnesota.” — Insurance Federation of Minnesota spokesman Mark Kulda commented on the filing of a federal lawsuit that accuses a diagnostic imaging company, Mobile Diagnostic Imaging Inc., its owner and 46 chiropractors of engaging in an elaborate kickback scheme aimed at defrauding Minnesota’s no-fault insurance system.

Figures $42 Million

Political Commentary “His rewrite of the ballot title does not adequately represent the meaning and purpose of the constitutional amendment. … His rewrite is a political commentary on the use of the revenue source instead of an explanation of the ballot measure, something prohibited by state law.” — Oklahoma state Rep. Joe Dorman, a Democrat, criticized the rewrite of ballot language by Republican Attorney General Scott Pruitt for a plan to issue $500 million in bonds to help school districts pay for safe-room shelters. Dorman said the new language focuses on the business franchise tax that would be used to fund the proposal, rather than placing safe rooms or storm shelters in schools.

0.05%

The amount Arch Insurance has paid to the Tennessee Valley Authority to help pay for its $1 billion cleanup at the 2008 ash spill at the Kingston Fossil Plant. TVA is also seeking payments from ACE and Zurich.

$30 Million

The cost of a renovation project that would restore some of the luster to the Travelers tower, a Hartford, Conn., landmark. The makeover involves cleaning the granite, replacing 30 miles’ worth of mortar between the stones and restoring decorative moldings. The project began in 2011 and is expected to take until 2015.

10 | INSURANCE JOURNAL-NATIONAL November 4, 2013

The maximum amount of alcohol drivers would be allowed to have in their blood if a conservative think tank and advocate for harsher liquor laws in Utah has its way. Salt Lake City-based nonprofit Sutherland Institute wants to lower the legal limit from 0.08 percent.

The number of robberies at insurance agencies in North Texas that police say Michael Cleveland committed during a spree in July and August. Cleveland was being held by Dallas police on October 21 on charges that included aggravated robbery. Police say surveillance videos showed the suspect walking into insurance firms, waving a gun at employees and robbing people of money.

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WEST COVERAGE

News & Markets Utah Man Who Topples Rock Faces Questions Over Lawsuit

Utah Boy Scout leader whose toppling of an ancient rock formation in a state park was captured in a viral online video is facing questions over a personal injury lawsuit he filed a month before the incident. Glenn Taylor of Highland sued Alan MacDonald in September, claiming his daughter caused a 2009 car crash that left him with debilitating injuries. MacDonald question whether Taylor’s back injuries were as serious as claimed after watching him in the video. In the video shot by fellow Scout leader Dave Hall, Taylor pushes a large boulder from its delicate perch, sending it tumbling down a small embankment as the men cheer, high-five and dance. “In the video, I see a big strong guy who

steps up to a 2,000-pound rock and dislodges it, and I just think to myself, ‘that guy doesn’t have a bad back,”’ MacDonald said. Taylor’s attorney said the video may not play well to a jury, but it’s only one piece of a larger case, and that just because his client is beginning to recover from his back injuries does not mean he hasn’t suffered past pain. Taylor and Hall face possible charges over the Oct. 11 toppling of the rock formation in central Utah’s Goblin Valley State Park. They insist they took the action because they believed the balanced rock was about to fall and could hurt their Scouts and other park visitors. Taylor has said he regrets his actions and agrees “there’s a better way to treat the outdoors.” The Boy Scouts of America has branded the Scout leaders’ action as “reprehensible” said it would take “appropriate action” after a review of the matter. Copyright 2013 Associated Press.

Oregonians to Vote on Immigrant Driver’s Licenses

regonians are headed for a statewide vote on a new law that allows immigrants who can’t show they’re in the United States legally to obtain driver’s licenses. Secretary of State Kate Brown’s office in October said that opponents of the law submitted enough signatures to put a referendum before voters in November 2014. And as a result, the law won’t take effect as scheduled Jan. 1. The law would grant four-year restricted licenses to drive but not to vote, board a plane, get government benefits or buy a firearm. The licenses would be marked “Driver’s Card.” Earlier this year, the Legislature approved the bill with bipartisan support, and Gov. John Kitzhaber signed it.The law was

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aimed mainly at the tens of thousands of immigrants living in Oregon who lack legal status. Others also could apply, including homeless people and veterans who lack the proper documents to get a regular license. All applicants must pass a driver’s test and provide proof of Oregon residency. Referendum sponsors say the law rewards illegal actions and might encourage more people without legal documents to come to Oregon. But supporters say the law would reduce the number of unlicensed and uninsured drivers in the state. Thirteen states, including Oregon, now have laws that allow immigrants to obtain a driver’s license or driving privilege card, according to the National Conference of State Legislatures. Copyright 2013 Associated Press.

Las Vegas Sun: Cyberattack Behind Website Outage

fficials at the Las Vegas Sun say a cyberattack crashed their website for several hours on Oct. 15. The publisher of the website and its sister sites says the outage started a little after 6 a.m., and was under control by about 10 a.m., and that it’s unknown who’s behind it. The newspaper’s site has experienced similar attacks multiple times in the past year. The outage was described as a Distributed Denial of Service attack involving a hacker commanding a fleet of remotely controlled computers to flood a website with traffic, preventing the system from processing legitimate requests. Users visiting a hacked site would see a blank page. Copyright 2013 Associated Press.

Wyoming Traffic Fatalities Decrease In 2013

he Wyoming Highway Patrol says traffic fatalities in the state have decreased this year. According to Sgt. Steve Townsend, 120 people died in traffic accidents in Wyoming last year. There were only 67 traffic deaths through the end of September this year. Townsend says that even though the number of deaths has decreased, some people are still not buckling their seat belts. He says the most common type of crash in Wyoming is the single-vehicle rollover. Of those types of crashes so far this year, 82.3 percent of the people who died were not properly restrained. Copyright 2013 Associated Press. November 4, 2013 INSURANCE JOURNAL-WEST | W1

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News & Markets Eyeing Affluent Market, Crestbrook Ready to Launch By Stephanie K. Jones

CalFarm company that was purchased by Nationwide in the mid ’90s,” according to Pedersen. ell-to-do residents and their insur Crestbrook writes in California in affilance agents can soon look forward iation with Nationwide subsidiary Allied to another option when it comes to proInsurance’s private client business. tecting their assets. “So, technically there are customers on Crestbrook Insurance has selected what Crestbrook paper,” Pedersen said. But for is essentially a start-up insurance company all intents and purposes, Crestbrook is focusing on the affluent market. The coma start-up designed to help Nationwide pany launched in Illinois and was open for expand its portfolio into the profitable business the week of Oct. 28. high net worth market via the indepen Crestbrook is operating in California dent agency channel. under slightly different model and is Pedersen said a descendent ‘So, technically there are that around the of another California comcustomers on Crestbrook paper.’ middle of 2012, Nationwide pany, CalFarm. began looking into the possibility of Crestbrook will also be expanding to investing in a company dedicated to that California. portion of the personal lines market. The “When we re-implement California in company tapped Scottsdale Insurance February of 2014, we will continue to use President and Chief Operating Officer Crestbrook paper, but we will move away Mike Miller to undertake the strategic from the Allied private client nomenclaassessment of whether to enter what it ture, and we obviously will be renewing considers a $60 billion market. and converting those customers into our “Mike had had success in bringing new program,” said Crestbrook President new companies, such as Western Jim Pedersen, who is based in Scottsdale, Heritage and Freedom Specialty, Ariz. out of the ground at A subsidiary of Nationwide Mutual Scottsdale, and Insurance, Crestbrook is “an original

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they felt he was, within their leadership structure, best positioned to drive that analysis and recommendation back to the board,” Pedersen said. While both Scottsdale, a property/casualty excess and Jim Pedersen surplus insurer, and Crestbrook are Nationwide subsidiaries, and Pedersen reports to Miller, the connection with Scottsdale ends there. Crestbrook is “a stand-alone stock company, solely owned by Nationwide,” Pedersen said. The company decided to launch first in Illinois for three primary reasons. One is that “Illinois is a top-25 affluent state, so it’s one of the states we intended continued on page W6

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People Jay Dipasupil

Angela Newman

Novato, Calif.-based Fireman’s Fund Insurance Co. named Jay Dipasupil vice president of professional liability. Dipasupil will lead Fireman’s Fund’s professional liability business, and will be responsible for managing the professional liability line of business, specifically professional services and healthcare. Dipasupil has 27 years of insurance industry experience. He has been with Fireman’s Fund since February of this year, serving as vice president of programs. Prior to Fireman’s Fund, Dipasupil led the specialty solutions group at AIG. Before AIG, he held underwriting and leadership roles with Travelers and Zurich. Fireman’s Fund is a member of the Allianz Group. The Leavitt Group named Angela Newman vice president in its national restaurant insurance program. Newman will work in the Covina, Calif., office. Newman has more than 25 years of experience, and specializes in risk management for restaurants, drug and alcohol rehab facilities, golf courses and country clubs. The Leavitt Group provides clients with specialty products, a wide-range of insurance programs, risk management strategies and employee benefits solutions. Lockton’s Denver, Colo. operation announced the addition of Matt Edelheit as senior vice president and department manager in risk management. Edelheit has served clients in the retail, technology, manufacturing and hospitality industries, to name a few. Most recently, he was a team leader at Aon in Chicago, where he specialized in casualty brokerage for global accounts. Edelheit also has served on the board of directors of the Insurance Institute Charitable Foundation (IICF). Kansas City, Mo.-based Lockton reports serving more than 35,000 clients globally.

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IMA Inc. named Lawrence Cook to its risk management team as a vice president. Cook will be focused on the management of existing captive insurance programs as well as the development of new group captive opportunities. Cook began working in the insurance industry in 1982 and has program, captive and alternative risk financing experience. He previously worked with Travelers/Discover Re in various positions, ACE Captive Solutions, Risk Design Group, Arch Insurance Co. and First American Insurance Co. IMA has more than 500 employees in Dallas, Denver, Kansas City, Topeka and Wichita. The IMA Financial Group is comprised of IMA Inc., Signature Select LLC, Towerstone Inc. and TrueNorth Inc. SullivanCurtisMonroe Insurance Services LLC named Candice White director of marketing and communications in its Irvine, Calif., office. White has experience in creative marketing, project management, brand development, print and web design and social media strategy. Prior to SCM, White was a creative project coordinator at Barney & Barney LLC. Privately-held SCM is focused on middle market companies, and offers commercial property/casualty, employee benefits and personal lines coverage. The Professional Independent Insurance Agents of Colorado named Dot Wright its executive vice president following a national search ongoing since mid-May. Wright starts Nov. 1. She comes to PIIAC from the Arvada Chamber of Commerce. Wright follows as head of PIIAC Barbara Fidler, who represented the group executive vice president for 17 years. PIIAC membership is comprised of leaders in the insurance industry. The organization represents 2,500 independent insurance agents in Colorado.

1/27/11 9:42 AM 6/11/11 9/6/11 2:54 8:30 PM

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News & Markets continued from page W2 they do things to protect and manage their to be in at some point,” Pedersen said. risk, you can provide both a policy and a It also has a fair regulatory environment, pricing structure to represent that.” he said. Regulatory delays or issues relative to getting to market were not areas of Ready for Competition concern. Crestbrook is confident it has the ability Finally, the company felt it has strong to compete on several levels with insurenough relationships with agents and broance organizations that have an established kers that specialize in the affluent market presence in the in Illinois “to high net worth work through ‘In my mind, in a five-year period say, by the end of 2018 I’d like to market such as some of the early bumps see us somewhere between a half Chubb, ACE, Private that any new a point and a point market share.’ AIG Client, PURE company is and Fireman’s Fund. going to have in their first state when they “We believe our value proposition has launch,” Pedersen said. a few competitive advantages as we enter Crestbrook has plans to open in 15 more the market,” Pedersen said. states in 2014 and an additional 15 in 2015. For one thing, Crestbrook’s “technology platform and delivery will not be burTarget Customers dened by the challenges of legacy,” he said. The customer base that Crestbrook seeks Additionally, “we see ourselves as being to serve would on average have primary much more efficient, much better at the homes with replacement costs that range user experience, as a result of not having between $500,000 and $5 million. They may to deal with legacy assets [such as] 10-, also have additional coverage needs, such as 20-, 30-, 40-year old policy secondary homes, administration systems excess umbrella, and all their constraints.” personal collec Another advantage, tions, automobiles Pedersen said, is that and expensive toys. Crestbrook has had been Pedersen said able to recruit and select the company is its associates and employcomfortable with ees for marketplace talent the $500,000 to $5 and skills, as well for culture and behavmillion range and “will write some risks ior, as a start-up. higher than $5 million, based upon a per “Many larger organizations with legacy risk reinsurance strategy. … But that’s our are not in the same position to be able to core appetite.” do that,” he said. For these types of clients, price is “We also believe that our agent benefit important but they are also willing pay for package overall — commission, incentive additional coverage and “invest in risk mitcompensation agreements, some additional igation on their properties,” Pedersen said. marketing, and philanthropic aspects to With a focus on protecting their assets, our benefit package because of our reduced affluent clients “want a carrier that provides cost burden on the information technology coverages such as unlimited replacement side — will allow us to offer something costs, unlimited loss of use, waiving deductthat will excite agents, relative to, one, ibles on losses over $50,000, bundling ID ‘We value you.’ Two, we know we’re the theft and travel-assist, providing an effective new kid on the block, and we’re willing rate if you’ve got jewelry in a vault versus to make an investment in you so that you not having jewelry in a vault,” Pedersen said. make an investment in trusting us with “It’s really demonstrating to them that, as W6 | INSURANCE JOURNAL-WEST November 4, 2013

your clients,” Pedersen said. Crestbrook also has the backing of Nationwide and its ratings, so “we don’t have the challenges that most new companies would be dealing with on the financial stability or security front,” he said. Select Agency Force The company doesn’t plan on a large number of agency appointments and will instead rely on developing relationships with agents and brokers who have experience in the target market. Potential partners will be agents that have access “to the affluent market, have clearly made investments with their agency in the affluent market,” Pedersen said. “Quite frankly, you’ll find that … they have appointments with some of our key competitors in that market. Competition is good, and we’d like the opportunity to come in and potentially offer them a simplification or consolidation strategy. Or, if not, and they’re willing to take on another carrier, we collectively believe that both they and us can meet our production and premium standards.” By the end of 2015, “when we’re up and running in 31 states, we might have approximately 500 appointments,” Pedersen said. At this point Pedersen is eager for Crestbrook to write its first customer. In the long-term, however, a 3 percent to 5 percent share of a $60 billion market would “certainly define success,” he said. “In my mind, in a five-year period say, by the end of 2018 I’d like to see us somewhere between a half a point and a point market share,” Pedersen said. “Those are the aspirational goals that we’ve set for ourselves. Right now, I’m simply excited about, hopefully, somewhere before the month of October ends, writing our first customer.” www.insurancejournal.com

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News & Markets Two Legacy Network Executives in Idaho Sentenced

he former founder and chairman of the board of The Legacy Network, an insurance brokerage agency in Rexburg, Idaho, and his son were sentenced in October in United States District Court in Pocatello. The sentencing was announced by U.S. Attorney Wendy J. Olson. Adrian Rand Robison, 67, of Rigby, Idaho, was sentenced to four months in prison and ordered to pay restitution of $1.3 million for mail fraud. Chief U.S. District Judge B. Lynn Winmill also sentenced Robison to 18 months of supervised released with eight months of home detention, and fined him $20,000. Adrian Russell Robison, 38, of Idaho Falls, Idaho, the former CEO of the company, was also sentenced to four months in prison for making and subscribing false tax returns. He was also sentenced to 12 months of supervised release, the first eight months on home detention, fined $10,000, and ordered to pay restitution to the IRS of $270,631. The defendants were charged in May, and pleaded guilty in June. According to the plea agreement, Rand

Robison, a licensed insurance agent, owned a majority interest in The Legacy Network, a company that brokered the sale of life insurance policies between the carriers that offered the policies and the independent insurance agents that marketed the policies to clients. In return for its services, The Legacy Network received a commission paid by the carriers for each policy sold. According to the plea agreement, Rand Robison admitted that he encouraged some high net-worth clients to apply for high face-value life insurance policies with the promise of rebating all or part of the first-year premiums back to the customer. Robison further admitted that he misrepresented in agent reports and other contractual documents that he would not rebate, or otherwise finance, the premium payments of his clients. The Legacy Network received commission payments from the insurance carriers of roughly 105 to 138 percent of the first-year premium, and Robison admitted that with

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those funds he rebated some of the premiums to some high net-worth clients and kept the remainder. From 2006 to 2009, the Legacy Network received roughly $1.3 million in commissions from life insurance carriers on the policies of a group of their high net-worth clients; they rebated approximately $923,497 to the clients and kept approximately $448,137, according to the charges. According to the plea agreement, Russell Robison was aware that agents of The Legacy Network rebated all or part of the premium payments to some of their high net-worth clients, and had signed rebate checks to the clients. Neither Robison nor The Legacy Network issued IRS Forms 1099-MISC recording the rebates as income to the high net-worth clients. The company’s internal books and records recorded the rebates as deductible business expenses. After some clients’ policies lapsed due to non-payment of premiums — which occurred typically in the second year of the policies — some policies were replaced with policies issued by different insurance carriers. According to the plea agreement, Robison admitted that for tax years 2007, 2008 and 2009, he filed a partnership income tax return for The Legacy Network, knowing that the returns contained false information by improperly overstating expenses for rebates paid. The cases were the result of a joint investigation by IRS, the FBI, and Idaho Department of Insurance. www.insurancejournal.com

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News & Markets Nevada DMV Approves Final Rules for Driver Cards

eople living in Nevada without legal residency can begin logging on to a state website for information about a driver authorization card program set to begin Jan. 2. Department of Motor Vehicles officials say a state Legislative Commission has approved final rules for documentation to prove identity and residency. Cards will cost $22.25, plus $25 for a driver’s test. They’ll have to be renewed every year.

State officials expect tens of thousands of people who don’t have legal U.S. residency to apply under the program approved this year by state lawmakers and signed by Republican Gov. Brian Sandoval. It makes Nevada one of several states, including neighboring Utah and California, with programs or plans to let people obtain similar cards. Information about the driver authorization cards is at DMNV.gov.

NTSB: 2 Dead BART Workers in California Charge of Own Safety

ational Transportation Safety Board investigators say under Bay Area Rapid Transit rules, the two track workers who were killed in a recent accident were responsible for their own safety. James Southworth, the NTSB’s lead investigator, said at a briefing that the workers had requested approval from the control center to go onto the tracks.

Under BART’s rules, one of the two workers was to be a lookout positioned outside the right of way. Southworth says the train’s wheels showed signs of flattening from when the operator used the emergency brake in an attempt to avoid the fatal accident. Copyright 2013 Associated Press.

Oregon Jurors Order Hospital to Pay $2.4 Million

urors in October ordered a Columbia Gorge hospital to pay $2.4 million in compensatory damages to three victims of an anesthesiologist now serving a 23-year sentence for sex abuse and rape. One woman was awarded $700,000, a second was awarded $800,000 and jurors said a third plaintiff should get $900,000. The women had sought $6 million each. The lawsuit alleged that Mid-Columbia Medical Center and two executives didn’t take action that could have prevented the sex abuse. Dr. Frederick Field was sentenced in 2012 for molesting sedated women. He had pleaded guilty to 11 counts of sex abuse and one count of rape. The abuse occurred from 2007 to 2011. The suit alleged the hospital failed to act on allegations in 2008 and that allowed Field to prey on victims for three more years. A dozen women reported abuse. Ten have sought compensation. The hospital reports two have agreed to settlements. Trials in the cases of five more victims are planned later. Lawyers for the three plaintiffs said the hospital had enough information to act against Field before he was arrested, including additional complaints from hospital staff members. The hospital’s lawyers said the hospital couldn’t act earlier because one victim who phoned in a complaint in 2008 didn’t respond to requests for more information, and a second woman recanted. When another victim came forward later in 2011, law enforcement authorities asked the hospital not to tell Field he was under investigation. A lawyer for the women said the complaints of patients and harassment of staff would have been enough for the hospital to keep out a sexual predator.

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News & Markets IICF, Cookie Monster Promote Early Childhood Literacy By Don Jergler

t’s hard to conceive of taking a step further away from the topic of insurance than having a big, hairy blue monster drive home your point. But that’s just what the Cookie Monster did when he walked into the Magnolia Place Family Center in Los Angeles in October, drawing exuberance from most, but inspiring terror in those who didn’t know what to make of him. The Insurance Industry Charitable Foundation and Sesame Workshop, the nonprofit organization behind Sesame Street, were on hand with the Cookie Monster to announce the launch of Every Day is a Reading and Writing Day. With the goal of encouraging early childhood reading, IICF and Sesame Workshop will be promoting Every Day is a Reading and Writing Day at events nationwide and will be reaching out to families and volunteers through local and national programming.

The Cookie Monster was at an IICF and Sesame Workshop sponsored event to announce an early childhood literacy program. W12 | INSURANCE JOURNAL-WEST November 4, 2013

The event in Los Angeles on was at the nonprofit Children’s Bureau’s Magnolia Place Family Center, located in the heart of a community in need of a little help. The center opened its doors in 2008 in the 90007 ZIP code, where more than 66 percent of residents have an income below the poverty level, according to the most recent Census data. The event began as the center opened to a flood of dozens of children and their parents, who The Insurance Industry Charitable Foundation and Sesame quickly rushed into an activity Workshop have partnered on an early childhood literacy program. center and took up residence in computers and coloring at the event, IICF front of coloring books, as well as several CEO Bill Ross talked about the importance computers displaying screens with online of learning. Sesame Street characters encouraging kids “The path for success in America has to spell, or plant gardens, or color. always been associated with learning,” Ross The initiative from IICF and Sesame said. Street is in response to the wide gap in lit Ross talked about the battle against illiteracy rates that prevails between children eracy and the partnership, then asked and of high and low-income families, according answered the one big question that loomed to the groups. large before it could be posed by any skep According to IICF, a nonprofit funded tics in the room: What’s the by the insurance ‘The path for success in tie-in between the insurance industry and America has always been industry and the Cookie focused on community developassociated with learning.’ Monster? “Why is the insurance ment across the industry here?” Ross stated. “Because we country, children from low-income families believe in our children.” have a decided disadvantage when it comes Alex Morales, president and CEO of to learning to read. Prior to starting school Children’s Bureau, talked about the 100children from high-income families benyear history of the organization and then efit from 400 hours more literacy-related thanked the industry for its help. activities than children from low-income “I want to be able to say thank you to this families, and by age 4, a high-income child industry — that is the insurance industry,” is exposed to 35 million more words than a he said. low-income child, research shows. Both men happily battled to be heard As part of the initiative the groups above the noise for those who came with unveiled a new bilingual, digital resource the purpose of hearing what they had to that includes tips, games, and activities to say. And a few parents and maybe a child or engage children and improve their reading two raised their heads to look at the speakand writing capabilities. ers, but the keynote address was delivered The free resource is available at in silence by a large, blue hairy character SesameStreet.org/literacy. walking around the room. Above a din of noisy children playing on www.insurancejournal.com

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Business Moves Aspen Re Bermuda-based Aspen Reinsurance, the reinsurance segment of Aspen Insurance Holdings Ltd., has formed Rock Re, a new dedicated brokered property facultative unit within its U.S. operation. Rock Re will build on Aspen Re’s existing direct property facultative offering in the United States and will focus on the North American brokered property facultative marketplace. The new unit will be led by Russ Wagner, senior vice president and manager of Rock Re, with Jim Connors joining the team from Montpelier Re as vice president, assistant manager and Andrew Lombardo as assistant vice president. The team will be located in Rocky Hill, Conn., and report to Mike Sowa, managing director, North America for Aspen Re. Integro, Doodson Broking Group New York-based insurance brokerage and risk management firm Integro has acquired Doodson Broking Group, a U.K.-based entertainment and sports specialist that also provides full-service commercial and private client broking services. Doodson Broking Group was established in 1964 in Manchester. It has additional U.K. offices in London and Halifax, as well as a U.S. office in Austin, Texas. Integro said the Doodson deal would help the firm’s annualized revenue to surpass $150 million. Integro said the current Doodson management team, led by Neil Clayton with the support of James Dodds and David Leech in the United Kingdom, and Roger Sandau in the United States, will remain in place. Imperial Management Corp., National Automotive Insurance Imperial Management Corp. (IMC) agreed to purchase National Automotive Insurance Co. (NAIC) headquartered in Metairie, La. The transaction is pending approval of the Louisiana Department of Insurance and is expected to close the first week of November 2013. NAIC provides non-standard personal auto insurance to consumers through indewww.insurancejournal.com

pendent agents across Louisiana, with a heavy concentration of policyholders in New Orleans and Baton Rouge. The company currently serves more than 12,000 policyholders. Imperial, located in St. Landry Parish, has a long history of serving policyholders in Louisiana through its subsidiary Imperial Fire & Casualty Insurance Co. Stephen C. Schrempp will continue in his position as president of NAIC. Imperial’s CEO Marc Carter will serve as CEO, and Duane Heady will be chief operating officer. Based in Louisiana, Imperial is 100 percent owned by Southport Insurance Holdings, a New York City-based private equity and asset management firm. Imperial Management’s largest subsidiary, Imperial Fire and Casualty, is rated B+ by A.M. Best and provides personal auto, personal property and flood policies. The company actively writes policies in Arkansas, Florida, Louisiana, Oklahoma and Texas, and is licensed in Alabama, Georgia, Indiana, Kansas, Kentucky, Mississippi, Missouri, Nevada, South Carolina and West Virginia. Imperial Management Corp. is also parent to wholly owned subsidiaries ABC Insurance Agencies and RAC Insurance Partners. RHP Management, Republic Group Dallas-based Republic Group announced that RHP Management LLC will acquire all of the outstanding shares of common stock of Republic subsidiaries Republic Home Protectors Inc. (RHP) and Southern Vanguard Insurance Co. (SVIC). Under the terms of the agreement, the sale would include the business produced through RHP and written by SVIC, but would exclude all other business written by SVIC through reinsurance arrangements entered into at closing that will remain in effect until all other business is renewed into affiliates of Republic. The transaction has been approved by

the boards of Republic and the members of RHP Management and Omena Partners LLC and is expected to close in Q1 2014. Completion of the transaction is subject to certain conditions, including financing and customary regulatory approvals. Upon completion, the RHP business will continue to be managed by Terry Cotter, president of RHP, under the new name of RHP Managers LLC. The company’s headquarters will remain in Houston. Joe Mattingly, Republic’s president and CEO, stated that the proposed sale “allows management to focus on our core regional company operations, reduce exposure concentrations and free up capital that strengthens our balance sheet.” State Farm State Farm Insurance Co. plans to build a national operations center in the Atlanta suburb of Dunwoody. The Atlanta Journal-Constitution reported that the facility will be built on a nearly four-acre site at Hammond Drive and Perimeter Center Parkway. City officials said the site will serve as the heart of Bloomington, Ill.-based State Farm’s Perimeter corporate campus. The announcement did not say how many jobs would be created, when construction would begin or other details. November 4, 2013 INSURANCE JOURNAL-NATIONAL | 11

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News & Markets P/C Insurers’ CFOs Point to Hardening Markets: Towers Watson

hief financial officers with leading North American property/casualty insurers believe both property and casualty insurance markets are in the midst of hardening, according to a new North American Property & Casualty CFO survey by global professional services company Towers Watson. Twenty-three CFOs from P/C insurance companies participated in Towers Watson’s fifth North American Property & Casualty Insurance CFO survey. Respondents represent a variety of business types and ownership structures, and local and regional carriers, along with national carriers and multinationals. They represent a cross section of companies of all sizes and variety of distribution systems. In the survey, three-quarters (75 percent) of CFOs characterized the property market as hardening, hard or at the top of the cycle, a nearly 30-percentage-point increase compared to results from this survey two years ago. Almost two-thirds (65 percent) indicated they see the casualty market as hardening, hard or at the top of the cycle, a 52-percentage-point increase compared to the previous survey. Only 15 percent said the property market is softening, while 10 percent said the casualty market is softening. A narrow majority of CFOs who consider both the property and casualty markets to be hardening also believe these markets will remain that way for the next one to two years (51 percent for property, 52 percent for casualty). Those who see hardening in the casualty market think it will last longer than in the property market. “Insurers’ perceptions of the market have changed considerably, from a glimmer of hope for a turn in the insurance cycle, to the solidifying of firmer rates we’re experiencing today,” said Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business. “The impact of the softer market the past 12 | INSURANCE JOURNAL-NATIONAL November 4, 2013

several years, combined with low interest rates, has hurt insurers’ profitability,” Fell said. “The state of today’s market should give insurers some breathing room and an opportunity to increase their bottom-line.” Almost all CFOs surveyed (98 percent) believe reserve redundancies still exist, and 81 percent said they expect these redundancies to continue for at least a year. soft property market listed capital-related Less than half (42 percent) think those drivers, such as current capital base, and redundancies will last one to two years, capital entering and exiting the industry, and one-quarter (25 percent) indicated they as triggers. CFOs with both softening and expect them to last two to three years. hardening casualty perspectives cited finan “We believe the current hard market is cial performance and rate levels as triggers. very different from the hard markets of the past. Rather than being a reaction to poor CFOs List Their Top Challenges pricing and severely Eighty-one percent listed interest rates as deficient reserves their biggest economic and market environ— which cut deep ment concern, with natural catastrophes into the industry’s (44 percent) and inadequate rate levels (34 financials and take years to reverse — the percent) next. current market is characterized by pricing Almost half (46 percent) indicated they reflective of low investment yields and a are responding to today’s economic and tendency toward rational use of capital, and market environment challenges by realignexists in spite of the reserve redundancies ing their investment portfolio, while 37 suggested by the results of our survey,” Fell percent said they are expanding into new said. products or markets. “Better investment yields coupled with Most participants (93 percent) said investthe perception of relament returns are the tively healthy financials ‘Insurers’ perceptions of leading external chalmay eventually lead to to achieving the market have changed lenge eroding pricing discipline. growth, profit and Further, the recent influx considerably.’ risk objectives, with of alternative capital into economic growth (51 the catastrophe reinsurance market could percent) and competitive environment (49 place downward pressure on reinsurance percent) following. Forty-five percent indirates,” he added. cated they are not well-prepared to respond Respondents’ views on key triggers shapto these challenges. CFOs named human ing today’s market varied, although many capital (36 percent), data availability (31 perconsidered financial performance essencent), regulatory restrictions (25 percent) tial. CFOs who see a hardening property and technology limitations (25 percent) as market cited pricing, profitability and rate the leading internal challenges they’re faclevels as principal drivers. Those who see a ing. www.insurancejournal.com

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News & Markets Aon Benfield: U.S. Homeowners Market Offers Opportunities

.S. homeowners insurance is showing significant growth opportunities, says a new report from Aon Benfield, a reinsurance intermediary and capital advisor of Aon plc. The report, titled “Homeowners ROE Outlook: 2013 Update,” reviews the industry aggregate state level statutory financial filing information along with rate filings and supporting actuarial information for the 20 top homeowners insurance groups by state. It concludes that insurers’ prospective aftertax return-on-equity (ROE) for homeowners insurance is 4.6 percent on a countrywide average. The countrywide ROE outlook is essentially flat relative to last year’s 4.7 percent estimate. But Aon Benfield says that at the state level, positive rate momentum is improving the outlook for many states. Excluding Florida, the industry’s prospective ROE is 8 percent, with 36 states having prospective ROE outlooks better than this average, and 28 states with prospective ROE outlooks 12 percent or greater. The report says positive rate momentum has been evident — as approved rate changes in homeowners lines have averaged a 7.7 percent increase across the United States in the past 18 months. The report also points to advancements in ratemaking methodology associated with capturing the cost of catastrophe risk. Recovering the cost of capital required to support retained catastrophe risk has seen widespread acceptance by state regulators and by-peril rating is becoming more widespread, according to the report. Gulf states achieved some of the highest average rate increases, particularly Texas, where rates increased 12.6 percent, while the hurricane-exposed state of Florida average rate increase was 8.2 percent. Although rate adequacy still remains elusive in the gulf and Southeastern states, positive rate and underwriting actions have put the outlook of rate adequacy within reach for states outside these regions, according to Aon Benfield. 14 | INSURANCE JOURNAL-NATIONAL November 4, 2013

Furthermore, the study says that in an industry desperate for growth as auto premium volumes have stagnated, homeowners continues to be a growth opportunity for personal lines carriers. The study shows strong growth in the homeowners line between 2009 and 2012, with direct written premiums increasing 15 percent countrywide. Only Nevada saw a decline in premium volumes, as written premiums decreased by 1.5 percent during the period. At the same time, personal auto direct written premium growth was only 6.5 percent. The study says to maximize the growth opportunities available from the homeowners line of business, more granular pricing of catastrophe costs beyond state level indications is a necessity. It also says accurate segmentation of reinsurance and capital costs at the territory

level and refining territory definitions more granularly to better match rates to cost variations is essential to achieving overall rate adequacy without jeopardizing an insurer’s ability to grow in areas that will diversify its catastrophe risk. “Overall, the homeowners line of business is still not producing adequate returns for the industry, but given the recent rate and underwriting actions, for the first time we are seeing an improving outlook for many states, especially in non-coastal regions,” says Parr Schoolman, Aon Benfield’s global risk and capital strategy team leader. “Although more can still be done in terms of pricing segmentation, capturing the cost of catastrophe risk in rate filings is becoming a more widespread practice within the industry,” Schoolman says. Industry premium change from 2009 to 2012 shows strong growth for the homeowners line. The Aon report says that when compared to auto growth over the same period, the picture is clear: growth opportunities in personal lines start with getting home right. Flat home values in 20092012 indicate much of the premium growth is from rate activity. Chart: Aon Benfield.

The map shows average rate changes approved for top 20 homeowners insurance groups in each state between Jan. 1, 2012 and July 1, 2013. Gulf states, where rate is most needed, show approved rate increases above the countrywide average of 7.7 percent. More activity is still needed in these states to achieve ROE targets. Chart: Aon Benfield.

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CLOSER LOOK

Habitational & Dwellings E&O Insights: What Could Go Wrong When Insuring Habitational?

nsuring habitational risks has generated more than its fair share of errors and omissions (E&O) claims. While there are a host of issues, consider these specific ones: valuation, ordinance or law coverage and flood.

Valuation A significant number of E&O claims dealing with property involve the issue of valuation. The economy has contributed By Curtis M. Pearsall to this issue as clients may be able to buy property (at market value) for less than the replacement cost amount. As a result, education dealing with the concepts of market value and replacement cost is extremely important. On your property proposals containing co-insurance, look to include a claim example to illustrate the significance of this clause, how it works and the importance of insurance to value. Also look to include definitions of some key terms, such as “actual cash value” or

“replacement cost,” based on the specifics of your proposal. The valuation amount is potentially a sticky issue. Technically in most, if not all, states, the agent has no duty to determine this number. Thus, if the agent comes up with an incorrect number, he or she is likely to be blamed if a loss occurs. If the agent performs the calculation, he or she should ensure the necessary detail — square footage, construction type, etc. — is secured and correct. Most of the carrier approximator tools can be a great starting point, and proper use should result in a quality output. Unfortunately, these calculations can often be inaccurate. In essence, the quality of the output is directly attributable to the quality of the input. Take the time to ensure you have full and accurate information. If possible, visit the property personally or have someone knowledgeable in property insurance visit the location to ask any necessary questions. There are typically various questions on most of the approximators addressing issues such as quality of construction.

How you answer these will directly impact the final value, so be sure to have the correct answers. There have been many E&O claims where the calculation did not even have the correct square footage or construction type. The agency staff member simply took the customer’s word for it. If the customer provides the agency with the information, include a disclaimer on the proposal noting that the limit calculated was based on information provided, and the agency cannot attest that this limit will be sufficient at the time of a loss. It is also highly recommended that agents protect themselves by informing all customers in writing whenever the agent comes up with the number; the limits are an approximation using the available information. A licensed insurance appraiser would need to render an opinion to ensure a risk is properly insured. Ordinance or Law Coverage While most insurance consumers probably have a good understanding of how their personal or commercial property insurance addresses damage done by a covered peril, to what degree do those same consumers understand how their insurance addresses the undamaged portion of the risk if it needs to be torn down or modified due to a change in the municipal codes? This is where ordinance or law coverage comes into play. How many of your customers have this coverage? If a customer has it, is the limit, usually expressed as a percentage, going to be sufficient? Ordinance or law coverage is designed to pay for: • Loss of the value of the undamaged portion of a building when it must be torn down to meet code requirements. • Cost of the demolition and removal of the debris of undamaged portions of the structure that must be torn down or modified. (Debris removal for the damaged property is covered. Debris continued on page 18

16 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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CLOSER LOOK

Habitational & Dwellings continued from page 16 removal for the undamaged property is typically excluded.) • Increased cost of reconstruction, that is, the added cost to repair or rebuild in accordance with the current code. This may include issues such as adding more electrical outlets, installing a sprinkler system, redesigning to meet earthquake/hurricane resistant standards, etc. The dollars associated with any of these items could be costly — but how many consumers are familiar with the various local and state building and zoning laws? To avoid creating a duty, it is best for an agent to explain the coverage and suggest that the client contact the zoning board if the client has questions. Sample questions a client should ask include: • Do any existing codes prohibit rebuilding with present construction, occupancy, or size of location, or require demoli-

tion if more than a given percentage of the building is damaged? If so, what is that percentage? • Since the building was constructed, have there been any changes to any of the codes that could adversely affect the property? If so, what have those changes been and what would be the effect? Normally, the focus will be on homes/ buildings built many years ago. Yet agents and customers must realize that there could even be code changes for a home built 20 years ago or less. Flood Super Storm Sandy seemed to highlight a host of issues pertaining to flood insurance. These issues include: • Lack of knowledge of the 30-day waiting period. • Lack of knowledge on exactly what coverage was provided by the flood policy. While many consumers had flood cov-

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erage, there appeared to be an overall lack of understanding on exactly what coverage was provided. Some consumers did not understand that while they had a flood policy, that policy only covered the building, not contents. Many consumers seemed to only insure their property to the extent of the mortgage. When the storm occurred, they then realized that the limit was not adequate to cover the full amount of the property. Consider the following flood-loss example (unassociated with Sandy). The agent wrote coverage for a condominium association on an apartment building being converted to condos. The FEMA policy was written on a standard building form, with a $250,000 limit. After that, the apartments were being converted to condos, and some of the condos remained as the property of the client. The $250,000 limit remained on the policy. The policy was never converted to a FEMA condo policy. A flood loss occurred and initially the servicing carrier denied coverage because the flood policy was written on the wrong form. The carrier then reformed the policy to a condo policy. Unfortunately, the limit remained at $250,000. Following the carrier’s inspection of the loss, it determined the value of the condo property, including common areas and condos owned by the association, to be $2.2 million. The FEMA policy applies 80 percent coinsurance if the maximum coverage available — $500,000 — is not purchased. The loss of $290,000 was reduced to $26,000 by the carrier due to coinsurance, leaving an unpaid loss of around $260,000. The agent should have had the full available limit of $500,000 in coverage for the building and condos. The claim settled for $200,000. Knowledge of the exposure and applicable coverages is the best way to minimize the potential of your insurance agency facing some type of errors and omissions litigation. Pearsall is president of Pearsall Associates Inc., a risk management consulting firm specializing in helping insurance agents to protect themselves. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. Email: curtis@pearsallassociates.com. Blog: www. agentseotips.com.

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Habitational & Dwellings 10 Things to Know About Habitational and Dwelling Risks Sales of new single-family houses reached a seasonally adjusted annual rate of 421,000 in August, 7.9 percent above the revised July 2013 estimate of 390,000. (U.S. Census Bureau)

There were roughly 24,400 completions of multifamily buildings with five-plus units in the first quarter of 2013, which was 53 percent above the first quarter of 2012. The data includes only privately financed, nonsubsidized, unfurnished, rental housing. (Survey of Market Absorption of Apartments)

Property damage is by far the leading cause of loss for homeowners insurance loss, ranking in at 94.6 percent from 2006 through 2010. (Insurance Information Institute)

The number of multifamily units completed has been on a downward decline since 2008, when roughly 301,000 multifamily units were completed. There were 166,000 units completed in 2012, the latest figures available. (U.S. Census)

Privately owned housing starts in August were at a seasonally adjusted annual rate of 891,000, putting sales 0.9 percent above the revised July 2013 estimate of 883,000. (U.S. Census Bureau)

20 | INSURANCE JOURNAL-NATIONAL November 4, 2013

The median existing-home price for all housing types in the United States was $212,100 in August, up 14.7 percent from August 2012. (National Association of Realtors)

Homeowners insurance accounts for 14.4 percent of all property/casualty insurance premiums and 28 percent of personal P/C lines insurance. (Insurance Information Institute)

The five most expensive commercial real estate markets in the United States in terms of operating expenses, which include insurance, are: New York, N.Y. ($11.80 per square foot); San Francisco, Calif. ($9.66); Washington, D.C. ($9.51); Santa Monica, Calif. ($8.54); San Jose, Calif. ($8.47). (Building Owners and Managers Association International) The five least expensive commercial real estate markets in the United States in terms of operating expenses, which include insurance, are: Salt Lake City, Utah ($4.87 per square foot); Atlanta, Ga. ($5.57); Phoenix, Ariz. ($5.60); Cincinnati, Oho ($5.69); Nashville, Tenn. ($5.69). (Building Owners and Managers Association International) Building Owners and Managers Association International Multifamily permits taken out were down 15.7 percent in 2013 to an annual level of 291,000. (National Association of Home Builders)

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SPECIAL REPORT

Professional Liability How Health Law Could Affect Medical Professional Liability

he U.S. medical professional liability (MPL) market has been profitable in recent years, but challenges await MPL insurers because an influx of newly insured patients, coupled with healthcare delivery system changes, could expand the risks MPL insurers face. The federal government estimates 32 million Americans who have no health insurance will become covered under the Patient Protection and Affordable Care Act (ACA), a measure which will be primarily implemented in 2014. MPL insurance policies financially protect doctors against lawsuits alleging negligence or errors and omissions on the doctors’ part that result in harm to their patients. “Health care coverage offers no guarantee that someone will have access to healthcare,” says Kevin Bingham, an associate of the Casualty Actuarial Society (CAS) and a principal at Deloitte in Hartford. Bingham says that while 78 percent of all doctors had either a private practice or operated with one other doctor in 1978, the number of doctors who work under that business model dropped to 30 percent as of 2013. Many of these same doctors are now working directly for hospitals, so the need for hospitals to provide personalized care has grown in importance. “A lot of medical malpractice claims go away if there’s good customer service,” Bingham says. “There may be fewer doctors to care for a greater number of patients,” according to Brian Ingle, a CAS fellow and executive vice president with Willis Re. Inc. in New York City. Ingle agrees with Bingham’s assessment of the changing health care delivery landscape that sees reduced health insurance reimbursement payments causing some doctors to close their private practices and either retire or work directly for hospitals. MPL insurers could in turn lose premium revenue because half of all hospitals self-insure when it comes to MPL, according to Ingle, meaning doctors who previously purwww.insurancejournal.com

chased MPL policies will no longer need to chief underwriting officer, at the Salt Lake do so. City, Utah-based MGIS Cos. Doctors need The MPL experts who convened at the to make sure they’ve made progress notes CAS annual reinsurance seminar in June after each patient visit, and record their also point to Massachusetts’ health care patients’ lab results and vitals properly so law, similar in some ways to the ACA, this information can be used in the doctor’s when arguing that a more insured populace defense in the event of a lawsuit. would not necessariProtecting Medical professional liability these electronic ly reduce the general insurers could lose premium medical records from public’s reliance on hospital emergency revenue because half of all public disclosure is room visits. also a concern for hospitals self-insure. actuaries who price Technology Factors MPL policies and cyber-related exposures. The panel on Medical Professional Strict privacy laws govern the release of Liability: Effects of the New Health Care this information, Kirsten-Brauer says, and Law, which was moderated by Athula a single lost laptop could cost an insurer Alwis, associate vice president and actuary, upwards of $60,000 if it stored sensitive Freedom Specialty, also discussed how docpatient information. tors can use technological advances to docu MPL insurer exposures could also ment their treatment of individual patients. increase as nurse practitioners and physi “Data and IT [information technology] is cian assistants are asked to handle a greater the new frontier in healthcare,” says Elke workload than they have previously, the Kirsten-Brauer, executive vice president, panelists agree.

November 4, 2013 INSURANCE JOURNAL-NATIONAL | 23

SPECIAL REPORT

Professional Liability

By Andrea Wells

pecializing is one way to get ahead in today’s insurance world. But becoming an expert comes with its own share of risks. Phrases such as “expert” or “specialist” have the potential to raise the level of legal liability for agencies, according to Curtis Pearsall, president of Pearsall Associates Inc., a risk management consulting firm and a special consultant to the Utica National Agents Errors and Omissions (E&O) program. “Typically, an agent is an order taker. They provide or are asked to provide the coverage that the customer is looking for. If they are an expert or a specialist, it then potentially takes their level of legal liability up to the standard of an advisor,” Pearsall said. For example, if an agency says that it is a specialist in writing restaurants, and all of a sudden the restaurant does not have any liquor liability coverage, then the agent could potentially be held to a higher

24 | INSURANCE JOURNAL-NATIONAL November 4, 2013

standard because the agency indicated that it specializes in that class of business and really knows the exposures of that class of business, Pearsall said. “The words that you use in promoting your agency, whether it’s on the website, whether it’s in your proposals, wherever, if you’re using the word ‘expert’ or ‘specialist,’ they have the potential to raise the standard of legal liability,” Pearsall said. While specialists have the expertise needed to reduce E&O exposures, specialization also brings the potential for higher claims settlements should an E&O situation arise, according to Sabrena Sally, head of Swiss Re Corporate Solution’s U.S. Agents E&O program. From an E&O perspective, there are two schools of thought. “One is that, if you’re a specialist, you certainly have more expertise and knowledge to bring to the table than someone, for example, who writes only a few aircrafts [specialty risk] per year. Someone that specializes in aviation has

the relationships with the carrier. They have expert producers and CSRs [customer service representatives], and are much less likely to have a claim.” At the same time, some specializations — not all, but some — bring with them the potential for catastrophic claim settlements, Sally said. Gary Mann, Being an expert director, profesor specialist sional liability, for Fireman's potentially raises Fund Insurance an agent’s level Co., agrees that specialization can of legal liability. be dangerous to agency E&O, with the type of specialty also being a consideration. “It can be a double-edged sword,” Mann said. “What matters most is the type of specialization. With a specialist agency, the agency is better managed, has a better grasp of coverages and the market,” he said. However, in a specialty industry the www.insurancejournal.com

“Understanding Your Standard insureds tend to be more 0.6% 0.2% of Care” to address the issue. sophisticated as well, No. 1 Reason Agencies (http://rms.iiaba.net/Content/ which raises the bar for 13.0% Publications-Media/Webinars/ agents. Carrry E&O Coverage Webinars.aspx) Also, agencies that $1,000 Both Swiss Re Corporate specialize in one industry Protect the assets of the agency Solutions and Fireman’s Fund can have an aggregation Required by my carriers 86.3% serve as underwriting carriers for $1,001 to of risks from an E&O Access to risk management information the Big “I’s” Professional Liability standpoint, Mann says. From the business Program. “So a single loss can $2,501 to “We spend a lot of time disaffect to a much greater cussing an agent’s standard of degree.” care, which varies by the state in$5,001 to While being an expert Agency E&O Premium which they’re licensed and selling increases an agency’s insurance, and statements made E&O risk, misrepresentChange in 2012 as to one’s expertise or special- $10,001 to ing expertise is even risk34.5% Compared to 2011 ization can serve to increase the ier. 52.3% standard of care beyond their “There is danger in Increased $15,001 to legal duty,” Sally said. According dabbling,” says David 13.2% Decreased to the Swiss Re webinar, the Hulcher, assistant vice Stayed same trend among states is toward $25,001 to president of agency a higher standard of care that professional liability includes an obligation to advise risk management for the More than insureds about additional coveragIndependent Agents & Agency E&O Premium es and limits There are very few Brokers of America (Big order taker states, so playing to “I”). “Agents always need 24.2% Change in the Past the higher standard better serves to know themselves 62.6% Three Years both agents and clients. and make sure they 13.2% understand their area of Increased Buyer Beware knowledge and experiDecreased Buying agency E&O coverage ence.” Stayed the same can also present dangers, espe Hulcher, who helps cially when agency owners don’t agencies in the Big “I’s” understand the difference in covProfessional Liability erage provided by various agency Program avoid claims by Prediction on E&O Premium mium m E&O markets. offering tools and risk “There are substantial dif-Region management tips, advises Change at Next Renewall ferences in the coverages being agencies to proceed with Midwest 55.2% 40.6% offered by E&O providers as East caution in a new business Increase it’s always been,” said Ron Von opportunity if they're Decrease South Centra Haden, executive vice presinot comfortable and lack Remain the same 4.3% Southeast dent and CEO of PIA National, experience or product which offers its members an West knowledge in that indusagency E&O product called PIA try. Pro underwritten by Argonaut “Agents need to be Midwest Insurance Co. Standard of care is an important topic aware that if they don’t have that expertise, Agency E&O “As with any type of insurance if you buy for agents, Hulcher says. The standard of consider walking away from theIncreased account a stripped down policy you would expect care is the degree of prudence and cauor consider working with another agent Limit in Past Three tion required when rendering services 24.4% to pay less for it and that’s no different in or a wholesaler that has that expertise … the E&O market,” Von Haden said. “I’veLower price to customers. Swiss Re and the Big “I” because there is danger in dabbling if you Years seen policies being offered for considerably Professional Liability Program recently don’t understand either the process or the Nonrenewed 73.9% offered a free webinar on the subject, titled coverage that you’re selling,” HulcherNo says. continued on page 26

Annu

Comparis By Region

Why Chan

Yes

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November 4, 2013

Nonrenewed Carrier withd INSURANCE JOURNAL-NATIONAL | 25 Needed broa

Change in the Past Three Years SPECIAL REPORT Increased

24.2%

10%

62.6%

13.2%

Professional Liability

Decreased Stayed the same

Prediction on E&O Premium mium m Change at Next Renewall

Annual Cost of Agency E&O Coverage 55.2% 40.6%

Increase $1,000 or less Decrease Remain the same

4.3% 4.3%

$1,001 to $2,500

15.7%

$2,501 to $5,000

23.5%

$5,001 to $10,000 Increased Agency E&O Limit$10,001 in Past Three to $15,000 Years

16.8%

$15,001 to $25,000

9.2% 73.9%

9.1%

More than $50,000

11.1%

10%

association’s professional liability program.Increased Region Decreased According to Hulcher, those agencies

Midwest 15.0% 54.0% that don’t buy coverage through the Big “I” East 10.0% Professional Liability Program are likely 57.0% South Central looking for a better17.0% price. “The reality is, 56.0% you could potentially go out and get a bet-56.0% Southeast 9.0% ter price, but this program West 15.0% is not just about 41.0%

price,” Hulcher said. “But at the end of the day the Big ‘I’ Professional Liability Program is the largest program in the country. We understand where the losses are coming from, and we think we can give a good long-term, stable price that's going to offer you consistency over time.” Lower price Fireman’s Fund has been an underwriting Nonrenewed due to claims insurer for the Big “I” program since 2006. Nonrenewed due to in underwriting cr According to Mann, anchange agency might fall Carrier fromprogram agencybecause E&O market outsidewithdrew of an association of its operations and size, or even its speNeeded broader coverage cialization. Other reasons Some agencies may choose agency E&O coverage through a non-admitted market instead of an admitted market. Mark Harris, president and CEO of Quadrant Insurance Managers and Epoch Underwriting Management, says that the size of the agency matters when searching for the right agency E&O market. Quadrant offers retail agent E&O insurance Attended aninsurance E&O class nationwide through multiple sur- designat Agency staff has achievedA-rated additional plus lines markets. More actively utilized an exposure analysis che “When agencies get bigger and more Hired a third-party to perform an agency audit complex, a lot of the admitted markets Enhanced agency focus on internal quality con cannot accommodate the growth-generated Developed/updated agency procedural exposures,” he says. That’s when the surplus manua lines market becomes a very viable option for agencies since these insurers have flexibility to amend their rates and forms. For example, an agency might go to a continued on page 28

Why Change in E&O Carriers

10.4% 24.4%

No Yes $25,001 to $50,000

Comparison of Changes in E&O P By Region

15%

20%

Satisfaction with Agency cy E&Ocontinued Terms,from Conditions page 25 28.1% than the major players in the market andless Limits

25%

30%

“Because, if not, they could be moving their account to another carrier strictly based that have the better forms. A stripped Comparison of Changes in 65.2%on price,” Pearsall said. “Sometimes, Yes 6.7%E&O Premium you get what you pay for.” down policy is a stripped down price.” NoBy Region People — even some agents — look at It’s important Somewhat satisfiedfor agents to compare poliDecreased Same insurance as a commodity, Hulcher said. cyRegion forms before moving their agency’s Increased E&O MidwestPearsall said. 15.0% 54.0% 30.0% But purchasing E&O coverage should not coverage, 57.0% 32.0% just be about price, he says. East “One thing about10.0% errors and omissions is South Central 27.0% “You need to think through other things that no two policies17.0% are the same,” he 56.0% said. E&O Southeast Claims 9.0% 56.0% when35.0% it comes to buying your E&O cover“They must History do some type of a comparWestor ask the agents’ 15.0% 41.0% 44.0% 12.6% age. It’s not just about price. It’s about price, ison, association or the of Respondents it’s about the product, and it’s about the wholesaler, or whoever they’re interacting 12.4% 47.0% claims support that you get, where the rubwith, ‘What are some of the differences?’ Never had a claim ber meets the road, when the time comes Sometimes, some of those carriers will Had a claim in the past 5 years Why Change in E&O Carriers 28.1% that you’ve had somebody that’s brought an provide checklists of what things to look Had a claim 6 to 10 years ago Had claim such more as than 10 years E&O claim against you, and how that claim at, athings whether itsago claims made, Lower price 29.4% is handled.” claims made and reported … two different Nonrenewed due to claims 1.7% Hulcher2.1% agrees concepts that agents to beinaware of … Nonrenewed due toneed change underwriting criteria there’s some inCarrier terms of what their responsibility is — withdrew from agency E&O market0.7% 5.5% danger in 10.2% moving deductibles, definition of who is an insured, Neededof broader coverage Number Agency E&O New E&O Risk Management ent E&O carriers what professional services are covered, 5.5% Other reasons 7.6% Carriers Five Years rss Steps in the Past Year as well. “You’ve what arein thePast tail options.” 30.7% got to make sure There’s a host of differences to consider 34.3% One carrier you’re reviewing when shopping agency E&O. Pearsall rec59.4% Two carriers the product. ommends agents asking the potential E&O Yes Risk Management Steps Implemented Three carriers But not all Big carrier for a specimen policy before moving No More than three carriers in Past “I” or PIA memcoverage soThree they canYears review it, and make bers buy their sure that they understand it. Attended an E&O class Agency staff has achieved additional designations More activelyJOURNAL-NATIONAL utilized an exposure analysis checklist 26 | INSURANCE November 4, 2013 Hired a third-party to perform an agency audit

Risk Management Steps Impleme in Past Three Years

77.6% 38.8% 35.2% 5.5%

69.3%

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Increased Decreased Stayed same

13.2%

SPECIAL REPORT

$15,001 to $25,000

9.2%

$25,001 to $50,000

9.1%

Professional Liability Agency E&O Premium Change in the Past Three Years Increased Decreased Stayed the same

More than $50,000

24.2%

13.2%

11.1%

10%

15%

20%

62.6%

50 Vulnerable E&O Dangers in Agencies Today

continued from page 26

surplus lines market for 1 Customer service representatives E&O coverage rather than Comparison of Changes in E&O Premium 2 Telephone-based electronic transactions an admitted market if 3 Commercial coverage gaps caused by By Region Prediction mium m errors of staff on E&O Premium that agency has employees 4 Personal lines renewals - companies Region Decreased Increased Same Change atdrastic Nextchanges Renewal l working as registered are instituting without Midwest 15.0% 54.0% 30.0% warning the agency 55.2% reps. 5 All areas are vulnerable in today’s legal40.6% East 10.0% 57.0% 32.0% Increase “Let’s say I’m a retail climate Decrease South Central 17.0% 56.0% 27.0% 6 Failure of clients to buy recommended agency and I have some Remain the same 4.3% Southeast 9.0% 56.0% 35.0% coverage people with series 6 and 7 7 Cyber liability West 15.0% 41.0% 44.0% 8 Policy procedures licenses, and they want to 9 Valuation software provided by the carrier become client investment 10 Anything dealing with claims made forms for clients and selling price over coverage to advisors. Most agency Increased E&O issues to clients without Agency disclosing coverage E&O policies aren’t writWhy Change in E&O Carriers them Limit in Past Three 11 New producers 24.4% ten to do that. The reason: 12 Personal Years lines underwriting errors Lower price 29.4% insurance agents E&O 13 Compliance with multistate requirements Nonrenewed due to claims 1.7% 14 Additional insured status and certificate of 73.9% No policies are pitched to the insurance issuance Nonrenewed due to change in underwriting criteria 2.1% Yes exposures of the insurance 15 Contractors insurance Carrier withdrew from agency E&O market 5.5% 16 Commercial lines profession. Registered Needed broader coverage 10.2% 17 Excess and surplus lines reps are more like securi18 Endorsements Other reasons 7.6% 19 Crop insurance ties dealers. Most agents 20 Failure to provide with coverage Satisfaction Agency cy or brokers E&O policies 21 Moving coverages between carriers 22 Coverage analysisConditions and compliance E&O Terms, don’t contain the exclu23 Obamacare rules that are unknown and28.1% consions necessary for that and Limits stantly change Risk Management Steps Implemented 24 Failure to report and oversee claims hanexposure. I’m not saying 65.2% 6.7% dlingYes properly in Past Three Years No that some admitted mar25 Communication offset by documentation Somewhat satisfied 26 Property kets couldn’t make adjustAttended an E&O class 77.6% 27 Loss of coverage and professionalism due to ments; some will and electronic rating and underwritting Agency staff has achieved additional designations 38.8% 28 Carriers often change forms, increase some won’t.” More actively utilized an exposure analysis checklist 35.2% deductibles and surplus lines writers often Hired a third-party to perform an agency audit 5.5% E&O Claims change companiesHistory who have different coverage forms Enhanced agency focus on internal quality control 62.2% 12.6% Market Conditions of Respondents 29 Consistent documentation Developed/updated agency procedural manual 42.6% For 2013, the industry 12.4% 30 Underwriting 47.0% Never had a claim 31 Policy endorsements saw a few carriers either a claim in the past 5 years 32 SalesHad rewrites 28.1% withdraw from the agency 33 Arbitrary carrier that lead to unnecHad a claim 6 to actions 10 years ago essary disputes Hadcoverage a claim more than 10 years ago E&O prices are on the rise. According to E&O market or limit their underwriting 34 Certificates, daily changes Insurance Journal’s 2013 Agency E&O Survey, appetite, according to Swiss Re’s Sally. But 35 Communications 36 Health insurance 52.3 percent of agencies saw E&O premiall the experts agree that in general, the 37 Clients that despite agents’ best efforts in 0.7% ums increase in 2012 compared to 2011, agency E&O market still seems to have writing and verbally, do not E&O understand Number of Agency New E&O Risk Management ent what insurance covers 5.5% and 55.2 percent expect E&O premiums to ample capacity and availability. Carriers inchanges Past Five Years rss Steps in the Past Year 38 Personal lines increase “For newer agencies, or brand new 39 Missing coverage 30.7% again at the next renewal. 34.3% 40 Contractors One carrier The exclusive IJ survey startups … those 41 HR and 59.4% Two benefits carriers 69.3% Yes is based on responses agencies typically 42 Cyber liability Three carriers No 43 E&S More placement from 684 agency ownhave to access the than three carriers 44 Placing coverage when requested by insured ers across the country from Oct. 6-21, 2013. non-admitted market, but there still is an and/or making changes to coverage 45 Customer service Even though prices are on the rise, most underwriting appetite for those,” Sally said. 46 Coverage offered but not purchased by cliagencies (65.2 percent) purchasing E&O “Right now the markets are pretty wide ent, then client has claim 47 Failure to support an offer of coverage that coverage say they are satisfied with E&O open,” said PIA’s Von Haden. “I’m not noticthe client rejected terms, conditions and limits today, according any difficulties in the majority of agents 48 Employment practices liability 49 Data protection, coverage questions ing to the survey. being able to secure coverage from a multi50 Maintaining underlying insurance for For clean risks, Pearsall sees agency E&O tude of markets, particularly the ones that umbrellas especially when agencies don’t control all of the underlying business increasing about 3 to 5 percent on average. have been stable for years.” Despite widespread availability, agency Source: Insurance Journal’s 2013 Agency E&O Survey continued on page 30

‘There is danger in dabbling.’

28 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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25%

More capacity. Fewer carriers.

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SPECIAL REPORT

By Region

Prediction on E&O Premium mium m Change at Next Renewall

Region

Professional Liability Increase Decrease Remain the same

continued from page 28

40.6%

4.3%

55.2%

Midwest East South Central Southeast West

allegations against agents,” Sally said. Increased Agency E&O Other trends in agency E&O continue to evolve, Pearsall said. Limit in Past Three 24.4% “Certainly, certificates continue Years Lower price to be a concern for most carriers. Nonrenewed du They’re indicating somewhere 73.9% No around 5 percent to 8 percent of Nonrenewed du Yes E&O claims involve a certificate.” Carrier withdre Weather-related catastrophes Needed broade continue to put stress on agency Other reasons E&O claims. “Superstorm Sandy generated Satisfaction with Agency cy a tremendous amount of E&O E&O Terms, Conditions activity. Obviously, a lot of flood 28.1% issues, but also a lot of business and Limits interruption claims, as a result of 65.2% Yes 6.7% businesses not having any business No interruption coverage,” Pearsall Somewhat satisfied said. Attended an E& Even with Sandy, E&O claim Agency staff ha frequency is stable, according to More Pearsall. “It’s pretty much still in actively u really good shape.” Hired a third-pa E&O Claims History That could change withEnhanced the agen 12.6% of Respondents implementation of the Affordable Developed/upd 12.4% Care Act. 47.0% Never had a claim “We think about how healthHad a claim in the past 5 years care reform will impact E&O a 28.1% Had a claim 6 to 10 years ago lot, almost on a daily basis,” said Had a claim more than 10 years ago Sally. “There’s just uncertainty around the type of roles that agents may assume, as the distri0.7% bution of healthcare changes and Claims Number of Agency E&O they New find theirE&O way toRisk offeringManagem When it comes to 5.5% different types in of services to cus- Year claims in agency E&O, rss Carriers in Past Five Years Steps the Past tomers. We try to think ahead on the same issue continues 34.3% what types of liability that may to crop up. The failure to One carrier 59.4% Two carriers create forYes an agency. … There’s no provide the proper coverThree carriers answer yet age continues to top the Nobecause it’s completely More than three carriers new territory.” list as the leading claim in Quadrant Insurance’s Harris agency E&O. says, “The reality is nobody The poor economy knows; it’s all conjecture at this did lead to a few unique point.” One thing is certain, he says, as Insurers also saw E&O issues pop up claims trends, according to Swiss Re’s Sally. healthcare continues to evolve, agency E&O with home vacancies in recent years. “So “We certainly saw agency customers that and the insurance industry are going to many homes became vacant throughout the were lowering coverages to save money. have to evolve with it. country. It became a trend for opportunistic That can lead later to allegations of forgetthieves, and then we saw issues of uncovful memories when a claim comes around Insurance Journal wishes to thank Demotech ered claims. The insurance carrier was not and there’s less coverage in place than the Inc. for providing analysis once again for this aware of the vacancy and that caused some agency customer would have needed.” year’s Agency E&O Survey. However for agencies that have had a claim or two, prices have jumped more and those agencies probably are seeing different terms and higher deductibles, he said. “This is the time that the E&O carriers try to react to the hard market, and maybe try to get some additional pricing because, they know, at some point in time, it’s going to turn the other way again,” Pearsall said. While most agencies stick with their E&O carrier, some agencies do shop around. According to Insurance Journal’s 2013 survey, 59.4 percent of agencies have had the same E&O carrier for at least the past five years, and 34.3 percent have had two carriers in the past five years. However, of those that shopped E&O markets, 29.4 percent said the reason they shopped was for a lower price.

30 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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M&A Review Third Quarter Activity Picks Up Pace

of the fastest-growing brokerages, completing three deals and raising its year-to-date mark to nine, followed by Digital Insurance with eight deals. Hub announced six U.S.-based deals, and INSURICA Insurance Management Network completed five deals, its first acquisition in more than two years. INSURICA had been quiet since 2011 when it nearly doubled the size of its agency with the acquisition of Guaranty Insurance Services. Private equity continues to drive the M&A market with 40 deals, or 30 percent of all buyer activity, and accounted for some of the largest deals this year. Hub International entered into an agreement with private equity firm Hellman & Friedman LLC, a recapitalization valued at approximately $4.4 billion. The deal enables Hub to continue its growth strategy and expand its capabilities. Hub was originally taken private by Apax Partners and Morgan Stanley Principal Investments in 2007. Hub added nine deals in Canada since January, bringing the total to 15 for all U.S. and non-U.S.-based deals. Another buyer expanding outside of the United States is Arthur J. Gallagher (AJG).

fter a sluggish start to the year, merger and acquisition (M&A) activity gained some momentum in the third quarter. With 55 transactions announced from July to September, the third quarter comprised 42 percent of the total 132 deals for the year. [See Figure 1] While the year-todate count is off from last yearâ&#x20AC;&#x2122;s mark of 192, there were some By Meredith Reeves large deals that kept the industry buzzing. The most active acquirers of the year were all busy in the third quarter. The top six buyers, each with five or more acquisitions in 2013, completed 21 deals in the third quarter, half of the total 42 transactions for the year. Confie Seguros completed five deals in the third quarter alone, raising its year-todate mark to nine. Its latest acquisition of the retail agency of Affirmative Insurance Holdings Inc. establishes a platform in the Midwest and Southeast, allowing for continued strategic growth. AssuredPartners Inc. continues to be one

AJG completed one acquisition in Canada and expanded its presence in the United Kingdom with three, including the Giles Group of Cos. for $364 million. The combined operation will employ approximately 3,100 across 70 offices. AJG also made headlines with its expansion in the Northeastern United States. In a deal valued at approximately $276.5 million, AJG announced the acquisition of Bollinger, a top 100 broker. The deal expands AJGâ&#x20AC;&#x2122;s footprint in the Northeast and is expected to generate more than $100 million in annualized revenue. Bollinger was previously owned by private equity firm Evercore Capital Partners. Public brokers completed 13 deals through September, down from 40 during the same period last year. Privately owned broker activity dropped from 55 to 49 completed deals, while bank activity totaled 11, flat to last year. On the seller side, 39 percent of all acquisitions were of property/casualty brokers, and 35 percent were multiline, P/C and benefits agencies. The remaining 26 percent were benefits firms, compared to 28 percent of all firms through the third quarter 2012. continued on page 34

Figure 1: Comparison of Quarterly Announced U.S. Transactions (2011-2013) 133 115 95 75

55 38

35 15 -5

2011

Q3 2012

2013

Note: Past performance is not necessarily indicative of future results. Source: SNL Financial, Insurance Journal, and other publicly available sources 32 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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M&A Review continued from page 32 While M&A activity has been relatively calm after the storm of activity that closed 2012, prospects continue to fill the pipelines and deals are coming to completion. Although we are unlikely to set any new records this year, we believe that buyers will continue to need the growth acquisitions provide, and deal activity will likely

strengthen. The appetite among buyers remains strong, and as we have been seeing, this is helping to keep valuations high and attractive to sellers. Securities offered through MarshBerry Capital Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co. Inc. 4420 Sherwin Road,

Willoughby, Ohio 44094 (440-354-3230). Except where otherwise indicated, the information provided is based on matters as they exist as of the date of preparation. Past performance is not necessarily indicative of future results. Reeves is a senior consultant for MarshBerry & Co. Inc. Email: Meredith.Reeves@MarshBerry.com.

Figure 2: Merger & Acquisition Activity (July - September 2013) Announced Date Buyer 08/01/13 Allstate Corporation 09/27/13 AmTrust Financial Services, Inc. 08/12/13 Arthur J. Gallagher & Co. 09/06/13 Arthur J. Gallagher & Co. 09/18/13 Ascension Insurance, Inc. 07/17/13 AssuredPartners, Inc. 08/27/13 AssuredPartners, Inc. 09/16/13 AssuredPartners, Inc. 07/15/13 Atlantic Risk Specialists, Inc. 07/01/13 Berry Insurance Group, Inc. 07/01/13 Confie Seguros Insurance Services 07/01/13 Confie Seguros Insurance Services 08/05/13 Confie Seguros Insurance Services 09/04/13 Confie Seguros Insurance Services 09/16/13 Confie Seguros Insurance Services 07/15/13 Delta Trust & Banking Corporation 07/18/13 Digital Insurance, Inc. 08/01/13 Digital Insurance, Inc. 08/21/13 ECM Solutions 08/07/13 Edgewood Partners Insurance Center 09/18/13 Fidelity National Financial, Inc. 08/05/13 Glenville Bank Holding Company, Inc. 08/13/13 H.W. Kaufman Financial Group 07/17/13 Health Insurance Innovations, Inc. 08/05/13 Hellman & Friedman LLC 09/12/13 Higginbotham & Associates, Inc. 08/01/13 Hub International Limited 08/02/13 Hub International Limited 08/31/13 Hub International Limited 09/30/13 Hub International Limited 07/16/13 Ink Underwriting 08/29/13 INSURICA Insurance Management Network 08/29/13 INSURICA Insurance Management Network 08/29/13 INSURICA Insurance Management Network 08/29/13 INSURICA Insurance Management Network 08/29/13 INSURICA Insurance Management Network 07/24/13 Jacobson, Goldfarb & Scott, Inc. 07/12/13 Leavitt Group 07/01/13 Madison Dearborn Partners, LLC 08/01/13 Management group 08/26/13 Management Group 09/17/13 Management group 07/02/13 Marsh & McLennan Companies, Inc. 08/08/13 National Financial Partners Corp. 09/04/13 National Financial Partners Corp. 08/07/13 Randall & Quilter Investment Holdings Plc 09/03/13 RGEB, Inc. 09/16/13 Ryan Specialty Group, LLC 07/01/13 Southwest Bancshares, Inc. 08/26/13 Specialty Underwriters & Risk Evaluators, LLC 09/30/13 T&H Global Holdings, LLC 07/19/13 The Andrew Agency 07/02/13 The McGowan Companies 07/17/13 USI Holdings Corporation 09/20/13 USI Holdings Corporation

Seller Northeast Agencies, Inc. The Insco Dico Group Bollinger Holdings, Inc. R.W. Scobie, Inc. Transure Services, Inc. Donald F. LaPenna Associates, Inc. dba The Insurance Centers and Ironbound Business Insurance Agency Golseth & Gregson Insurance Services dba GBP Risk Solutions Dwyer Franchise Insurance International, Inc. Insurex, Inc. MacDonald Insurance, Inc. C W Baker Insurance Agency, Inc. Lewiston Insurance Agency, Inc. Economy Insurance Mart of Hernando LLC Olympic Insurance Agency Retail Agency Distribution Business of Affirmative Insurance Holdings, Inc. dba Retail Agency Group Allen Kerr Insurance Agency, Inc. Berg Andonian, Inc. Strategic Employee Benefit Services - Wellesley, Providence and Springfield Ferguson Employee Benefits Agency SafeHarbor Risk Management Ovation Benefits Group LLC Scautub Agency Inc. ISI Insurance Services Secured Health and Life Hub International Limited Capital Benefits Group Inc. Unity Group, Inc. Vicencia and Buckley Insurance Services, Inc. Manuel Lujan Insurance, Inc. Connelly, Carlisle, Fields & Nichols Insurance Pioneer Programs Insurance Solutions JRJ Agency Kenderdine Agency, Inc. Partners In Benefit Planning, Inc Rosemary Spring & Associates Biltmore Benefits Employee benefits book of business United Valley Insurance Services National Financial Partners Corp. Northwestern Benefits, Inc. Highland Capital Brokerage, Inc. Networked Insurance Agents, Inc. Smith Group Wood Insurance Group, Inc. Insurance West Corporation Risk Transfer Underwriting, Inc Individual, Medicare and group health insurance business of Archer Weiss S.H. Smith & Company, Inc. Luhn-McCain Insurance Agency, Ltd. WSIB Insurance Agency, LLC McMartin Wasek & Associates, Inc. Samuel D. Baughman Insurance Services Professional Risk Placements, LLC Cohen-Seltzer, Inc. Alliance Benefit Solutions

Sources: SNL Financial, Insurance Journal, other publicly available sources and MarshBerry proprietary databases Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. 34 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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Programs Increasing Retentions: The Hidden Premium Increase

s the market hardening? A Google search shows that most experts think it is, and it is nearly impossible to find a professional journal without an article discussing the topic. The premium increases that are being implemented indicate that a hard market is at least on the way. Whether your program has begun to feel the effects of this yet or By Chad Glenn not, it is very likely that at some point in the near future it will. In addition to premium increases and the expert opinions, one telling suggestion that the hard market could be upon us is the number of large deductible programs required to increase their retentions. According to the RIMS Benchmark Survey — produced annually by the Risk and Insurance Management Society (RIMS) — there is a slight indication from 2010 to 2011 that some companies participating in certain lines of business increased their deductible/retention amounts (results may be skewed as tables provided do not compare similar respondents across years). As the market continues to harden, it is likely that the shift will be more evident from 2011 to 2012. Several programs have been forced into these higher layers but are not being credited adequately in the form of a premium reduction for accepting the increased risks. For this reason it is essential that the direc-

36 | INSURANCE JOURNAL-NATIONAL November 4, 2013

tors of these programs understand how to quantify this additional layer of risk before essentially paying twice for coverage that was previously provided, once for the lack of premium discount for the additional layer and again for the losses that were previously covered and now retained. In addition to those being pushed, several of the smaller, mid-market companies are accepting these higher limits to eliminate any premium increases. They accept the additional layers without fully understanding the risks and costs associated with the higher retentions that their programs will have to pay for in the future. While a reduced premium may seem like an appropriate measure to reduce costs, it is essential that purchasers understand the costs associated with this additional layer to determine whether the reduction in premium now outweighs the additional expected future costs. Evaluating the Premium Reduction This article discusses several methods for calculating the costs associated with the additional layers of retention depending on the size of one’s program. While some of these methods have shortcomings, and may require additional expertise and a more complex approach to achieve better accuracy, it is quite possible for risk managers and program directors to get a sense of the appropriateness of the new premium. For illustration purposes, we utilize an example of a program covering workers’ compensation. All numbers, development factors, and increased limit factors are for illustration only. However, factors that would be applicable to your program can be found through many sources including brokers and actuaries or can be purchased from the National Council on Compensation Insurance (NCCI). For a program that is large enough or has had a few claims each year that have penetrated or exceeded the proposed layer, a quick check is as

simple as Method 1, figuring the average amount of losses incurred in that layer. For example, if XYZ Insurance Co. wants to increase retention from $100,000 to $250,000 and the insured has incurred losses in this layer as shown in Figure 1, then the premium decrease for accepting that additional

$150,000 of risk should be at least $175,000. This quick and dirty estimate assumes the program has not changed in the last six years (i.e., business is the same, safety programs are similar, etc.). Method 1 also completely ignores loss trends and loss development, so in most cases it would understate the amount of premium reduction. An improvement on this simplistic method is to exclude the two most recent years, as larger claims in those years haven’t had the chance to develop into the higher layers. By removing 2011 and 2012 from the average, the estimate increases to almost $220,000, which is closer to the answers utilizing the additional methods outlined next. Method 2, while not as simple, does take into consideration loss development and loss trends. The losses incurred in the proposed layer are multiplied by the excess loss development factors (LDFs) and a 5.0 percent loss trend to calculate the ultimate excess losses for the layer $100,000 to $250,000. The results of Method 2 are shown in the table in Figure 2. The average cost of the developed and trended losses continued on page 38 www.insurancejournal.com

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Programs continued from page 36 is now valued at almost $300,000. Because it is necessary to obtain excess factors and

determine appropriate loss trends to apply to the losses in the proposed layer, this method may not be possible, but it does demonstrate the impact that loss development and trends have on the losses. This is the primary reason why Method 1 listed above tends to understate the premium reduction. Method 3 utilizes increased limit factors (ILFs) and is more of a theoretical approach than using actual loss data. Typically insurers will limit data to a credible point. For example, a larger program that consistently has several losses that reach $500,000 would likely use its own loss history to price the insurance up to the $500,000 limit and then use industry ILFs to price the remaining coverage at the higher limits on a theoretical basis. A smaller program’s data may only be credible up to the $100,000 limit and then be priced using industry ILFs. The capping of the losses at a credible limit stabilizes the insured’s premium increases and avoids large swings caused by a large fortuitous loss. Given that ultimate losses have already been calculated for the currently insured policy year at the current retention, the industry ILFs can be utilized to determine the amount of premium charged for the proposed layer. For example, according to Figure 3, if the ultimate loss projection for a program’s current retention of 38 | INSURANCE JOURNAL-NATIONAL November 4, 2013

$100,000 per occurrence is $1 million then the estimated ultimate for that program at $250,000 would be $1.305 million ($1 million x 1.305). This method would indicate that the layer between $100,000 and $250,000 is worth approximately $305,000. Last, Method 4 is the most complicated and would most likely require the assistance of an outside expert. This method relies on a very similar approach to what would be employed in calculating the program’s projected ultimate losses that were used in Method 3. Actuarial methods and the program’s loss data limited to $100,000 are used to determine the program’s ultimate losses at the current retention. Similarly, to calculate the ultimate losses at a $250,000 retention, losses would be limited to $250,000 and plugged into the forecasting models to determine the new projection. In a perfect world, this method would be identical to the answer from Method 3, but because the industry ILFs are not program-specific, this method places more reliance on the program’s actual data for determining the additional layer. However, this method also requires that the program have sufficient data in the proposed layer, otherwise the more theoretical approach is the more prudent approach and a combination of the two should be utilized after determining the appropriate credibility to apply to each method. Limitations These methods are a great way to get a ballpark estimate of the premium reduction associated with taking on additional layers of risk, but they are not without limitations. As mentioned, Method 1 ignores loss development and loss trends.

Method 2 utilizes excess loss development factors which, depending on the layers being priced, are often based on a limited amount of data. This is especially true for the higher layers where the data used to determine these loss development factors is scarce, and the excess factors are based on aggregated industry data that may or may not be a good representation of your unique program. Method 3 also suffers from a similar fate to Method 2, because the increased limit factors are also calculated using aggregated industry data and are not specific to any one program. Method 4, while being the best method, is hard for most programs to perform without the assistance of an expert. In addition to the specific limitations of each method, all of them ignore the insurer’s expenses, profits, risk margins, and investment income, which are loaded into the premiums being charged. These methods provide only a pure premium estimate that excludes these loads. Finally, the results of these methods, as with any actuarial estimates, assume that the past is indicative of the future. To the extent that a program has changed significantly, these estimates will not be as reliable. Conclusion With this hard market, as with any hard market, the insured will be at the mercy of the insurance market. As business gets tougher to place and prices increase, companies may not have a lot of opportunities to shop around for better prices and may be forced to accept higher retentions and more risk, especially smaller and less sophisticated programs. However, while these methods do have their limitations, they will provide a program’s manager and insurance professional the means of testing the premium reduction for accepting the additional layers and will provide them, at best, the necessary groundwork to negotiate better terms and, at worst, the opportunity to become more sophisticated buyers. Glenn, FCAS, MAAA, is a consulting actuary for Milliman Inc.

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Fraud The Fight Against Employee Theft By Doug Karpp

raud remains a big threat to businesses, and new technologies are creating new ways for employees to embezzle and rip off their company. “The 2012 Marquet Report on Embezzlement” shows that the number of major embezzlements in the past year is staggering, up 11 percent in 2012 compared with 2011. The average size is also increasing at an alarming rate, $1.4 million in 2012 compared with $750,000 in 2011. This is happening not just to large companies and financial institutions, but also at a variety of Main Street businesses. What qualifies as a major theft depends on the size of the company. A relatively minor theft could be enough to take down a small firm. Firms can help themselves by knowing what to look out for and having a policy that will cover them in case things go wrong. Fraud is responsible for an average loss of 5 percent of revenues annually across the U.S. economy, according to the Association of Certified Fraud Examiners. Employees across the country are actively stealing from their employers right now. If an employee started to steal from a firm today, on average it would take 18 months for the theft to be discovered. A major embezzlement can go undetected for nearly five years. And it could be even worse. Rita Crundwell was stealing from her employer, the city of Dixon, Ill., for 24 years to fund her show horse business, and she ended up with a whopping $53.74 million. What can companies do to find out if an employee is taking money from the firm? What to Look Out For One of the traditional measures to weed out potential damage is the pre-employment criminal background check. But what about a mid-employment background check? If an employee is arrested after being hired, this could be the only way for management to find out. This is how one company found out its employee had 40 | INSURANCE JOURNAL-NATIONAL November 4, 2013

been arrested for assault — the employee continued to show up in the office while serving his time on the weekends. Reference checks are another perennial risk management technique to protect against hiring unsavory characters in the first place. But, sophisticated reference scam websites are now providing anyone (willing to pay the price) with contact numbers where operators will confirm that somebody previously “worked for them” and provide official-looking reference letters. How strong are your background and reference checks? Is your due diligence vendor aware of these scams, and is the vendor taking the required steps to ensure it does not fall prey to such scams? What You Can Do There are simple measures to check for fraud before it happens or becomes a habit for employees, starting with some simple data analytics. Benford’s Law (also known as the FirstDigit Law) has shown a normal distribution of the first digit in any data set. Any particular figure will start with 9 about 5 percent of the time, but is six times more likely to start with 1 (30 percent of the time). Reviewing financials with this in mind can help spot irregular figures in vendor payments. In a case recently where an employee was writing checks to cash or himself, every one of the checks was for a round figure ($25,000, $500, etc.). Data analytics software can catch this kind of trend. By the way, this brazen employee was originally making the checks out to “cash,” but when he didn’t get caught, he started making them out to himself. Before being caught, he was including his full name and address as the payee (maybe his bank was getting suspicious

when the business checks didn’t include his address). He had taken advantage of a known glitch in a popular accounting software package that many small businesses use and that allowed him to enter a transaction to the ledger and change the payee name before printing the physical check. This could easily have been caught if the business had been matching the payee on the canceled checks with its general ledger. More specifically, review employee expense reports with an eye out for any duplicates in amounts, vendors, dates or other key fields. If you limit this to a single employee’s expenses, you could miss duplicate expenses from multiple employees (two employees submitting the same expense for the same date and vendor). Also be aware that there are websites out there peddling phony expense receipts. continued on page 38 www.insurancejournal.com

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Fraud

continued from page 40 There is even a site that will let you request invoices — anything for a price. a total dollar amount (say $1,500) and it will give you a single sheet with valid looking Verify Vendors and Account Numbers receipts that add up to that amount. Other One of the more “effective” embezzlesites offer an entire fictional travel itinerary ment techniques is vendor fraud. R1_Iflights, J_Half_Ins Journalreceipts, 10/11/13 with car rental and10:25 hotelAM Page 1The Marquet Report shows that in 2011,

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vendor fraud accounted for only 5 percent of major embezzlements but 13 percent of the amounts stolen — meaning that the average per incident was much higher than other fraud techniques. Vendor fraud is where an employee sets up a phony vendor in the accounts payable system and begins submitting invoices for this vendor. Most often the invoice is for “consulting services.” For instance, a company recently had an invoice for more than $20,000 for “consulting services” to create a PowerPoint presentation. Can you imagine seeing this PowerPoint presentation that cost $20,000? It must have been truly amazing. Watch out for vendor Employees across the names that are country are actively identified only stealing from their by initials or employers right now. provide a P.O. box as the only address. Both are common tricks employed in hiding fraudulent payments. Data analytics also may help identify vendor fraud. In one recent example, an employee changed bank account information for the vendor to his own account. It turned out he was having his payroll sent to the same bank account. Employers should review vendor files and payroll records to look for duplicate account numbers, phone numbers and street addresses. Insurance Coverage There’s a wide variety of crime coverage available on the market, but it’s important to get coverage that matches the needs of your client’s business or that of your agency. A policy that doesn’t cover computer and funds transfer fraud, vendor theft or the theft of clients’ property for a professional services firm will leave you exposed to some of the fastest-growing financial crimes. You also need to have the right limits — it can take time for a fraud to be detected and your losses will keep growing. Karpp is vice president of crime at Hiscox USA, responsible for the insurer’s crime book of business.

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Professional Liability Franchise Opportunities By Peter Taffae

an you name an industry that contributes $2 trillion to our country’s gross national product (GNP)? How about an industry that is the fastest-growing and represents one in every 12 businesses that exist today? Or how about an industry that has more than 5,000 different companies and more than 1 million affiliates, and whose historical rate of success is much higher than any other business? The answer to all of these questions is the same — franchise. The franchise industry, although around for more than 40 years, has seen a renaissance in the past five years. This burst of growth can be attributed to two or three factors. First, with the financial crisis of 2008,

which resulted in corporate downsizing, an entrepreneurial opportunity of owning a business with a proven business plan became very attractive to people who found themselves seeking a new career. This increased demand for franchisee businesses. Second, with the wars winding down and veterans returning to a high unemployment environment, they were attracted to taking control of their future with a limited investment and a proven business model. Lastly, these individuals are strongly attracted to being their own boss and not having to risk everything on an unproven concept. Opportunities With rare exceptions, the franchise industry has been under the insurance industry’s

radar. Although there are miscellaneous programs for certain franchisees available, franchisors have had a difficult time securing a comprehensive insurance product to senior management’s personal assets and corporate balance sheet. Franchisors have been the step-child. The insurance marketplace has been limited in fulfilling this need. The likelihood of success for those capitalizing on the need for insurance expertise for franchisors and their franchisees presents a great opportunity, specifically in the area of franchisors’ liability, which we define as directors and officers (D&O) liability, franchisors errors and omissions (E&O), employment practices liability and fiduciary liability. The general perception is that unless the franchisor is providing medical, accounting, legal, insurance or technology services through their franchisees, all the franchisor needs is a D&O policy. This is a critical error in thinking. Most underwriters exclude suits brought by franchisees, which is the most likely constituent to bring suit (the majority of franchisors are closely held). With the standard breach of contract and professional liability exclusions, liabilities arising out of the Franchise Disclosure Document (FDD), previously known as the Uniform Franchise Offering Circular, would be excluded. The FDD is similar to SEC documents in that it is filed with the Federal Trade Commission and spells out the services and responsibilities of the franchisor. This is one of two or so documents the potential franchisee will base his investment on. The most common allegations in litigation by franchisees against franchisors involve misrepresentations arising out of the FDD. The senior management of franchisors needs D&O insurance to protect its potential assets. Vicarious Liability The other common cause of litigation with the franchisor is vicarious liability continued on page 46

44 | INSURANCE JOURNAL-NATIONAL November 4, 2013

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Professional Liability continued from page 44 arising from the actions of the franchisees. Many courts have determined that a franchisor exercises sufficient “control” over franchisee(s), which leads to the finding that franchisor(s) is vicariously liable for the acts of its franchisee(s). An example of franchisor’s vicarious liability would be based on allegations that the franchisor supplied a defective product to the franchisee(s) or was otherwise sufficiently involved in the design, manufacture, or distribution of defective product(s) sold by the franchisee(s). Another possible example would be allegations that the franchisor negligently required the franchisees(s) to adopt specific injurious procedure(s) that caused the injury. Very few insurance markets offer this coverage, and rarely under the D&O policy. Franchisors E&O will protect the senior management of the franchisor, as well as the franchisor (legal entity) from litigation

brought by the franchisee(s) arising from numerous potential allegations. One of the most frequent allegations that franchisee(s) bring against the franchisor is that the service outlined in the FDD, for which the franchisee is paying a royalty and/or franchise fee, is not performed as it was represented. Franchisor’s E&O is only offered by a small group of insurers. Each company that offers the coverage has its own policy language and target market. Often the franchisor requires its franchisees to purchase insurance as outlined in the franchise agreement. An insurance

We Believe

professional who understands the requirements and franchise concepts can provide better risk management at a better cost. Taffae is managing director of FranchisePerils, a national wholesaler broker solely dedicated to the franchise industry. Phone: 310-444-9333. Email: peterT@franchisePerils.com.

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My New Markets Service Station Program Market Detail: RoamNet Insurance Marketing Programs’ Service Station Program (www.roamnetins.com) is designed to encompass all aspects of the auto service related business. It covers 24 hour stations and offers multiple work comp markets. Convenience stores and full service car washes are also OK. Available limits: As needed Carrier: Unable to disclose, admitted States: Ariz., Calif., Colo., Idaho, Nev., Ore., Utah Wash., and Wyo. Contact: Customer service at 877-272-0333

bikes; custom bikes - subject to underwriting approval; and accessory coverage up to $3,000 included with physical damage. Carnegie targets the following risks: Class “A” bikes - Japanese or foreign street bikes; ATV’s; married insureds. Available Limits: As needed Carriers: American Modern States: Calif. only Contact: Rob Knight at 800-233-2442 or e-mail: robk@cgia.com

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Market Detail: Costanza Insurance Agency’s (www.costanzainsurance.com) exclusive insurance protection coverage options include: general liability coverage including errors and omissions for security guards, private investigators, polygraphers and most other security

Market Detail: Hartford Financial Products (www.hfpinsurance. com) new printers’ errors and omissions coverage form pays the insured’s legal liability for an economic loss resulting from a negligent act, error or omission in connection with printing services performed by the insured. Printing services errors are usually found in copy (words, pictures), printing (color, placement), assembly and distribution of material. “Correction of work” coverage is also available. Deductibles of $1,000/$2,500/$5,000/$10,000 available. Available limits: $1 million primary, umbrella up to $25 million Carrier: Unable to disclose, admitted States: All states Contact: Customer service at 212-277-0400

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services; workers’ compensation insurance; employment practices liability insurance; umbrella liability coverage; and commercial auto liability insurance. Available limits: As needed Carrier: Unable to disclose States: All states Markets.SM Contact: Customer service at 800-346-0942

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Minding Your Business The Power of 98/2 Delegation

to impose on anyone by asking for help. The bottom line is that delegation is needed to leverage one’s skills and improve productivity. Proper delegation frees a person to make the most of their unique talents. It engages others by allowing them to learn and grow while making a contribution. One can find it quite liberating once they really learn to let go and put their trust in others. Just think of Michelangelo’s work painting the ceiling of the Sistine Chapel. He had a whole team of employees that put together the scaffolding, mixed the paint and even sketched out some of the scenes. Michelangelo’s job was to paint the ceiling of the chapel. The University of CEO (http://

elegation is a critical skill for managerial and leadership success. Successful leaders and managers delegate to engage people, leverage the special skills, and get more done. Even the most talented person has a capacity limit when they do everything themselves. For some people, deep-seated issues of dependency and trust rise to the top when they need to delegate a task to someone else. From managers at work to parents at home, many people By Catherine Oak fall into the trap of doing everything. They believe it is a hassle to involve someone else with a task, or that they can do the task better or faster than anyone else, or it may even be & Bill Schoeffler that they don’t want

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universityofceo.com) and CEO Focus (http://ceofocus-norcal.com) have developed a program called 98/2 Delegation to help get past the common issues and install an effective delegation. 98/2 Delegation is a handson, entrepreneurial style of delegation and not a “text book” approach to delegation. It all starts with the business owner. In the typical insurance agency, the owner(s) are typically the most important asset. But, the owner(s) are also often the biggest liability in the firm. They create some of their own problems with outdated thinking or poor decision-making. The key for business owners is to learn to focus on their valuable skill sets and avoid creating their own roadblocks. “Textbook” or traditional delegation is to assign some of one’s tasks to another person. The problem usually is that the whole task or process is fully delegated, which typically includes low skilled and very high skilled steps. It is “all or nothing” type of thinking. Delegation fails when the task includes a step or two that is just beyond the skill level of the person who was delegated the task. The 98/2 Delegation approach factors in the real world facts of small business and how entrepreneurs think and act. The first step is for the business owner to look at the work they do from the standpoint of the value of the task — how much is it worth or what does it cost. The second step is to continued on page 52 www.insurancejournal.com

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Minding Your Business continued from page 50

The Value or Cost of the Task

look at the time requirement or frequency of the task. For those so inclined, one’s tasks can be laid out in a delegation grid:

Green Collar CEO (High Value, Low Frequency/Time)

White Collar CEO (High Value, High Frequency/Time)

Dog Collar CEO (Low Value, Low Frequency/Time)

Blue Collar CEO (Low Value, High Frequency/Time)

needs to focus on high value, low frequency/time tasks. The 98/2 Process The first step is to analyze the work an owner does from a systematic approach. Break down the overall process into as many steps as possible. Generally, 98 percent of the time on a task can be assigned — and the owner only needs to retain 2 percent of the time to accomplish critical steps. The University of CEO has a video that explains the process. Go to www. youtube.com/watch?v=86kK1AE1g50.

activities • More family time • Better quality of life • Increasing sales • Enhancing of the business model • Mentoring key employees • Grow strategic partnerships Summary The 98/2 Delegation is a method that actually works instead of frustrating the owner and employees. The technique that will empower staff and improve skills. Best of all, delegation improves productivity and the bottom line.

The Time or Frequency Required for the Task

Benefits of 98/2 Delegation Aside from engaging others, leveraging the unique skills of others and improving productivity, one can also gain the following benefits from effective delegation: • Cut low-impact work in half • Re-invest that time into high-impact

The ideal situation is to get most of the business owner’s tasks assigned to the “Green Collar” category. There will be some in each of the categories, even the “Dog Collar” category, but over time, the owner

Oak is the founder of Oak & Associates in Santa Rosa, Calif. The firm specializes in financial and management consulting for independent insurance agencies. Phone: 707-935-6565. Website: www. oakandassociates.com. Schoeffler is president and CEO of CEO Focus NorCal. Phone: 707-324-5531, ext. 3.

Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/ ACE Insurance www.acelimited.com 27, 37 Agency Ideas www.agencyideas.com 50 AIG www.aig.com 29 Anderson & Murison, Inc. www.andersonmurison.com 48 Applied Underwriters www.applieduw.com 56 Arrowhead General Insurance Agency www.arrowheadgrp.com W9 Ashley General Agency www.ashleyga.com SC2 Astonish Results www.astonishresults.com W4; SC6; SE1; E2;M1 Atain Specialty Insurance www.atainins.com 3; SC3 Burns & Wilcox Ltd. www.burnsandwilcox.com 7 Century National www.cnico.com W7 Chubb Corporate www.chubb.com 11 CNA Insurance www.cna.com 9 Demotech www.demotech.com 51 FEMA www.agents.floodsmart.gov/ij 41 Fujitsu www.fcpa.fujitsu.com 25 General Star www.generalstar.com 12

Great American Corporate www.greatamericaninsurancegroup.com 19, 45 Insurance Technologies Corp. www.insurancewebsitebuilder.com 31 ISU Group www.joinisu.com 55 JM Wilson www.jmwilson.com SE2; M2 K&K Insurance Group www.kandkinsurance.com 39 Lighthouse Holdings, LLC www.lighthousepropertyins.com SE5 M.J. Hall & Company, Inc. www.mjhallandcompany.com W8 Monarch E & S Insurance Services www.monarchexcess.com W5 National Alliance for Insurance Education & Research www.scic.com 46 Pacific Gateway Insurance Services www.pgiainsurance.com W11 PersonalUmbrella.Com www.personalumbrella.com 5 Philadelphia Insurance Companies www.phly.com 33 PULIC - Professional Underwriters Liability Insurance Company www.pulic.com 18 QBE www.qbededicated.com W3; SC5; SE3; E3; M3 Quirk & Company www.quirkco.com W10; SC4

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Scottsdale Insurance Company www.scottsdaleins.com 2 South & Western www.southandwestern.com SC9 Specialty Insurance Managers www.simtexas.com SC1 Tejas American General Agency www.taga1.com 3 Texas Mutual Insurance Company www.texasmutual.com SC7 Texas Surplus Lines Association www.tsla.org SC8 The Hartford www.privatecompanyinsurance.com 17 The Institutes www.theinstitutes.org 49 The Sullivan Group www.gjs.com 22 Vertafore www.vertafore.com 47 Western World Insurance Group www.westernworld.com 43 Westrope www.westrope.com 42 Worldwide Facilities, Inc. www.wwfi.com 21 Zurich Insurance Group www.zurich.com/internationalprograms 13, 15

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Closing Quote

Technology Spurs Industry, Government Modernization

By Alex Hageli

echnological innovations are revolutionizing how businesses and consumers operate — prompting quick action from the insurance industry and the government to enable people to adopt and embrace this rapidly emerging technology. The proliferation of computers, smartphones and tablets has changed how people manage their finances. The web and electronic communication have evolved into an important component of the insurance experience. Insurance consumers are increasingly going to the web to shop for insurance. Subsequently after a purchase, consumers want to use websites, social media, texting and emails to manage their policy and communicate with their agent and insurer. Agents and insurers are using Facebook and Twitter to communicate and respond to policyholders. While the personal attention of agents and brokers remain the preferred line of communication, websites and e-commerce transactions are growing in importance. “A positive online experience for customers has measurable benefits for insurers, both in terms of existing customer satisfaction and attracting additional shoppers to their websites,” says Jeremy Bowler, senior director of the global insurance practice at J.D. Power & Associates.

54 | INSURANCE JOURNAL-NATIONAL November 4, 2013

Insurers want their policyholders to benefit from the rapidly evolving technology, but antiquated insurance laws have prevented the use of some technologies. State legislatures have been called upon in recent years to approve legislation modernizing insurance laws so insurers can meet consumers’ demand and preference for online and paperless transactions. The insurance e-commerce revolution has advanced quickly. In 2011, no states allowed drivers to use their cell phone to show proof of insurance in a traffic stop. By the end of 2012, seven states had approved laws or regulations allowing the use of digital proof of insurance, or e-cards. In 2013, 21 states approved e-card laws including Alaska, Arkansas, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Mississippi, Missouri, North Dakota, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming. Now 28 states allow drivers to use their cell phone to demonstrate proof of insurance, and three more states are still considering similar legislation in 2013. Modernization of the insurance codes will enable consumers to avoid an unnecessary fix-it ticket and save time and precious court resources. Technology has changed many routine activities. But streamlining insurance transactions hit obstacles because some states prevented insurance documents from being electronically sent. Once again state legislatures were called into action to update insurance laws. With California Gov. Jerry Brown’s recent signing of a bill allowing policy ‘The insurance renewal notices and e-commerce revolution disclosures to be sent electronically, has advanced quickly.’ 14 states have enacted laws specifically allowing insurers to electronically deliver insurance documents to policyholders. In addition, 11 states have enacted laws allowing insurers to deliver standard property and casualty policies and endorsements that lack any personally identifiable information by posting such documents to the Internet and emailing a link to the policyholder. Now consumers can find their insurance policy securely without digging through a file cabinet or stack of forgotten mail. E-commerce in insurance is a win for everyone. Quick action in the past two years by legislators and governors is modernizing how insurance is managed, giving consumers more choice, access and flexibility. Hageli is director of personal lines policy for the Property Casualty Insurers Association of America. Phone: (847) 297-7800. Email: Alex. hageli@pciaa.net.

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