2022 May PIA Vermont by PIA Northeast

May 2022 • Vermont

PAGE 18

E&S: Amid mergers and acquisitions Plot a route through the wholesale broker market

EXCESS & SURPLUS 9

Why can't I find that in the law

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DEPARTMENTS May 2022 • Vermont

In brief

Tech

Risks

E&O

Ask PIA

Readers’ service and advertising index

COVER STORY 18 E&S: Amid mergers and acquisitions Plot a route through the wholesale broker market

FEATURE 25 Unusual risks Specialty insurance market is driven by demand

Statements of fact and opinion in PIA Magazine are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of the Professional Insurance Agents. Participation in PIA events, activities, and/or publications is available on a nondiscriminatory basis and does not reflect PIA endorsement of the products and/or services. President and CEO Jeff Parmenter, CPCU, ARM; Executive Director Kelly K. Norris, CAE; Communications Director Katherine Morra; Senior Magazine Designer Sue Jacobsen; Editor-In-Chief Jaye Czupryna; Advertising Sales Executive Susan Heath; Communications Department contributors: Athena Cancio, David Cayole, Alexandra Chouinard, Patricia Corlett, Crystal Ringler and Calley Rupp. Postmaster: Send address changes to: Professional Insurance Agents Magazine, 25 Chamberlain St., Glenmont, NY 12077-0997. “Professional Insurance Agents” is published monthly by PIA Management Services Inc., except for a combined July/August issue. Subscription rate for members is $13 per year, which is included in the dues; subscription rate for nonmembers is $25 per year. Professional Insurance Agents, 25 Chamberlain St., P.O. Box 997, Glenmont, NY 12077-0997; (518) 434-3111 or toll-free (800) 424-4244; email pia@pia.org; World Wide Web address: pia.org. Periodical postage paid at Glenmont, N.Y., and additional mailing offices. ©2022 Professional Insurance Agents. All rights reserved. No material within this publication may be reproduced—in whole or in part—without the express written consent of the publisher.

COVER DESIGN David Cayole

IN BRIEF

FIVE MINUTES WITH …

A look at the ‘wholesale’ marketplace

So much is going on in the world right now, how does what’s happening globally affect the surplus-lines market in the U.S.? Brady Kelley The market is growing. The 15 state Executive Director stamping offices report increases in Wholesale & Specialty Insurance Association demand in D&O, professional, excess Kansas City, Mo. liability, property, residential flood, wildfire and cyber coverages. Greater In 2010, surplus-lines premium was 6.8% frequency and severity of weather-related of total property/casualty premium, and events, social inflation, nuclear verdicts and global in 2020, it was estimated at 9.1%. On the commercial cyberincidents are likely factors. Economic growth also is side, surplus-lines premium was 13.7% of commercial a component of its overall growth. lines premium in 2010 and it grew to 18.4% in 2020, so growth as a percentage of the overall market also It’s also important to remember that the E&S segment is is noteworthy. designed for innovation, so in a time of rapidly developing technologies and emerging risks, the industry naturally excels. Exposures like cyber aren’t new, but their impact is evolving and expanding, and insureds need customized coverages that this industry can deliver.

The AM Best report also notes one unique financial impairment in the surplus-lines segment from 2010 to 2020, in contrast to 163 admitted property/casualty company impairments.

Does the WSIA have any initiatives that it is working on to strengthen the marketplace? WSIA’s mission is to help members across the entirety of the surplus-lines industry build profitable business relationships and strengthen the industry with networking, education, talent recruitment, regulatory/legislative advocacy and promotion of the value of the wholesale distribution system. Diversity, equity and inclusion initiatives also are a priority focus and related to every element of our programs, events and services to members.

When a wholesaler and a retail broker work together, how does an insured benefit? Wholesale brokers are technical specialists who work in a unique segment of the insurance industry, and they provide retail agents, and their clients, access to expertly tailored, customized solutions. Insureds benefit because wholesale brokers provide expertise and access to markets, coverages and options that might not be available in the standard market.

The WSIA Diversity Foundation was formed in 2020, through support of member firms, to influence a more diverse, equitable and inclusive workplace and industry. In addition to several student-focused initiatives with this in mind, we also are very focused on providing memberfocused resources, tools and education to help WSIA member firms influence meaningful change for their own workplaces and the industry. We believe that a more diverse and inclusive workplace will yield many benefits for the industry and our teams. 4

How has the E&S market evolved in the last decade? During the last decade, the E&S market has grown exponentially. AM Best’s 2021 Special Report, U.S. Surplus Lines– Segment Review found that the market reached a record $66.1 billion of E&S premium in 2020. That was a 17.5% increase over 2019 and ranks as the third largest growth since 2001-03. Domestic company growth was reported at 20.2%, which also is the largest since 2003, and E&S carriers maintain a higher proportion of secure financial ratings than the overall property/casualty market.

Brady Kelley is the executive director of the Wholesale & Specialty Insurance Association, a member service organization representing the entirety of the wholesale, specialty and surplus-lines industry. PIA Magazine asked him a few questions about the current state of the wholesale market.

In late 2021, WSIA partnered with Conning Inc. to update an analysis of data from 2016-20, which confirmed that wholesale distribution does not increase the cost of the transaction to the insured. That analysis determined that the cost of wholesale distribution was lower than retail distribution by 1.8 percentage points, which makes consulting a wholesale expert a common-sense approach for insurance buyers, particularly in emerging risks. There is never a cost to seek a wholesale quote, but there is high value when buyers need an expertly crafted solution from the wholesale market.

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BY THE NUMBERS

NFTs and the E&S market Nonfungible tokens—aka NFTs—are digital assets (e.g., digital artwork) that are bought and sold online. As their popularity grows—and individuals and businesses invest in them—they raise questions about insurance. How can the industry insure them? And, would they fall into the excess-and-surplus lines market? First, let’s break down what NFTs are:

Nonfungible vs. fungible

NFTs are: Unique in value (nonfungible) Equipped with one-of-a-kind digital signatures (like the VIN on a car)

Nonfungible: A house Its value is unique—no identical house at the same value exists. Fungible: Cash Its value is not unique— $50 in New York is the same $50 in Los Angeles, and it can be exchanged for the same value.

Insurance implications

A helpful analogy:

If insureds purchase NFTs, insuring digital assets would be tricky—what type(s) of coverage would protect them?

A Van Gogh painting is nonfungible If Starry Night is sold, the seller cannot get the same unique value in return There is only one original Starry Night A poster of Starry Night is a copy of the painting (and worthless) If Starry Night was crafted digitally, it would be an NFT

E&S Outlook on NFTs NFTs—especially if certain coverages for them fall under specialty fine-art insurance. NFTs are risky to insure, so it wouldn’t be surprising to see coverage for these digital assets become part of the specialty-insurance market.

Purchased with non-unique (fungible) currency Able to be copied, but copies aren’t NFTs—because they aren’t the original

Would it be the property policies (e.g., homeowners, commercial general liability)? Nope HO and CGL policies cover damage to physical property NFTs are intangible (not physical) Cyber policies Maybe Many cyber policies exclude cryptocurrency —the main currency used in NFT transactions Some cyber policies may cover third-party exposure (for NFT purchasers) There are gaps in first-party exposure (for NFT sellers) Specialty fine-art policies Maybe Traditionally, fine-art policies also cover damage only to physical property To get coverage, fine-art underwriters would need to: Determine how to appraise NFTs for first-party coverage; and Determine how to underwrite risk depending on how NFTs are stored

Time will need to tell us—along with more research and examination from the insurance industry as a whole.

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FYI

Moving some standard business to the E&S market? Typically, during the hardening of the market, you probably will find most of your standard markets modifying their underwriting guidelines. This could mean that some of your standard market accounts will be nonrenewed, and your agency will need to find them a new home, which could include the surplus-lines marketplace. However, keep these issues in mind. The application. While wholesalers typically will accept ACORD applications for most of their business, carriers may want their own applications completed for some classes of business. Contact your wholesaler in advance and ask if there is a specific application needed. This initial contact could play an important role down the road. The timeline. Give your wholesaler plenty of time with the submission. If the wholesaler has questions, respond quickly and accurately. In many situations, the wholesaler may have the “pen” for that market, so the submission can be turned around quickly. In other situations, it may take upward of 60 days. Moreover, don’t just send the application and forget about it. Follow up with your wholesaler to ensure the application was received and to check whether any additional information is required. The proposal. E&S proposals can be unique and contain some forms, endorsements and exclusions for which you must watch. A general liability policy in the E&S market might look much different from a general liability policy in the standard market. Review the proposal and don’t hesitate to ask for a specimen policy if the forms are unfamiliar to you. One endorsement to look for is the Classification Limitation endorsement. This form, commonly found on general liability policies in the E&S market, is a potential errors-and-omissions headache. Essentially, this endorsement restricts coverage under that policy to only those classifications noted on the policy. For example, if your insured is a carpenter, the coverage would state that only claims arising from carpentry would be covered. If the carpenter puts up drywall, there would be no coverage for this exposure unless the policy was modified accordingly. Look for this form and, if it is included on that particular policy, advise your customer in writing of this limitation. Explain that if the customer performs any work outside the stated classifications, there is no coverage, and the agency should be contacted before undertaking this additional work. Document this discussion in writing back to your customer.

Lack of authority to bind. In the standard marketplace, agencies usually will have some type of binding authority guidelines. In the E&S market, your agency technically is not the agent of record (the wholesaler is), so it is likely that your agency has no binding authority. To bind a risk, you would need to advise the wholesaler. Realize that the wholesaler might not even have the authority and may need to contact the carrier. Due to this situation, do not advise the customer that coverage is bound until the wholesaler confirms it. It is crucial that you know the rules when dealing with various wholesalers. In virtually all circumstances, the wholesaler will make clear what is needed to bind coverage. Is premium payment needed in advance of the binding? Are the affidavits needed to bind coverage or do you have some time to get these completed? This may vary among wholesalers. Remember coverage must be bound on or before the effective date for coverage to be put into effect. There is no back-dating in the E&S market, so request binding in advance of the actual effective date. This may prompt a higher level of priority on the handling of these accounts. Know the carrier. There are many E&S carriers that do a fantastic job. Unfortunately, many of these carriers are not a household name. When you receive proposals from the wholesaler, look at who the carrier is. It may be a new carrier you have never heard of or one you have not dealt with previously. It is recommended that agency management establishes a guideline to detail what an acceptable rating is. It is best to factor in how your agency’s E&O policy addresses this issue to ensure that if the carrier became insolvent, the agency would have protection under its E&O coverage. It is easy to check carriers’ ratings through the AM Best website (www.ambest.com). With the exception of New Jersey, most state guaranty associations do not provide any protection if an E&S carrier is declared insolvent. Do your homework. The wholesalers you do business with will be busy during a hard market. Work with them and you will find that they will work with you. Doing your homework and having a professional relationship with these folks could make a big difference in whether your application gets to the top of the pile. This article is adapted from QS90737, which can be found in the PIA QuickSource library (www.pia.org).

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E&S market: Why can’t I find that in the law? The answer to the question posed in the headline is because many excess- and surplus-lines insurance companies’ actions are covered by the contract.

When you need to consult the contract

Have you ever asked yourself why E&S insurance carriers can cancel a policy with only 30 days’ notice when in most other instances 60-120 days’ notice before the end of the policy period is required (with some exceptions)? Do you find it odd that E&S carriers can charge a short-rate penalty when an insured cancels a policy? This is because only certain sections of Insurance Law apply to E&S carriers. The rest of the rules governing their conduct with insureds are contained in the insurance contract itself.

As you can see, there are not many laws that govern the actions of E&S carriers. Because of this, when such a carrier takes certain action—such as canceling or nonrenewing a policy— as the agent or broker, you must consult the insurance policy itself to see if the carrier is acting appropriately. The rules set forth in the policy regarding notice of such actions is likely to be shorter than for other policies with admitted carriers.

What applies to E&S lines policies? If the laws and regulations of a state do not explicitly include E&S policies, they are excluded and the rules regarding conduct are found in the contract itself (see more later in this article). However, states have ensured that certain protections for insureds extend to E&S policies. There are two laws that Connecticut, New Hampshire, New Jersey, New York, and Vermont all have that apply to all insurance carriers, admitted or not. The first is that a carrier is not allowed to conduct insurance business in the state if it is not authorized/licensed to do so by the state insurance department. The other is the prohibition on unfair trade practices for those engaged in the business of insurance. These laws apply to all who conduct business of insurance, thus E&S carriers are not excluded from following these rules. All five states also have rules that insurance producers/brokers must follow, including licensing rules and rules for placing insurance in the nonadmitted market. Each state has an export list, which means the risk can be placed with an E&S insurer without doing due diligence and checking to ensure admitted carriers do not offer such coverage. In New York, even though the section of law governing commercial policies (Section 3426) excludes E&S policies, this does not hold for Section 3425, which governs personal-lines policies. According to the Excess Line Association of New York: “As to the personal-lines cancellation/nonrenewal law, set forth in Section 3425, no such exemption exists and by negative implication, that law appears to apply to excess-line personal-lines policies.” Moreover, the New York State Department of Financial Services opined that Section 3425 applies to excess-line personal-lines policies (see OGC Opinion 06-10-07).

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TECH

KATHERINE SLYE-HERNANDEZ, PH.D. PAC coordinator & public policy analyst, PIA Northeast

The policy also will outline the rules regarding renewal, such as the number of days’ notice the carrier must give to the client before renewal and regarding increases in premium. Unlike admitted carriers that must file rates and have premium increases approved by the state insurance department, E&S carriers are not held to the same standards so policy premiums can go up much more yearto-year on these policies than in the admitted market. One question PIA members ask the association is whether an E&S carrier can cancel a policy short rate or how much minimum earned premium a carrier can keep if a policy is canceled. Unfortunately, unlike for admitted carriers, there are no filed rates for these carriers and the rules regarding both are found in the contract itself. If the policy does not 9

spell out that a carrier can cancel short rate, then it cannot take such action. Similarly, for minimum earned premium, the amount will be spelled out in the policy and the carrier must follow what is dictated in the policy.

1. the conditions upon which an excess-line policy may be written;

You also must consult the contract to ensure that your clients are acting appropriately if they wish to cancel their policies before the end of term. For most admitted policies, the client must simply give advanced notice of cancellation. However, when it comes to an E&S policy, the rules for how the insureds cancel their policies could be different. As with most other things, the policy will spell out the rules in this instance.

2. advice on how unauthorized insurers may not be subject to all the regulations of the DFS pertaining to policy forms; and

One thing to remember regarding E&S insurance policies is that they often are manuscript (i.e., customed by the carrier). This means that the terms often will vary from carrier-to-carrier and possibly between types of policies. An E&S carrier cannot discriminate and give one client different rules than another in a policy for the same type of coverage. However, this does not mean the rules cannot differ between contracts for different types of E&S coverage. Thus, never assume you know what the rules are for a specific policy just because those were the rules in a policy for a different risk from the same carrier.

Restrictions placed on E&S insurers

One thing to remember regarding E&S Connecticut also forbids an E&S insurer from soliciting policies to insurance policies Connecticut residents by advertising is that they often or any other means. are manuscript (i.e., Conclusion customed by the The old adage of make sure you read carrier). This means the contract could not ring more true than with E&S insurance policies that the terms because most of the rules regarding often will vary the actions of the insurance carrier on the policy are found there, not from carrier-to- in state insurance law. So, next time carrier and possibly you find yourself asking, “Can the carrier cancel the policy like that?,” between types be sure to check the contract first. of policies. Should you have questions regarding

Even though many laws and regulations that apply to admitted carriers do not apply to E&S carriers, some states have rules that are directed specifically at E&S carriers. Connecticut, New Jersey, New York and Vermont all require some form of disclosure to clients when placing coverage with an E&S insurer because they are not protected by a state guaranty fund should the E&S carrier become insolvent.

E&S insurance in Connecticut, New Hampshire, New Jersey, New York or Vermont, PIA members can consult the QuickSource and Ask PIA Resource libraries, which can be found at www.pia.org, or contact PIA Industry Resource Center at resourcecenter@pia.org.

In Connecticut and Vermont, this information is included in the policy on the cover or on the declarations page. Connecticut stipulates exactly what that disclosure must say, and Vermont requires it be in a contrasting color and bolded. However, New Jersey and New York require more specific disclosures.

Slye-Hernandez is PIA Northeast’s PAC coordinator & public policy analyst.

In New Jersey, the originating broker must provide a Quotation Disclosure Form for the applicant to sign at the time of quotation, which warns the applicant that the coverage terms of E&S forms may be significantly different than regulated forms. New York requires brokers to provide a “notice of placement” to an insured when they place a policy, which must include:

3. a caution that in the event of insolvency of the unauthorized insurer losses will not be covered by any New York state security fund.

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Rising real estate: Shore up clients’ protections A home or business can be your clients’ most valuable asset. In the event of a flood, that asset is at significant risk of damage or, in severe cases, total loss. Historically, just an inch of water can equate to tens of thousands of dollars in damage.1 Purchasing flood insurance is a primary defense against such devastating loss—and knowing the appropriate amount of flood coverage to buy is critical for property owners to be able to recover quickly. The real estate market has been booming since the pandemic began—with home prices rising as much as 30% in some cities,2 and 15.8% on average in 2021.3 After a slight dip at the beginning of the pandemic, commercial real estate pricing also has been on a steady growth rate, in the mid-single digits. This trend is expected to continue through the end of 2022.4 Higher residential and commercial real estate prices, coupled with an ongoing rise in the cost of materials and labor, mean increased replacement cost value for homes and businesses. Now is a good time to assess whether your clients’ flood insurance needs are being met under their current coverage.

Why excess coverage may be a good choice for your clients Most homeowners insurance does not include flood coverage, so flood insurance must be purchased separately. Primary flood insurance can be obtained through FEMA’s National Flood Insurance Program, which is distributed by a network of over 50 insurance companies called Write-Your-Owns and the NFIP Direct, which allows enrolled agents to offer flood insurance to their clients directly from FEMA. Underwritten by the federal government, the NFIP provides flood insurance to homeowners, renters and businesses. There also are many private primary flood insurance options available through the insurance marketplace. [EDITOR’S NOTE: PIA members can offer their clients’ personal and commercial flood policies through Hartford Flood.] Excess flood insurance is widely available, and supplements primary policies offered through the NFIP or private insurance. If the property is insured under the NFIP, excess coverage is available once property and contents values are maxed out (see chart on page 14), and it should be offered to clients

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when a house or business property is valued over those limits. Maximum NFIP residential building coverage limits are $250,000. To provide more context around the benefits of including excess flood as part of the overall flood insurance package for a residential property, the median home prices across the United States are increasing rapidly. According to the National Association of Realtors, the median U.S. house price rose to over $350,000 as of January 2022.5 This is an increase of 15.4% year-over-year.6 To ensure a home is protected, it is imperative excess flood is included in the equation. For example, take Collier County, Fla., an area that borders the Gulf of Mexico. Home prices rose by 14.4% year-over-year with a median home price of over $435,000.7

RISKS

MELISSA LEUCK SVP, sales & client relationship leader, Torrent Technologies Inc.

Based on current NFIP maximums, the values of many houses and businesses exceed primary coverage limits, so excess insurance is not only a good option, but may be a necessary consideration. Similarly, if the property is insured through a single carrier—outside of the NFIP— excess coverage can be added easily to your client’s insurance and should be considered when primary flood insurance coverage is not sufficient to cover a total loss.

NFIP primary policy limits Type of property Building coverage Contents coverage maximum maximum Residential

$250,000

$100,000

Commercial

$500,000

Generally, excess flood insurance is easy to quote during the application process, and it can be economical. Some insurance providers offer excess flood insurance policies for as little as $250. FEMA’s recent introduction of Risk Rating 2.0 methodology—which went into effect on new policies on Oct. 1, 2021, and now is required for renewals starting April 1, 2022—has shone a spotlight on the importance of replacement cost values as a key loss factor. The time to talk to your insureds about excess coverage is now.

What is Risk Rating 2.0? Risk Rating 2.0 was introduced by FEMA in 2021 after a review of the flood rating methodology under the NFIP was completed. For 50 years, flood insurance was rated based on fairly static criteria such as the property’s flood zone. The new rating system incorporates a wider range of flood risk factors,8 such as flood frequency, multiple flood types—river overflow, storm surge, coastal erosion and heavy rainfall—and distance to a water source,

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along with property-specific characteristics, including elevation and replacement cost. Risk Rating 2.0 is designed to make pricing unique to each property and by extension more equitable for insureds. For some, this means that rates will go up. For others, rates will go down. It is important to note, NFIP rates were increasing prior to Risk Rating 2.0—to more accurately reflect actual risk. Consistent with current legislation, Risk Rating 2.0 will cap rate increases at 18% per year, until the actuarially sound rate—which means each property’s evaluated true risk—has been achieved.

Best practices Here are some suggested approaches to help clients make the most of flood insurance coverage available to them:

Additional options. The NFIP offers standard coverage for a house or business, and its contents. Private insurance also is available through individual carriers and can offer additional coverage options not available through the NFIP. Whether the insured has flood insurance through the NFIP or a single carrier, coverage needs should be reviewed carefully on an annual basis or as property values increase. Property values can increase at any time—based on a variety of economic factors—so it is important to maintain regular communication with clients to ensure there is sufficient insurance to cover a loss. If the replacement cost value of the property exceeds maximum limits or is expected to do so during the policy period, excess insurance options should be offered to help mitigate risk and ensure the total replacement cost of your client’s property is covered at the time of loss. Many online quoting platforms make it easy to request both primary and excess coverage options during the initial or renewal application process. A valuable tool is a multirater to provide agents with different flood insurance options. These may include quotes from the NFIP, private primary flood insurance, and excess flood insurance. A curated and integrated portfolio helps to eliminate the stress of too many options for the agent and their clients. Mid-term excess flood. Some companies offer mid-term excess flood. This benefits both agents and insureds because it allows more flexibility to protect the insured’s property without the confines of doing so only at renewal or at the time of new business.

NFIP or private insurance? The NFIP is attractive to many because it is underwritten by the federal government. Combining the NFIP coverage with excess flood to maximize coverage showcases the complementary nature of these two products. The NFIP also has set maximums for primary coverage, while private insurance often offers higher limits and potentially broader coverages. For homeowners, private insurance may include coverage for additional living expenses. And, for small-business owners, private insurance also may offer coverage for loss of business income and business interruption.

Admitted vs. nonadmitted options Many states require agents to do a diligent search to place clients with an admitted policy. If there are no admitted policies, only then may nonadmitted lines be an option. Admitted policies can be more secure as well as being more convenient, because: • Admitted carriers are licensed by the states in which they operate and file their rates and forms with the state regulator. • Claims on admitted policies are backed by the state guaranty funds, so the fund will assume liability to pay the claim if the carrier is insolvent. For nonadmitted private flood insurance that is written by an E&S insurer, there is no state guaranty fund to protect the insured in the event of a company insolvency. The NFIP has financial backing from the federal government. Products and options are helping to bridge the U.S. flood insurance gap, while also ensuring properties have full replacement cost coverage. Between the NFIP, private flood and excess flood offerings, agents are able to offer their clients flood protection and financial peace of mind. Leuck leads the client executive team at Torrent, the leading flood insurance administrator in the U.S. She is passionate about leveraging sales and community education tools to expand her clients’ flood portfolios while closing the flood insurance gap. Leuck joined Torrent in 2019, and she is based in Chicago, Ill. For more information, visit www.torrentcorp.com. 1

FEMA, 2020 (bit.ly/3wqpxth)

Realty News Report, 2022 (bit.ly/3tXLMDT)

National Association of Realtors, January 2022 (bit.ly/36gaebn)

Forbes, December 2021 (bit.ly/3CSqlYT)

National Association of Realtors (bit.ly/3KNf8vr)

National Association of Realtors (bit.ly/3IlHAmI)

National Association of Realtors (bit.ly/3q7qd2u)

FEMA Risk Rating 2.0 (bit.ly/37yHuvc)

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E&S: Amid mergers and acquisitions Plot a route through the wholesale broker market he insurance industry is full of uncertainty. However, there is one thing that is constant: Mergers and acquisitions are happening at warp speed within all sectors of the insurance marketplace— including the wholesale brokerage market segment. It used to be that many agencies sold primarily due to aging sellers who were worried about the perpetuation of their business; this is no longer the case.

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According to Mark Maher, president, Jencap Group, “The wholesale broker marketplace has been consolidating for a number of years not dissimilar to the retail broker marketplace.” Consolidation in the distribution chain has been driven by well capitalized buyers with private equity backing. For example, Russell Bond & Co. Inc., sold to the fourth largest wholesaler, Jencap, in October 2021. Prior to the sale, Russell Bond was an independent regional wholesale broker, and it is now a part of a national company. Both national and independent wholesalers provide their own unique value proposition to you, the agent, and we will provide insight into the pros and cons of working with each type of wholesaler. This article includes thoughtful insights from four highly respected professionals in our industry: Tim Russell, CPCU, president, The Russell Agency, and independent retailer firm, Southport, Conn.—he also is the former president of PIA Connecticut and PIA National; Tony Curti, operations executive with Acrisure LLC, a national retailer firm, Grand Rapids, Mich.—he also is the current president, PIA National and past president of Michigan PIA; Coryn Thalmann, CEO of Jimcor Agency Inc., an independent wholesale firm, Montvale, N.J.; and Mark Maher, president of Jencap Group, a national wholesale firm, New York, N.Y. To find a wholesale relationship that works best for your agency, you need to consider the Three P’s: people, products and processes. These factors are the foundation for any business relationship and they should be considered carefully.

People Insurance is a people business built on solid relationships. In addition, human nature leads people to do business with those they like and with whom they connect. Look for a wholesale broker that is viewed as trustworthy, dependable and possesses specialized expertise; one that acts as a trusted adviser. Thalmann offers this advice, “Build a relationship with your wholesaler. Spend time getting to know what makes them different, what products and markets they have to offer and how they can help you grow your agency.” Russell shared, “So much of what my agency does in the E&S market is relationship driven. It’s really not the company, but the people that we are dealing with. Have they been responsive in the past? Do they get quotes out quickly? Do they seem to know what they are talking about when we have coverage questions?” From an independent wholesaler’s perspective, Thalmann offered: “Agents should look for wholesalers that want to build a relationship with them. They should ask what products they have and what service levels they should expect from the wholesaler. They should also spend some time getting to know their claims and accounting teams along with the underwriting teams. The post-bind relationship and experience is important to build as well.”

Products The second area of focus is on product/coverage specialization and market access to help the retail agent find a solution for the risks that they are not able to place with their direct markets. The end goal of the wholesaler should always be to serve the retail agents and help them write a piece of business

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they may not have otherwise been able to without help. If your agency writes E&S property/casualty business, you may have noticed you are getting more nonrenewal notices due to surplus-lines carriers exiting delegated bind-authority business. In the past year, two markets that worked with Russell Bond, exited this segment because they were unable to write this business at the targeted profit margins. The renewal team needed to remarket this business and Russell Bond needed more p/c markets. Despite my solid relationships and our reputation within the E&S marketplace, I was finding it a challenge to obtain new markets before we were acquired. Why? Because we didn’t have scale. Continuing this idea, Maher shared, “Without a certain amount of scale, access to markets is a concern, and staying relevant to your retail customers—especially those who have sold to a larger retail brokerage group—becomes difficult to do. As a wholesaler you constantly need to bring more products to the table to help your retail customers grow. This gets more difficult to do without the scale that a larger organization can bring to the table.” The same concept applies to the retail side, and it is a major reason for M&A—the formation of Alliance Groups (e.g., Renaissance Alliance, SANS Group and Iroquois Group) and cluster groups. This means that agents need to pair with other agents to get market access and get scale.

Processes Ease of processing business with your wholesaler is vital, whether it is a national firm or an independent firm. Often these policies are written with lower commission than retailers’ direct markets and as the

saying goes, time is money. The ease of doing business equates to greater success and revenue. Russell also evaluates his wholesalers on: Have they been responsive in the past? Do they get out quotes quickly? There is nothing more frustrating for a retail broker than to be asked a lot of questions and complete supplemental applications only to be told that the wholesaler has no markets, which means the retail broker must start over with another wholesale broker. The technology a wholesaler uses also is important. The easier it is to do business, the more accounts can be written together. This technology can include: an online rating platform, a means for retailers to obtain certificates on their own, and an efficient policy issuance or simple billing strategy.

Intuitively, the ability to leverage technology, geographic coverage, breadth of product scope, access to capital and broader underwriting capacity are all potential advantages. A great independent wholesaler (think: boutique) can get things done based on their personal relationships, specialization and motivation to win.” When Russell Bond went from being an independent firm to a national firm last fall, I called many of my retail brokers and many of them shared that when their favorite independent wholesaler broker sold to a national firm, they were told that nothing would change, but this was not always the case.

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National vs. independent So, what happens when an independent wholesaler is acquired by a national firm? What does this ultimately mean to you? And, what needs to be retained? Curti shared his views, “If an independent wholesaler becomes part of a larger national organization, it is critical that it retains its value proposition, relationships, attention to detail and specialization. Joining a larger, more stable and broader platform is the best of both worlds. What is paramount is exceptional service, quality products and communications—if this is lost, the potential value created will suffer.” Regarding what a national wholesaler can bring to the merger, he said: “National wholesalers can provide several benefits and services to the agency/broker community.

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They found that some national wholesalers reassigned the retail broker to a junior member in the firm or consolidated accounting or service departments—which at times left those feeling disconnected. This does not have to be the case. As a national firm, we focus on a boutique style, with solid personalized agency/broker relationships as part of our value proposition. While the idea of working with a national company may turn some retail brokers off, Russell noted that its more about the rapport: “I like the idea of independent brokerages, but if a firm is purchased, I am still going to use them if it is the same people and we had a good relationship,” he said.

The relationship benefits As solid relationship benefits both sides. What are the advantages of good working relationships with independent wholesalers? According to Thalmann, “The benefit of working with an independent wholesaler is a more personalized and custom experience, as we focus on independent retailers and aggregators as our core clients. We partner with clients of all sizes, to add value and help them write more business. Our market reach provides a great spread of products and markets to meet their customers’ needs, without making them feel like a number. Independent wholesalers understand the independent retail agency model, as we face many of the same opportunities and challenges. We view our partnerships as a true extension of the retailers’ access to markets, knowledge and products.”

“Our market reach provides a great spread of products and markets to meet their customers’ needs, without making them feel like a number.”

Moreover, what are some of the benefits to the wholesaler that may choose to merge with a national wholesaler? And, how can those advantages also benefit the retail agent’s clients? “I think if you spoke with all of the former founders of the firms we have acquired, they would tell you bringing access to more markets—and a seat at the table with the management of those markets—is very impactful immediately,” said Maher. “This allows our team to be able to compete with anyone in the market. The additional specialties and programs that we/Jencap have, are products that these firms did not have preacquisition. So again, there is more to offer our clients to help them grow. As a larger organization, we can attract talent that might have been difficult to do as a smaller firm.”

The future of M&A It looks like mergers and acquisitions will continue to be a part of the insurance industry’s future, as firms continue to look to consolidate their relationships. According to Curti: “We’re constantly evaluating our wholesalers to ensure our agency and our clients are receiving the best value. We are a tech-driven brokerage firm, and we are looking for wholesalers that can use data/artificial intelligence to drive growth. There are benefits of consolidating

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wholesalers, including enhanced compensation, dedicated service and brokerage staff, access to technology, and enhanced service. Ideally, we’ll have local relationships that provide exceptional service backed by the power of a large national wholesaler that offers best-in-class technology, broad access to markets, specialization, leverage in the marketplace, and proprietary products.”

Take your next steps As you decide which wholesaler best fits your agency’s needs, remember the three P’s—people, products and processes. The insights provided by the panelists are meant to assist you in navigating the ever-changing wholesale broker landscape. Whether they are a national or independent firm; the ultimate goal is to build a long-term relationship; and help your agency find solutions for your hard-to-place clients. Winsky serves on the PIACT board of directors and she has been active in the insurance industry—serving on many carrier agency adviser groups and facilitating at a national level for Wholesale & Specialty Insurance Association. She is passionate about insurance and she is committed to continual learning and mentoring and growing others in our industry. In her free time, Winsky enjoys hiking, riding her Spyder, entertaining, listening to live music and travel. She resides in western Massachusetts with her husband, Stuart.

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Unusual risks Specialty insurance market is driven by demand Due to a demand for innovative, customized solutions to help combat increasingly unique risks across industries, the specialty insurance market is booming. In fact, Market.US projects that the global market— which was valued at $229.6 million in 2018—will increase at a compound annual growth rate of 5.7% from 2019 to 2028. This steady, upward trajectory is driven by an appetite for customized solutions across industries, from ride-share to commercial property. And, this growth has the potential to touch all players in the insurance continuum—from managing general agents and managing general underwriters, to brokers and agents—who are looking to the specialty market to solve specific challenges. According to Chad Levine, executive vice president and chief strategy officer for Aon Affinity, “There is an intense craving for customization and for partners who truly know what they’re doing. For agents, being able to zero in on a specific client risk and provide coverage for it is a serious leg up. In fact, consumers no longer hope you have what they want—they expect it. Specialization is driving every facet of our lives—including what coverages we choose to protect our most important investments.”

Built for speed and innovation Typically, specialty insurance companies are among the first to bring a solution to market when a new insurance need emerges due to their business model. Designed to be nimble and forward-thinking, specialty companies aren’t looking at 50 industries and trying to understand the impact of an event. They’re often laser-focused in one area and that enables a faster pace of evolution and innovation—they can adapt quickly as risks emerge. The internal structure of a specialty provider differs from a more traditional insurance company in a way that supports bringing a product to market quickly. While a traditional company might need to own every part of the policy lifecycle—from the sales and marketing to launch the product to claims management—specialty companies often assemble a team of experts from different organizations to design and deliver a product that’s in line with unique or emerging client needs in a shorter time frame. You can see this process playing out in real-time as insurance experts work together to address questions in the fine art world about the potential for coverage to help protect NFTs, or nonfungible tokens—which are digital PIA.ORG

assets designed to show one has unique ownership of a virtual item. This conversation really started to gain momentum in March 2021 when the digital artist, Beeple sold an NFT of his work for $69 million during a first-of-itskind auction at Christie’s. It was a moment that demonstrated what collectors are willing to invest in digital art and the need to make sure that investment is protected adequately. And, while the specialty insurance world hasn’t arrived at an answer to NFT coverage, it is exploring a range of options—from how it might adapt traditional fine art coverage for the digital world, to how coverage from the financial institutions market might work—to meet the needs of this emerging group of clients.

Industries leading the specialty charge While there are many drivers moving the needle in the world of specialty insurance, there are four industries that are really driving demand for unique products, which include the following: Catastrophes. There’s a great awakening happening in catastrophe coverage. Commercial property owners are coming to understand their increased threat of flooding no matter where their property is located. Typically, property owners arrive at this awakening because of increased access to data about the property’s true flood risk, as well as personal experiences with flooding—a moment that usually brings about the understanding that flooding is the most costly catastrophe exposure for property owners, yet isn’t covered under a standard commercial property policy. Because of the great awakening, two areas of the market will become growth hotspots in the coming years: • Special flood hazard areas. Historically, lender flood insurance requirements have driven the market. In the absence of a lender requirement, penetration remains low, even in high-risk flood zones like A and V. However, as the quality of data improves, the industry is better able to educate commercial property owners on their individual perils. With better education and clear data, property owners in all flood zones will begin to proactively consider nonlender-required flood insurance, growing the industry in a different way. • The private market. In the past, you could only buy flood insurance from one source: the National Flood Insurance Program. Today, an emerging private market is blossoming, providing wider protection options, excess coverage and different—and often more affordable—rates. Having this choice can make a significant difference for commercial property owners, opening the door for them to select more customized coverage. Health care. Beyond the daily risks involved with delivering patient care, the COVID-19 pandemic created new risks and has accelerated the maturity of those once simply deemed as emerging. As a result, as providers and practices navigate a more complex risk landscape, it is essential that they work with insurance specialists who understand these complexities and can deliver contemporary solutions for their clients. There are many forces that will continue to shape and reshape health care’s risk environment in the coming years, but four stand out because of their projected 26

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scope and impact: 1. changes in the delivery of care—particularly telehealth; 2. the growth of the home health care industry; 3. a rebound in the senior living industry; and 4. the rise in demand for mental wellness services. The world of health care is dynamic and so are the risks these professionals face in their work. Professional liability insurance will continue to play a vital role as health care professionals and practices seek to protect from today’s risks as well as tomorrow’s. Nonprofit. The pandemic intensified the need for the criticalresources nonprofits provide as more people deal with serious issues like food insecurity, lack of access to educational resources and insufficient housing. Yet the pandemic also tested nonprofits, pushing them to their limits and exposing them to new risks as they seek to serve greater numbers with less funding, increased expenses, and fewer volunteers. Beyond the myriad of risks, the rising price of insurance will continue to be a pain-point for nonprofits—presenting insurance professionals with an opportunity to serve as a true counselor to their clients in this industry. These organizations are looking for protection options in the middle of a fluid risk landscape and often don’t have the expertise to choose on their own. As risks continue to converge and press against each other, insurance agents will play a major role in serving as advisers to help their clients find alternate coverage solutions that can serve as an umbrella of protection. “Nonprofits are faced with the potential of choosing a policy based on price and ending up with coverage that doesn’t do what they thought it would,” said Amy Doherty, senior

vice president of Affinity Nonprofits. “It’s a critical moment for any insurance professional who serves the industry to meet the challenge and serve as a guiding light to keep these incredibly important organizations moving forward.” Mortgage banking. Originally predicted to be a challenging year as consumers grappled with a spike in unemployment and an economic crash, 2020 saw a boom in the mortgage banking industry, which “had everything to do with low interest rates,” said Tom Delaney, president of Bankers Insurance Services, an Aon Programs solution. Across the board, Delaney notes a few key trends that will continue to propel insurance solutions for the industry forward, including the hot selling market, continued interest in refinancing, and a new level of demand for mortgage impairment.

Areas that historically have never flooded are flooding because of changing weather patterns, overbuilding, and increasing urban density. Yet, if consumers buy houses that are not in traditional high-hazard flood zones, they’re still not required to purchase mandatory flood insurance protection—which means mortgage lenders are sitting on high risk, expensive collateral properties. This disconnect between flood insurance requirements and the reality of flood risk is driving an appetite for mortgage impairment insurance as lenders look to insulate their businesses against the impact of catastrophic events. “The insurance industry is working to educate consumers about this hidden risk and how they can help mitigate it, especially in those areas considered low hazard,” Delaney said. “But, until we truly have widespread adoption of flood insurance and more accurate flood mapping, mortgage impairment insurance will be critical for lenders in all corners of the country.”

Conclusion The specialty insurance market shows no signs of letting up, proving tremendous opportunity for insurance professionals looking to expand or evolve their books of business. “There is—and will continue to be—a significant appetite for specialty products,” said Levine. “The last year certainly showed how important it is to be able to rely on expertise in the face of new challenges.” Zeornes is the sales leader for Aon Programs, an Aon Affinity business that helps agents and brokers develop tailored insurance portfolios. An experienced sales leader, Zeornes is skilled in property/casualty insurance, strategic planning, and team building.

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Don’t be a victim of cyber extortionists, ransomware Ransomware1 attacks—also known as cyber extortion—are on the rise. As these attacks increase in frequency, ransom demands are increasing as well. More particularly, such demands are estimated to have nearly doubled in 2020 over the prior year;2 the average ransomware demand is $233,817.3 If your computer system is compromised by ransomware, it can cause delays in conducting your business, a loss in profits, increased expense in responding to the breach, and may impact your business’s good will if personally identifiable information is exfiltrated by the hackers. Although ransomware attacks are increasing, there are steps you can take to protect your computer system from the attempts of hackers to encrypt, compromise and/or steal your data, as well as to help you rebound quickly in the event your computer system is encrypted by hackers: Educate staff members on malware and system vulnerability. You and your staff members need to be aware of what files and links you are accessing on your computer system. One way for hackers to gain access to your computer system is through phishing (i.e., social engineering in which the hacker sends a fraudulent email that appears to be a legitimate business email with links or attached files that, if accessed, release the ransomware on your computer system). Educating users on the types of social engineering scams being used and the importance of not clicking on links or opening files from untrusted sources are the first line of defense against a ransomware attack. Ensure that your system software, including antivirus software, is updated regularly. Ransomware can be quite sophisticated, and it may take advantage of weaknesses in your computer system’s architecture. Ensuring that your operating system and programs are updated regularly with security patches can increase the efficacy of your computer system’s built-in security. Likewise, having antivirus software is important for early detection. However, if it is not updated regularly, it will not be as effective at locating and isolating potential malware. If available, employ endpoint detection and response. An endpoint is any point in your computer system or network where communication occurs (i.e., entry and exit of data). EDR is a complementary component to antivirus software, and it offers a proactive tool for locating malware before it can negatively impact your computer system. However, EDR is not included in all antivirus platforms, and may require additional cost per user. Therefore, you must consider the cost and benefit of such an application. Depending on the PIA.ORG

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size and volume of your agency, it may be a worthwhile investment in your business operation. Automate your computer system backup. It is important that you backup your computer system daily. Why? Once your computer system is encrypted by ransomware, it is likely that you are not going to be able to access that data without a key code from the hacker—which may be quite expensive, and you are not guaranteed to get all your data back. Moreover, even if the hacker provides a key that unlocks your data (after paying a hefty ransom), there is no guarantee that there is not more malware on your computer system that will be activated later. However, if your computer system is backed up daily, you can simply wipe your system of the encrypted data and ransomware and restore your data from the most recent backup (that predates the infection). Many cyber risk policies will cover that restoration cost up to the applicable sublimit for ransomware. Create an Incident Response Plan. Having an Incident Response Plan will provide your agency with a framework on how to respond to a cyberthreat, such as a ransomware attack. It should include information on available resources, such as information regarding your cyber risk coverage, third-party vendors that are approved for servicing your 29

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Protecting your proprietary information and the personally identifiable information of your customers is a necessary component of a trusted and successful business. Avoid being a victim to cyber extortionists by being proactive in the use and management of your computer system. Utica National Insurance Group and Utica National are trade names for Utica Mutual Insurance Company, its affiliates and subsidiaries. Home Office: New Hartford, NY 13413. This information is provided solely as an insurance risk management tool. Utica Mutual Insurance Company and the other member insurance companies of the Utica National Insurance Group (“Utica National”) are not providing legal advice, or any other professional services. Utica National shall have no liability to any person or entity with respect to any loss or damages alleged to have been caused, directly or indirectly, by the use of the information provided. You are encouraged to consult an attorney or other professional for advice on these issues. © 2022 Utica Mutual Insurance Company A type of malware designed to encrypt a user’s data and lock users out of their system. Some types of ransomware allow for the exfiltration of data, while others merely restrict access to the data.

• Competitive commissions (20% for new business; 19.5% for renewal; and 20% for rollover) • Brand recognition, with a locally based carrier • Multi-rater quoting system • Online quoting, endorsements and policy issuance • Free flood zone determinations, certified to be accurate • Dedicated flood sales director assigned to your agency Get started—contact The Hartford today. CT/NY—Art Brickley | (860) 547-2190 | a.brickley@thehartford.com NJ—Cheryl A. Maginley | (860) 547-5007 | Cheryl.Maginley@thehartford.com VT/NH—Michele Battis | (704) 972-5918 | Michele.Battis@thehartford.com The program is available to PIA members and their policyholders in all 50 states, the District of Columbia and Puerto Rico, and offers special PIA member commissions starting with the first sale (no minimums to qualify).

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Cyber Security Trends in 2021, Firch, Jason, MBA, Dec. 31, 2020

This Year In Ransomware Payouts (2020 Edition), Soare, Bianca, Dec. 18, 2020

Collapse exclusions, condo fences and more Massachusetts surplus-lines fees

Condo fences

Q. What is the law on the maximum surplus-lines fee that can be charged in Massachusetts?

Q. Are fences that are owned and installed by the condo unit owner insured on a replacement-cost basis? What will be the Coverage A limit if none is specified on the application?

A. The Commonwealth of Massachusetts allows for “reasonable and customary” fees. For more information, see Bulletin 2013-09. Many of our members report that they see fees ranging from $50 to over $100. This practice repeals a former law in Massachusetts, which had set this limit by statute.—Dan Corbin, CPCU, CIC, LUTC

Collapse exclusion Q. My homeowners client had a five-inch thick and two-by-three-foot cement slab in front of his fireplace. The whole thing suddenly fell into the basement. Is the damage covered as collapse under his HO-3 homeowners policy? A. In the ISO 1991 HO-3 policy, collapse is an excluded cause of loss unless covered under Additional Coverage No. 8. This additional coverage applies only to collapse caused by the specific perils listed, which precludes coverage for collapse caused by excluded perils such as a flood, earthquake or latent defect in the home’s construction. The burden of proof is on the insured to show that the cause was one of these specified perils. In the case of the cement slab, if the collapse occurred because of hidden decay, hidden damage from insects or vermin, the weight of people or contents in the house or one of the “broad-form” perils, there should be coverage. However, the ISO 2000—and later edition HO-3 policies—also provide collapse coverage under Additional Coverage No. 8, but the wording has been revised to preclude its application under the circumstances you presented. As stated in this provision: Collapse means an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its current intended purpose. The hole in front of the fireplace in your scenario does not likely make the dwelling uninhabitable, which is necessary to trigger collapse coverage in the 2000 and later HO-3 policy editions.—Dan Corbin, CPCU, CIC, LUTC

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A. Yes. Unlike the HO-3, the HO-6 settles claims on all structures, even if they are not buildings, on a replacement-cost basis. The default amount, according to ISO rules, is $5,000.—Dan Corbin, CPCU, CIC, LUTC

Above-ground pools ‘contents’? Q. Is an above-ground pool covered on the homeowners policy under Coverage B–Other Structures or Coverage C–Personal Property? I’ve been told it could be “contents” because the owners could pack up the pool and take it with them if they move. A. Mobility is not the only determining factor. Even a house could be moved. The primary factor is whether it has been constructed. Above-ground pools are constructed on the premises, so I believe they are covered as “other structures” under Coverage B.—Dan Corbin, CPCU, CIC, LUTC

Covering parties with paid bartender Q. Five or six times a year, one of my homeowners clients hires a friend to serve drinks at parties that my client gives in his home. The parties are social affairs, not business-related. Is my client covered for liquor liability exposures from these parties? How about the friend who tends bar for him? A. The liability of a host server depends upon the statutes and case law in the state where the homeowner resides. Generally, serving alcohol to minors is the sole basis for liability; while some states hold a host liable for gross negligence or for serving a visibly intoxicated person. Because these parties are not business-related and no exclusion in the homeowners form precludes host liquor liability coverage, the insured would be covered for serving alcoholic beverages to guests, provided the injury is not caused by the use of a motor vehicle. The 2000 (or later) edition of the ISO homeowners policy forms thoroughly closes the door to liability coverage for a loss involving the use of a motor vehicle, regardless of who is operating it. However, coverage for the homeowner would apply to an intoxicated guest who negligently injured someone or damaged property without the use of a motor vehicle. The 2022 HO policy (proposed to be effective March 1, 2022) has been enhanced to cover this host liquor liability exposure by changing the definition of “motor vehicle liability” to read: (2) Maintenance, occupancy, operation, use, loading or unloading of: (a) An aircraft, hovercraft, or watercraft by any person; or (b) A motor vehicle by an “insured.” By isolating motor vehicle use by “an insured,” as opposed to “any” person, liability for someone other than the insured operating a vehicle is no longer excluded as “motor vehicle liability” in the homeowners policy.

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However, his bartender friend does not satisfy the definition of an “insured” on the host’s policy, so he would not be covered under this policy. Also, the bartender’s homeowners policy is likely to exclude this activity because of the business pursuits exclusion. (This activity could be construed as a business pursuit since he is compensated and performs it with some regularity.) One way to access coverage for the bartender could be to have your client enter into a written contract under which your client agrees to assume the bartender’s liability. The contractual liability exclusion of Section II–Exclusions, Coverage E– Personal Liability, makes an exception for a written contract relating to the ownership, maintenance or use of any “insured location,” or when the liability of another is assumed by the insured prior to an occurrence. If your client chooses to assume the bartender’s liability (not sure why he would do it), the assumption of risk would be limited to that which is covered by the homeowners policy which, of course, excludes the use of motor vehicles. Even if it was the 2022 edition of the HO policy, there still will be no coverage because of the following exclusion: “bodily injury” or “property damage” arising out of or in connection with a “business” conducted from an “insured location” or engaged in by an “insured,” whether or not the “business” is owned or operated by an “insured” or employs an “insured.”—Dan Corbin, CPCU, CIC, LUTC

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