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VOLUME 125, NUMBER 3 / Februar 10, 2014

Serving: New York, New Jersey, Connecticut, Pennsylvania and Washington D.C.

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Contents

February 10, 2014 | volume 125 number 3

[COVER STORY ] 16

LICONY Heats Up Legislative Activities

[FEATURES] 4

Foreword: CARCO Key to 16 Arrests Steve Acunto, Publisher

6

Insight: Budget Balancing (and Other Magic Tricks) Peter H. Bickford

10

In the News: National General Holdings Corp. Acquires Renewal Rights and Assets of Tower Group’s Personal Lines Business

12

On the Level: Peace of Mind Jamie Deapo

18

In the Associations: MetroRAP Rings in the New Year

24

LIFE: Life Settlements Market Holds New Opportunities

30

On My Radar: First Party vs. Third Party Barry Zalma

35

Classifieds

36

Looking Back: February 1989

[AD FEATURES] 14

PIANY: Webinars and CE Marathon

20

American Transit

25

IIABNY: 2014 Annual E&O Loss Control Seminars

www.insurance-advocate.com

16

6

18

Correction: We incorrectly identified Martin D. Haber, Esq., as being affiliated with FTI Consulting in our End of Year, 2013 edition, page 24. Mr. Haber is an independent lawyer specializing in insurance, reinsurance and arbitration matters with no affiliation to FTI Consulting. We apologize to Mr. Haber for the error.

Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / Februar 10, 2014 3


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[ FORE WORD ]

Steve Acunto

S

CARCO Key to 16 Arrests

S

o sad to learn of Gene Wollan’s passing. He was a force for good in the field of reinsurance law and a great friend. I knew Gene from the Metropolitan Opera and other incarnations in addition to his being a great writer and contributor for the Insurance Advocate. R.I.P... The Life Insurance Council of New York (LICONY) met recently and hosted Senator Seward, Assemblyman Sullivan and DFS Superintendent Ben Lawsky. All in all, LICONY has challenged legislators to pass some interesting legislation and from the looks of things there is great interest in it. We hope that Tom Workman, LICONY President and CEO, EUGENE WOLLAN and Mike Zarcone, the new Chairman and Chief of Staff, realize gains for this enormously important sector of the industry... Speaking of important sectors, we have been debating in these pages the value of CARCO. Along comes an article in the New York Times concerning a luxury car theft ring with sixteen arrests and credit for its undoing goes to CARCO. We quote the New York Times report, in part, as follows: “As crime rates have dropped, so too it seems has the caution of car owners. Some of the thefts by the gang arrested this week occurred when drivers left vehicles idling in a driveway or parking lot, the police said. “In other cases, the thieves plucked cars from the lots of dealerships after stealing the keys, the police said. They would also go after valets and sometimes shipments of cars, jumping behind the wheel while the vehicles were sitting, keys in the ignition. At their most innovative, the thieves would steal one of a pair of identical keys from a car rental company and place a GPS device in the matching car, the police said. Then they would wait for the car to be rented and track it down. “These days, many luxury cars have sophisticated security systems that make it almost impossible to drive a vehicle without its specific set of keys, the police said. That has forced car thieves with expensive tastes to become more creative. “The ring of thieves arrested in this case treated driveways, dealerships, parking lots and other locations like their personal showrooms,” Police Commissioner Raymond W. Kelly said in a statement. New York police detectives, he said, “brought these car thieves’ operation to a screeching halt.” The thefts occurred in New York City and wealthy neighborhoods in New Jersey, in Westchester County and on Long Island, the authorities said. The investigation into the thefts began in early 2012 after a tip about suspicious cars from a vehicle inspection company called the CARCO Group, the police said. (our emphasis -Ed.) Investigators then identified a shop in Queens that was providing fraudulent inspection records. From there, the police, working with the New York State Department of Motor Vehicles, the Queens district attorney and the New York State Department of Financial services, uncovered a plot.” It seems our point about a voluntary use of CARCO would be spurred by such an eventuality as this, once insurance companies realize the value of the service. We do not think the photo inspections need to be mandatory except in certain cases that could be defined by the DFS or by a group of companies. The service is quite valuable and we do endorse CARCO as an effective – obviously - anti-fraud device... In this issue we present PIA’s RAP session and urge agents to keep up with their associations since all of them have swung into gear in 2014 with excellent programs. PIA’s regional meetings are very valuable in my view and offer agents a rare occasion to meet with carriers and providers and to network in a reasonable time frame and in a good environment.

4 February 10, 2014 / INSURANCE ADVOCATE

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VOLUME 125, NUMBER 3 FEBRUARY 10, 2014

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Rafi Michael Loguercio Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x126 circulation@cinn.com PUBLISHED BY CINN Group, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN G R O U P, I N C .

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 21 times a year, and once a month in July, August and December by CINN Worldwide, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing offices. POSTMASTER Send address changes to Insurance Advocate®, PO Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com. INSURANCE ADVOCATE® is a registered trademark of CINN Worldwide, Inc. and is copyrighted 2013. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Office.

For high-quality article reprints (minimum of 100), including e-prints, contact Gina Balog at g@cinn.com or call 914-966-3180, x113


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[ INSIGHT ]

By Peter H. Bickford

Budget Balancing (and Other Magic Tricks)

T

he State of Nirvana has come up with a painless way to not only balance its budget, but to also increase spending on new programs and capital projects and reduce taxes. Nice trick, right? How, you may ask, is this possible? Nirvana has decided to require all state domiciled insurance companies to transfer excess reserves

insurance, will release reserves totaling approximately $2 billion that are no longer required to fund future liabilities. The Enacted Budget authorizes using the released reserves over a period of four years, including $250 million for debt management in FY 2014

The NY courts supported the State’s taking of Insurance Fund assets as early as 1983, by determining that because the State Fund was a state agency and not a mutual insurance pool, policyholders had no property or contractual interest in the funds, and therefore there was no violation of the Federal or State constitutions. Peter H. Bickford

– as determined by the State – to the State treasury. “Wait a minute,” you say, “that cannot be right.” You point out the obvious: it is not the companies’ money to transfer or the State’s to take. If Nirvana considers it a borrowing instead of a taking, it has to show a liability for the debt and borrowing costs, not to mention that insurance company reserves are largely set by statute and cannot be encumbered. Most importantly, however, those funds are held for the benefit of policyholders who paid premiums to ensure that their claims or insured obligations are covered in the future. Finally, such a practice would likely bring instability to the marketplace and raise serious solvency concerns for insurers if claim payments cannot be met in the future. But the government of Nirvana says not to worry, it has all that covered, and is just expanding on the precedent so wisely set by New York over the years. Last year New York’s budget included authority to transfer funds from the New York State Insurance Fund to the general funds of the State. The official report on the enacted budget explained the move as follows: “As a by-product of the [Workers’ Compensation] reform legislation, SIF, a State agency that provides Workers’ Compensation

and $1 billion for gap-closing purposes in FY 2015.” Never mind that the principal source of reserves being released to the State was premiums charged to policyholders, primarily small businesses. Why, you may ask, are these “unnecessary” reserves being transferred to the State rather than refunded to these small business owners? Having obtained the authority for the transfers from the State Fund in 2013, it was understandably difficult to find any reference to the $1 billion of released reserves included in Governor Cuomo’s 2014-2015 budget unveiled this January. The revenue from the State Fund transfer is shown in the proposed 2014-2015 budget as a simple $1 billion one-liner with no elaboration. The press release announcing the new budget heralded going from a $10 billion deficit to a $2 billion surplus over the past several years – a surplus that could not have been possible without this taking of “unnecessary” reserves. If you think this budget strategy sounds familiar, you would be right. Consider the New York Times article, “New York’s Dangerous Insurance Policy,” reporting that: “Over the years, Governor Cuomo has repeatedly raided the fund in order to help balance state budgets. The new balance sheet

shows transfers of more than $1 billion in cash - a third of the fund’s liquid assets - to the state treasury and describes the advance as a ‘’contingent receivable,’’ meaning it can be relied on only in special circumstances. But a contrary footnote explains that with permission of the Legislature and Governor, the fund can treat it as an ‘’admitted asset,’’ implying unchallengeable value.” Before you go scurrying around to find this article, or if you are asking how you could have missed it, note that it is dated October 14, 1989 – almost 25 years ago – and the referenced Cuomo is Mario not Andrew. The NY courts supported the State’s taking of Insurance Fund assets as early as 1983, by determining that because the State Fund was a state agency and not a mutual insurance pool, policyholders had no property or contractual interest in the funds, and therefore there was no violation of the Federal or State constitutions. The original 1983 raid was “only” for $190 million, and that sum was to be paid back by 1985. The 1989 raid, however, was for an amount in excess of $1 billion. The New York Legislature prohibited further raids of the State Fund in 1996, but did not force the repayment of any prior transfers, nor did it stop the most recent raid beginning in 2013. The State Fund’s audited 2012 balance sheet (the most recent available at the time of this writing) shows the transferred sums from the 1989 and earlier raids as an admitted asset in the amount of $1.295 billion, and identified simply as a “Contingent receivable from New York State.” That “admitted asset” represents over 40% of the State Funds reported surplus, and does not include the $2 billion current round of raids! It will be interesting to see if the “release” of reserves authorized in 2013 will also be shown as a receivable from the State or simply a reduction in reserves, a transfer of assets and a source of revenue without any offsetting state obligation. But wait! If the NY legislature prohibcontinued on page 8

6 February 10, 2014 / INSURANCE ADVOCATE

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[ INSIGHT ] Cuomo#1’s first term. Also there have been other raids, including the transfer of funds from the Insurance Security Funds to the State’s general funds during the Pataki years.) Can you imagine a licensed private insurer with 40% of its reported surplus represented by an unsecured IOU from the state? Or can you imagine a State declaring reserves of licensed insurers to be excessive and requiring the excess to be transferred to the State? Nirvana can! According to the Nirvana budget footnotes (in 8-point type),

continued from page 6

ited further raids in 1996, how was the current raid possible? Simple: what the Legislature giveth the Legislature can taketh away, and the present about face was accomplished by the Legislature’s approval of the 2013 budget. (A word of caution lest one concludes that raiding insurance funds is solely a Cuomo thing: the authorization for the first State Fund raid actually predated

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approval of the budget will provide that the State will only take assets that are not needed to pay claims, or will allow IOUs for “borrowed” assets to be carried as admitted assets on insurers’ balance sheets, so there would be no change in their financial condition. Also, the state will not be paying interest on the borrowings in any event so there are no carrying costs. If a solvency concern arises in the future, the state insurance regulators can require insurers to post additional reserves or take other remedial actions. Nirvana recognizes that these actions will probably lead to increased premiums for the consumers, but not to worry. Any additional costs to the public will lead to outrage against everyone’s favorite target, the insurance companies. That outrage, however, will come long after any transfer or borrowing occurred so any attempt to reflect blame back on the budget action or to collect on any IOU will be futile. The public pays and the companies, who are used to playing the heavy, are blamed. Outrageous! Could not possibly happen! The raid of the assets of the State Fund, which the NY courts found to be a public agency, is not comparable to taking from private insurers, and state legislatures and their courts would never condone a taking of assets from private companies to solve budgetary problems in any state. But given the propensity of courts to defer to the authority of the legislature and the government – particularly in New York – is it really that far-fetched? Following the precedent of the State Fund case, is it that much of a stretch to see a court holding, for instance, that once paid as premiums, policyholders have no continuing interest in the funds whether paid to a state agency (like the State Fund) or to a private insurer serving the same function? The courts could also determine that aggrieved policyholders have no “standing to sue,” or that there are no damages until an actual default many years down the road, at which time the statute of limitations precludes a recovery. Budget gimmicks are nothing new, and are not confined to government budgets. One hopes that there would be sufficient will on the part of administrators and legislators to draw a line in the sand to prevent a state from taking funds paid by policyholders to purchase insurance. But it has already happened and now it is a matter of degree. [IA]


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[ IN THE NEWS ]

National General Holdings Corp. Acquires Renewal Rights and Assets of Tower Group’s Personal Lines Business Karfunkel Cites Advantages to Agents, Brokers

N

ational General Holdings Corp. (NGHC) has moved to acquire the renewal rights and assets of the personal lines insurance operations of Tower Group International, Ltd in connection with an agreement simultaneously entered into by ACP Re Ltd, a privately held Bermuda corporation, and Tower pursuant to which a subsidiary of ACP Re has agreed to acquire 100% of the outstanding stock of Tower for $3.00 per share and merge with Tower, subject to regulatory and shareholder approval. In addition, NGHC has also reached an agreement with several Tower subsidiaries to enter into, immediately upon the receipt of regulatory approval, a 100% quota share reinsurance agreement and provide a cutthrough endorsement (the “Cut Through Reinsurance Agreement”) on most of Tower’s in force personal lines policies and on new and renewal personal lines business. NGHC has also obtained a 10-day option to reinsure, on a prospective basis, not less

than 60% of the unearned premium reserve relating to Tower’s personal lines business. NGHC expects to exercise the option and to reinsure, prospectively, most of the business included in the unearned premium reserve. The Cut Through Reinsurance Agreement, when approved, will be effective as of January 1, 2014. The Company will pay a 20% ceding commission to Tower on all Tower premium subject to the Cut Through Reinsurance Agreement. Michael Karfunkel, Chairman of National general stated “I am very excited about this transaction as it will add increased product offerings to our customers, agents and brokers. This transaction will introduce homeowners and umbrella coverage into our product offerings which will allow us to bundle these coverages with our existing auto business and make our product offerings even more competitive. The transaction will also add geographic and product enhancements to our auto business. The reinsurance agree-

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ment and cut through endorsement are designed to stabilize and secure Tower’s business and allow Tower’s agents, brokers and policy holders to rely on the financial strength of National General to stand behind Tower’s new, renewal and in-force policies.” Upon the completion of the merger of Tower with an ACP Re subsidiary, NGHC expects to acquire the assets necessary to support the Personal Lines Business (the “Assets”), including several of Tower’s domestic insurance companies, the Personal Lines Business renewal rights, the systems, books and records required to effectively conduct the Personal Lines Business as well as the right to offer employment to certain Tower employees engaged in the conduct of the Personal Lines Business. The Company will acquire these Assets from ACP Re for cash in an amount equal to the statutory tangible book value of the acquired companies. The total purchase price for the Personal Lines Business is expected to be approximately $130 million. The acquired companies will be used to support Tower’s Personal Lines Business and will contain assets and surplus equivalent to the purchase price. Through a reinsurance agreement that will be fully collateralized, ACP Re will retain and run off all historical liabilities of the acquired companies. The acquisition is expected to close in the summer of 2014, pending regulatory approvals and the consummation of the merger. [IA] About National General Holdings Corp.: National General Holdings Corp. is an insurance holding company headquartered in New York, NY. It offers both personal lines property and casualty and accident and health insurance products, including personal and commercial automobile insurance and recreational vehicle, supplemental health insurance products and other niche insurance products.


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[ ON TH E LEVEL ]

By Jamie Deapo

Peace of Mind

S

ome 30 years ago when I was starting my new career as an independent agent I learned a concept at the time that I thought was just a gimmick to get people to buy the coverage they needed. During my training at the Aetna’s PRIME school they stressed we weren’t selling

If a consumer properly protects their home, car, family and business by working with an independent agent or broker it removes an enormous amount of responsibility and stress from their lives. They can go about their business knowing that if something happens in any of those areas

If a consumer properly protects their home, car, family and business by working with an independent agent or broker it removes an enormous amount of responsibility and stress from their lives.

Insurance we were actually selling Jamie Deapo “peace of mind”. Like I said at the time it sounded kind of foolish and designed to engage consumers with an easily understood concept. Now when I look back I see the real value of providing consumers with “peace of mind” and if used properly it can be an awesome sales tool. One of the biggest issues in today’s fast paced world is the stress associated with getting everything you need done taken care of quickly and easily. As a society we look for fast and easy ways to do everything. Our houses are filled with time saving gadgets. We are inundated with “magic” pills that will help us sleep, help us to lose weight, help us to be less anxious and on and on. With so many people searching for that “magic” pill the concept that working with an independent agent or broker can give you “peace of mind” sounds like a real deal. When you think about it that’s really what we do.

they needn’t worry because they have protection that will make them whole again. If that isn’t “peace of mind” then I don’t know what is. If they have a car accident they know their car will be either repaired or replaced and that they will be compensated for injuries to themselves and their passengers. They know any injuries or damage they are responsible for to others will be handled. That also includes being provided legal counsel to fight on their behalf in addition to ultimately paying a claim. If their house is damaged or destroyed they know they will have the money to repair or replace it putting them back where they were before the incident occurred. They also know they are protected if they injure someone or damage their property and are required to pay. If they purchase life and disability coverage for themselves and their family they know that an untimely death or disability will not seriously impact them financially and they will be able to continue the lifestyle they previously had.

Their business insurance will protect all that they have built over the years as well as protecting them from lawsuits and other unexpected business liabilities. I’d say that’s quite a lot of “peace of mind” especially when you look at the cost of the protection in relationship to what is being covered. It’s also important to buy your “peace of mind” from an independent agent or broker. They have the knowledge to assist consumers in buying the proper protection to meet their needs at a competitive price with the insurance company that best suits the consumer’s needs. The agent or broker’s thorough assessment of each consumer‘s risk and their recommendations for protection provide the real “peace of mind” that consumers want. If that’s not enough they also carry Errors & Omissions coverage that protect their clients should they make an error or fail to provide coverage as requested. Consumers who buy coverage online put themselves at a disadvantage as they don’t receive the professional and knowledgeable risk assessment and coverage recommendations provided by an independent agent or broker. Many consumers choose inadequate protection because they don’t understand their risk potential or how coverage works. Others are provided recommendations for coverage that won’t properly protect them. This actually puts them at a risk of having an uncovered loss which certainly won’t give them “peace of mind”. It’s strange but here I am 30 years after being taught to write insurance protection by presenting it as “peace of mind” coverage and I just now get it. After reading this I hope you might now appreciate using the idea of “peace of mind” coverage to get your clients and prospects to do business with you. [IA]

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March Ma rc h 4 4,, 2 2014 014 „10 „10 a.m. a .m . -12 -12 p.m. p. m . Don’t Don’t Confuse C o n fu s e C Contractual o n t r ac t u a l Indemnification In dem nification w with it h Additional Additional In Insured Coverage s u re d C overage „.9#% " 2 # 0# 0!„.*#% '% . „#4#% 0#„. (#% '% .0RODUCER ) NTO DAY´SCO M M ERCIALTRA NSACTIO NS CO NTRACTSTYPICALLYCO NTAINTWOP ROVISIO NS4H EFIRSTGE NERALLYREQ UIRESAP ARTYTOP ROC U REINSU RA N CEFORTH E BE N EFITOFTH EOTH ER4HESECO N DGE N ERALLYREQ UIRESAP ARTYTOIN DE M NIFYTH E OTHERP ARTY4H ESETWOTYPESOFCO NTRACTU ALOBLIG ATIO NSAREOFTE NCO NFUSE D B UTARETWOSEP ARATECO N CEPTS4HISCO U RSEA D DRESSESWH ATISCO NTRACTU AL IN DE M NIFICATIO NA N DWH ATLA N G U A GEISN EE DE DTOIN DE M NIFYAP ARTY ) NSTRUCTORS J ulia Talarick, Esq. a n d Kare n Moriarty, Esq.

March Ma rc h 1 18, 8, 2 2014 014 „10 „10 a.m.-1 a .m .-1 p p.m. .m . E Earthquakes, arthquakes, Floods, Floods, Hurricanes, H urricanes, Nuclear N uc l e ar and a n d Ot Other her D Disasters isasters „.9#% " 2 # 0! 0#„.*#% '% . „#4#% 0#„. (#% '% .02/ - A NYPEOPLEDO N´TTHIN KTH ATE ARTH Q U AKESHITTHEE ASTCOAST LETALO N E NORTH ERN. EW*ERSEY$O N´TTELLTH ATTO"ILL9O U N G O U RC H APTER´S$IRECTOROF 2ESPO NSE( E´LLB ETH EFIRSTTOTELLYO UTH ATM OREN ATU RALDISASTERSCA NOCC U R HERETH A NYOUTHIN K IN CL U DIN GH U RRICA N ES TORN A DOES A N DE ARTH Q U AKES4HIS WEBIN ARWILLDISC USSKEYELE M E NTSTOBETTERP REP AREYO USHO UL DYO UFACE SUC HADISASTERI nstructor: Steve Lyon, CPCU, CIC, CRM, AAI, ARM, AIS

April April 1 15, 5, 2 2014 014 „June „Ju ne 17 17, 7, 2 2014 014 „„10 10 a.m.-1 a .m .-1 p p.m. .m . E&O E &O Hotspots...2014 Hotspots...2014 and an d Beyond Beyon d ^UM/FF ^UM /FF „.9#% " 2 # ," # ,3" ,! 0# 0!„.*#% '% . „#4#% 0#„. (#% 4"! *3-hour form at, get your E &O loss preve ntion & CE credit i n one 3-hour session. 4H EREAREM A NYARE ASTH ATPOSEASIG NIFICA NTRISKTOA GE N CIESAS THEYTRA NSACTB USINESSTH AT IFNOTH A N DLE DCORRECTLY CA NCA USEA N% / CLAIM 4HIS7EBIN ARWILLDISC USSHOTSPOTSTH ATA GE N CIESN EE DTOB EO NTH E LOOKOUTFORI nstructor: Curt Pearsall, CPCU, CPIA

April April 1 16, 6, 2 2014 014 „„10 10 a.m.-1 a .m .-1 p p.m. .m . Understanding National Flood U n dersta n d ing tthe he N a t io n a l F lood IInsurance n s u ra n c e Program Progra m 2013 2013

„.9#% " 2 # 0# 0!„.*#% . &) 0 „#4#% &LOOD„. (#% &%- !&LOOD0RODUCER &% - !P U BLISH E DMINIM U MTRAININ GA N DE D UCATIO NREQ UIRE M E NTS AS REQ UIRE DBYSECTIO NOFTH E&LOO D) NSU RA N CE2EFORM!CTOF FORALLINSU RA N CEA GE NTSWHOSELL3TA N DARD&LOO D) NSU RA N CE0OLICIES ISSU E DTH RO U G HTH E. ATIO N AL&LOO D) NSU RA N CE0RO GRA M . &) 0 4HISCO U RSE IN CL U DESALLOFTH EMINIM U MTRAININ GA N DE D UCATIO N ALREQ UIRE M E NTSSET FORTHBY&% - !  I nstructor: Rita H olla d a, CIC, CPCU, CPIA

June Ju ne 26 26 and a n d 27, 27, 2014 2014 „„10 10 a.m.-12 a .m .-12 p p.m. .m . 2-part 2-p art W Webinar: eb i n a r : N NY YA AIP IP P Producer ro d u c e r P Procedures r o c e d u re s „.9#% " 2 # 0# 0!FOREACHPART#%TOTAL W h o i s r e q u i r e d to c o m p l e te t h e P r o d u c e r P r o c e d u r e s C o u r s e : N ewly Certified Pro d ucers !LLP RO D UCERSSEEKIN GCERTIFICATIO N  IN CL U DIN GRECERTIFICATIO NFOLLOWIN GASUSPE NSIO NORREVOCATIO N SH ALLB E REQ UIRE DTOCO M PLETETH EIN PERSO N0RO D UCER0ROCE D U RES#O U RSED U RIN G TH EIR DAYTE M PORAR YCERTIFICATIO N 0RO D UCERSSEEKIN GN EWCERTIFICA TIO NWILLB EALLOWE DTOTAKETH EO NLIN E0RO D UCER0ROCE D U RES#O U RSEP RO VIDIN GTH EREISNOIN PERSO NCO U RSEAVAILABLEWITHINAMILEDISTA N CE OFTH EP RO D UCER´SOFFICE WITHINDAYSOFTH EDATEOFCERTIFICATIO N  7H E NTH EREAREMORETH A NSU BLICE NSEES ATLE ASTFIVESU BLICE NSEES SEEKIN GCERTIFICATIO NU N DERO N ELICE NSEM USTCO M PLETETH E0RO D UCER0RO CE D U RES#O U RSE!NYP RO D UCERB ECO MIN GA NA D DITIO N ALSU BLICE NSEEOFA CERTIFIE DLICE NSEM USTCO M PLETETH E0RO D UCER0ROCE D U RES#O U RSEIFSUC H P RO D UCERISNOTC U RRE NTLYCERTIFIE DU N DERA NOTH ERLICE NSE U NLESSFIVE SU BLICE NSEESU N DERTH ATLICE NSEH AVEALRE A DYCO M PLETE DTH E0RO D UCER 0ROCE D U RES#O U RSE!NYP RO D UCERWHOCERTIFICATIO NH ASB EE NSUSPE N DE DORREVOKE DM USTCO M PLETETH EIN PERSO N0RO D UCER0ROCE D U RES#O U RSE ASAP REREQ UISITETORECERTIFICATIO N  I nstructor: Mishell M a g n usson, CIC, CISR, FI PC

S Sign ign up today and get ready to start earning C CE E Credit! REGISTRATION REGISTRATION $&BQQSPWFE8FCJOBSTNVTUCFUBLFOPOBOJOEJWJEVBMCBTJTUPFBSO$&DSFEJU $ &BQQSPWFE8FCJOBSTNVTUCFUBLFOPOBOJOEJWJEVBMCBTJTUPFBSO$&DSFEJU Unless U nless stated other otherwise, wise, rregistration egistration fees ar aree $25 per person, per CE cr credit edit hour GGPSNFNCFST GPSOPONFNCFSTCE PSNFNCFST GPSOPONFNCFSTCE applies only to liv livee W Webinars, eebinars, ebin NO NOT T for 8 8FCJOBST0O%FNBOE&WFSZQFSTPOXIPOFFET$&NVTUTJHOVQJOEJWJEVBMMZ  FCJOBST0O%FNBOE&WFSZQFSTPOXIPOFFET$&NVTUTJHOVQJOEJWJEVBMMZ  CCFBUIJTIFSPXODPNQVUFSBOEQBZUIFBQQSPQSJBUFSFHJTUSBUJPOGFF'PS$&BUFBUIJTIFSPXODPNQVUFSBOEQBZUIFBQQSPQSJBUFSFHJTUSBUJPOGFF'PS$&BUUUFOEBODFWFSJëDBUJPO 1*"XJMMNPOJUPSBUUFOEBODF FOEBODFWFSJëDBUJPO 1*"XJMMNPOJUPSBUUFOEBODF ^FF - This cour course se has been en appr approved roved for E&O loss prevention prevention credit credit by Fireman's F iireman's Fund. ^UM - This course courrse s has been approved approved for E&O O loss pr prerevention cr credit redit e by Utica Mutual. M

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4th Annual CE Marathon

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[ COVER ]

LICONY Heats Up Legislative Activities LICONY

16 February 10, 2014 / INSURANCE ADVOCATE

The Life Insurance Council of New York, Inc. (LICONY) celebrated its 46th Anniversary on Thursday, February 6, 2014, with a reception at the Mutual of America headquarters building on Park Avenue, NYC. The Anniversary Celebration Reception was attended by guests from life insurance companies, legal, accounting, actuarial, and other professional services firms, as well as New York State legislators and regulators. Addressing the audience on the occasion were Senate Insurance Committee Chair, James L. Seward; Assembly Insurance Committee Chair, Kevin A. Cahill; Superintendent of the New York State Department of Financial Services, Benjamin M. Lawsky; LICONY Board Chairman, Michael A. Zarcone of MetLife; and LICONY President and CEO, Thomas E. Workman. A commemorative portrait was presented to Bridget M. Healy, immediate past Chair of the Board in appreciation for her service over the past year.


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[ COVER ]

FROM LEFT TO RIGHT – NY SENATOR MARTIN J. GOLDEN; NY ASSEMBLYMAN KEVIN A. CAHILL; THOMAS E. WORKMAN, LICONY PRESIDENT & CEO

FROM LEFT TO RIGHT – MICHAEL A. ZARCONE, 2014 LICONY CHAIRMAN AND CHIEF OF STAFF, OFFICE OF THE CEO & HEAD OF CORPORATE AFFAIRS, METLIFE; ROBERT FARLEY, COUNSEL, NYS SENATE; NY SENATOR MARTIN J. GOLDEN

FROM LEFT TO RIGHT – THOMAS E. WORKMAN, LICONY PRESIDENT & CEO; MICHAEL A. ZARCONE, 2014 LICONY CHAIRMAN AND CHIEF OF STAFF, OFFICE OF THE CEO & HEAD OF CORPORATE AFFAIRS, METLIFE; ROBERT FARLEY, COUNSEL, NYS SENATE

INSURANCE ADVOCATE / February 10, 2014 17


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[ IN THE ASSOCIATIONS ]

MetroRAP Rings in the New Year

O

12in-

n Thursday, Jan. 23, PIANY held its first RAP of the year: MetroRAP, a landmark event for the New York City Metro insurance community, has become the first event professionals mark on their calendar. Despite record cold outside, insurance agents and those seeking to interact with them met each other warmly. “MetroRAP is where old friends come to see each other, make new business connections, and fuel the relationships that keep our industry running,” said PIANY President Alan Plafker, CPIA. Hundreds of agents rubbed elbows at trade show, making contacts to help their agencies and benefited from the camaraderie New York’s unique agent community enjoys. “You are part of some major milestones today,” MetroRAP Chair, Michael Demetriou told an audience of hundreds during the lavish lunch reception. “You probably know that MetroRAP is PIA’s first Regional Awareness Program of the year, but we also have the honor of announcing that PIA of New York, in coordination with PIA of New Jersey, is celebrating its 75th anniversary this year.” The announcement was met with applause as Demetriou shared that the Joint Annual Conference in Atlantic City will feature a black-tie gala affair to commemorate the diamond anniversary. The awards luncheon provided the opportunity for the MetroRAP committee to thank the generous sponsors and announce the Bernard I. Kozel & Arthur I. Moll Memorial Scholarship winners. PIANY presents two scholarships in memory of Arthur I. Moll, past president of both PIANY and PIA National, and Bernard I. Kozel, father of PIANY past President Shelly Kozel, respectively, to PIANY members with less than five years of experience in the insurance industry. Demetriou announced that Melvin Rivera, owner of Peconic Insurance in Peconic, N.Y., was the winner of the Arthur Moll Scholarship and Allison Mancuso of Windermere Agency in Greenwood Lake, N.Y., won the Kozel Scholarship. Each received full tuition to two courses conducted by PIANY toward the Certified Insurance Service 18 February 10, 2014 / INSURANCE ADVOCATE

METRORAP CHAIR, MICHAEL DEMETRIOU

Representative designation. The highlight of the lunch banquet was the award presentation. “Each year, MetroRAP recognizes extraordinary industry professionals who have demonstrated exceptional commitment to professional, independent agents and brokers and who exemplify the best our industry has to offer,” Demetriou said.

OTSEGO MUTUAL FIRE INSURANCE CO.’S TERRY M. GRAS, CPCU, ACCEPTING THE METRORAP EXECUTIVE OF THE YEAR AWARD

Demetriou first announced Terry M. Gras, CPCU, as MetroRAP Executive of the Year. Accepting the award, Gras thanked several colleagues at Otsego Mutual Fire Insurance Co., as well as PIA. Presenting David Bergeron, senior client manager for the Hartford Steam Boiler Inspection and Insurance Co., with the Industry Professional of the Year award Demetrio noted Bergeron’s 25 years of experience, and his reputation as an active company representative who supports his producer clients. Demetrio presented the Distinguished Service Award to Frank Carrigan, manager of the New York Automobile Insurance Plan, noting the Plan has become a model for other states, and has transition to the digital age under Carrigan’s leadership. Carrigan thanked PIA, and cited the work of AIP staff, producers and carriers and specifically thanked the many PIA members as critical to the Plan’s success. In addition to awards and networking, professionals could earn up to 15 credits at MetroRAP, beginning with a self-study course and monitored exam, Advertising, Rebating &  Referrals: Staying Compliant when Designing Your  Market  Plans. The course, which provided the opportunity to learn ahead of time and simply complete the exam at the show, is approved for 12 continuing credits, and is offered on an ongoing basis. For those who wanted a high-end classroom experience, two courses were offered: Data Compromise and Insurance, instructed by Bethann Savage, of Hartford Steam Boiler in the morning and E&O Hotspots—2014 and Beyond, with Curt Pearsall, CPCU, CPIA, AU, ARM, AIAF. Completion of the later class provided E&O credits, as well as continuing education. If you missed MetroRAP, you can see photos on the PIANY website at pia.org, under “Events.” Make sure you don’t miss out on PIA’s upcoming shows, including Long Island RAP on May 1 and the PIANJ/PIANY Joint Annual Conference in Atlantic City, June 8-10. Information and registration for both are available online. [IA] Photos continued on page 20


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Lawrence Brody lbrody@agostinolaw.com (201) 488-5400 x 132

Tara Krieger tkrieger@agostinolaw.com (201) 488-5400 x 118

Jairo Cano jcano@agostinolaw.com (201) 488-5400 x 144

Chrystal Loyer cloyer@agostinolaw.com (201) 488-5400 x 116

Jeffrey Dirmann jdirmann@agostinolaw.com (201) 488-5400 x 119

John Miscione jmiscione@agostinolaw.com (201) 488-5400 x 139

Christopher Grau* cgrau@agostinolaw.com (201) 488-5400 x 143

Lawrence Sannicandro lsannicandro@agostinolaw.com (201) 488-5400 x 128

Kevin Jost kjost@agostinolaw.com (201) 488-5400 x 120

Erica Son eson@agostinolaw.com (201) 488-5400 x 131

Eugene Kirman ekirman@agostinolaw.com (201) 488-5400 x 142

Mathew Turtoro mturtoro@agostinolaw.com (201) 488-5400 x 112

Jeremy Klausner jklausner@agostinolaw.com (201) 488-5400 x 130

Caren Zahn* czahn@agostinolaw.com (201) 488-5400 x 103

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[ IN THE ASSOCIATIONS ]

MetroRAP continued… LEFT - METRORAP CHAIR, MICHAEL DEMETRIOU PRESENTS DAVID BERGERON, SENIOR CLIENT MANAGER AT THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., WITH THE INDUSTRY PROFESSIONAL OF THE YEAR AWARD

RIGHT - BETHANN SAVAGE, OF HARTFORD STEAM BOILER INSTRUCTED THE MORNING COURSE, DATA COMPROMISE AND INSURANCE

A LARGE CROWD ENJOYED LUNCH AND THE AWARDS PRESENTATION

DEMETRIOU PRESENTS THE METRORAP DISTINGUISHED SERVICE AWARD TO FRANK CARRIGAN, MANAGER OF THE NEW YORK AUTOMOBILE INSURANCE PLAN 20 February 10, 2014 / INSURANCE ADVOCATE

CURT PEARSALL, CPCU, CPIA, AU, ARM, AIAF, TAUGHT E&O HOTSPOTS—2014 AND BEYOND AT THE AFTERNOON CE SESSION.


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COMMERCIAL LINES SPECIALTY PRODUCTS Outstanding Products, Easy Quoting, Great Service New Ventures Eligible Financial Strength Rating

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PERSONAL LINES SPECIALTY PRODUCTS Outstanding Products, Easy Quoting, Great Service Financial Strength Rating

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PERSONAL UMBRELLA Broad risk appetite Primary umbrella limits & excess umbrella limits up to $10,000,000 Direct bill option No self insured retention

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COMPREHENSIVE PERSONAL LIABILITY Coverage offered for owner occupied or tenant occupied 1, 2, 3, & 4 family dwellings Coverage offered for condo unit owners, mobile home owners, tenants of multiple unit buildings, & secondary/seasonal residences

Quick & Easy Phone Quoting: 888-845-6076 Access General Agency Amy Levy, Marketing Manager 516-622-4620 alevy@accessgen.com www.accessgen.com

Committed to the Success of our Agents!


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[ LIFE ]

Life Settlements Market Holds New Opportunities Conning, a thought leader in insurance since 1912, has recently shared an executive summary of its latest study on the Life Settlement market, revealing that there is increased investor interest and new opportunity for the aggregation of these policies by licensed agents and brokers.

A

s an asset class, life settlements continued to struggle to attract new capital in 2012. As 2013 developed, some indications of renewed interest in life settlements among investors surfaced. This renewal was driven in part by the prolonged low interest rate environment. At the same time, a new market opportunity emerged in the form of long-term care funding opportunities. Yet, as life settlements enter 2014, and beyond, will the new market opportunity and continued low interest rate environment combine to reignite investor interest and help meet consumer demand?

Looking ahead, because of the combination of fewer new policies settled with increased death claims and lapses on previously settled policies, the amount of in force life settlements decreased for the first time in our years of observing the market.

Market Review and Forecast In 2012, Conning estimates that life settlement sales increased over 2011. This increase reflects a change in the methodology we use to estimate life settlement annual volumes and, in our opinion, does not signal a change in broader market conditions. Capital continues to remain skittish about returning to this asset class, though anecdotal evidence suggests that there is renewed interest in life settlements driven by the prolonged low interest rate environment. Looking ahead, because of the combination of fewer new policies settled with increased death claims and lapses on previously settled policies, the amount of in force life settlements decreased for the first time in our years of observing the market. In the past, Conning based its estimate on a variety of sources, chief among these were annual reports and financial statements from life settlement funds and investors. However, the decrease in the number of publically available financial statements and reports no longer makes that methodology practicable. As a result, with this issue we are changing our annual volume estimate methodology to use the annual reports providers file in some states. Providers are the companies that purchase life settlements on behalf of investors. 24 February 10, 2014 / INSURANCE ADVOCATE

Based on our analysis of the life settlement market, we estimate that: - Investors purchased approximately $2.0 billion worth of U.S. life insurance face values in 2012. - Investors held just under $35 billion of in force U.S. life settlements at the end of 2012. - Transactions continued in 2013, with several large portfolios being purchased.

2013 Transactions Life settlement transactions continued in 2013. The first most noticed transaction was Berkshire Hathaway’s purchase of a portfolio with $300 million in face value from Coventry. This marked the return of Berkshire to the asset class it left in 2006. The decision by Fortress to sell its life settlement portfolio was the second largest transaction that drew attention. It marked a shift by the asset manager from an acquirer of portfolios in 2010 to a seller of them. Based on information in the AAP Life Settlement Market Update, internal rates of returns for life settlement transactions remained in the high-teens in 2013. This attractive return is a key reason some investors may be reconsidering the asset class as an alternative to other long-term fixed investments such as bonds.

2013-2022 Annual Volume Forecast Over the ten-year period from 2013 through 2022, Conning estimates the average annual amount of life settlements will be $2.2 billion. We estimate annual growth for face value settled will increase 1% to 2% per year over the forecast period. We base this on our analysis of broader investor and market conditions about this asset class. First, supply will not be an issue. Unless life insurers develop a mortalityadjusted cash surrender value, life settlements will continue to provide an economically competitive alternative to lapsing or surrendering some policies. Second, and equally important, there will be ongoing demand from some alternative asset investors for the low correlation to equity and debt markets that life settlements can offer. Third, the issue around changes in life expectancy should lessen as investors become familiar with the variability of this risk. Fourth, the regulatory environment surrounding life settlements has settled. What we are less certain of, and have difficulty seeing develop, is a strong return of capital to 2007 and 2008 levels. As we look at investor concerns about investment, liquidity continues to be a hindrance to a strong return of capital to life settlements. Without an efficient tertiary market where already settled policies can be sold, it will remain difficult for fund managers to provide a degree of liquidity to their investors. It is important to note that we view this as a hindrance, not a roadblock. There will always be some number of investors willing to commit capital for an extended period in a product with low, or no, liquidity. However, concerns about liquidity reduce the number of investors ready to make that commitment.

A New Long-Term Care Market Opportunity The number of individuals who may continued on page 28

R _ N _ N _ A _ A _ P R I 5 O C s r


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INA 2-3-14_INA 2-10-14 2/24/14 5:34 PM Page 28

IN THE MATTER OF THE LIQUIDATION OF FRONTIER INSURANCE COMPANY Supreme Court County of Albany Index No.: 000097/2006 NOTICE Pursuant to an order of the Supreme Court of the State of New York, County of Albany (the “Court”), entered on November 16, 2012, the Superintendent of Financial Services of the State of New York and his successors in office were appointed as liquidator (the “Liquidator”) of Frontier Insurance Company (“Frontier”) and, as such, have been directed to take possession of Frontier’s property and liquidate its business and affairs pursuant to Article 74 of the New York Insurance Law (the “Insurance Law”). The Liquidator has, pursuant to Insurance Law Article 74, appointed Michael J. Casey, Acting Special Deputy Superintendent, as his agent to carry out the responsibilities of the Liquidator, through the New York Liquidation Bureau, 110 William Street, New York, New York 10038. The Liquidator has submitted to the Court a verified petition (“Verified Petition”) seeking an order: (i) approving the Liquidator’s Report on the Status of the Liquidation of Frontier Insurance Company (the “Liquidation Proceeding”) and Request for Authority to Distribute Assets and Establish a Final Bar Date (the “Report”) and the financial transactions delineated therein; (ii) establishing December 31, 2014 as the final bar date, the final date by which the Liquidator must actually receive in respect of any claim presented prior to December 31, 2013 (the “Bar Date”, which was established in the Liquidation Proceeding by order of the Court entered on September 23, 2013) any and all evidence demonstrating (a) that such claim has been liquidated and (b) that there has been actual loss and/or payment in respect of such claim; (iii) authorizing the continued payment of administrative expenses; (iv) authorizing the Liquidator to distribute Frontier’s assets, consistent with this Court’s orders and the priorities set forth in Insurance Law Section 7434, to those creditors of Frontier with allowed claims, to the extent that, in the Liquidator’s discretion, sufficient funds are available; and (v) providing for such other and further relief as this Court deems appropriate and just; A hearing is scheduled on the Verified Petition on the 10th day of March, 2014, at 1:00 p.m., before the Honorable Richard M. Platkin, A.J.S.C., New York Supreme Court at the Courthouse, 16 Eagle Street, in the County and City of Albany, State of New York, 12207. If you wish to object to the relief sought, you must serve a written statement setting forth your objections and all supporting documentation upon the Liquidator and the Clerk of the Court, at least seven days prior to the hearing. Service on the Liquidator shall be made by first class mail at the following address: Superintendent of Financial Services of the State of New York as Liquidator of Frontier Insurance Company 110 William Street, New York, New York 10038 Attention: General Counsel. The Verified Petition and Report are available for inspection at the above address. In the event of any discrepancy between this notice and the documents submitted to Court, the documents control. Requests for further information should be directed to the New York Liquidation Bureau, Creditor and Ancillary Operations Division, at (212) 341-6809. Dated: January 14, 2014 Benjamin M. Lawsky Superintendent of Financial Services of the State of New York as Liquidator of Frontier Insurance Company. 28 February 10, 2014 / INSURANCE ADVOCATE

[ LIFE ] continued from page 24

need some form of LTC (long-term care) is increasing as Baby Boomers age. Life settlement investors may want to consider two distinct opportunities in the long-term care market. The first is an emerging opportunity to meet the financial needs of nursing home patients. This opportunity is emerging because of regulatory changes. The second opportunity is helping elderly individuals finance their stay in assisted living facilities and with home health care.

Growing Demand for LongTerm Care Funding Sources The number of elderly individuals using some form of LTC is increasing. The cost to live in a long-term care facility continues to increase. According to the U.S. Census Bureau, just over 40 million Americans were 65 years of age or older in 2010. What is interesting is that the 85 and older age group had the highest growth from 2000 to 2010. Over this period, the number of individuals age 85 or older grew 30%, compared to 19% for the 65 to 74 age group and just 5% for the 75 to 84 age group. This is important because as a person ages, the need for some form of assisted living increases. However, the sale of traditional longterm care insurance continues to fall. This creates an opportunity for life settlement investors to provide a source of LTC funding through the purchase of cash value policies

A State Encouraged Nursing Home Opportunity States, through Medicaid, are a primary funder of nursing home care. In 2011 (the latest available), according to the Centers for Medicare and Medicaid Services, Medicare and Medicaid paid 56% of nursing home care. Medicare paid 25% of total nursing home expenditures in 2011. Medicaid covers a much larger portion of long-term care expenses, but only after applicants have exhausted the majority of their personal resources in order to qualify for Medicaid benefits. In 2011, Medicaid paid 31% of total nursing home expenditures. Under Medicaid, if a cash value life continued on page 34


INA 2-3-14_INA 2-10-14 2/24/14 5:34 PM Page 29

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INA 2-3-14_INA 2-10-14 2/24/14 5:34 PM Page 30

[ ON M Y RADAR ]

By Barry Zalma

First Party vs. Third Party “Other Insurance Clause” Eliminates Coverage

F

irst party property insurance only insure the owner of the property for its loss and makes no promise to defend or indemnify the insured against

On November 28, 2010 and December 5, 2010, thieves stole BMI’s copper, valued at $483,389.20, from the MTS warehouse. Before the thefts, MTS had purchased

Even in bailment situations, where the policy insures against the risk of loss of property of others, it does not insure against suits by the property owner for its loss.

Barry Zalma

MTS (the “BMI lawsuit”). In March 2011, MTS requested that UNIC defend it in the BMI lawsuit. UNIC rejected MTS’s request because the UNIC policy did not provide liability coverage of any kind. UNIC moved for summary judgment in its declaratory judgment action, which MTS and BMI opposed. The district court granted summary judgment in favor of UNIC on the first and second declarations. The district court found that the UNIC policy does not impose upon UNIC any duty to defend or indemnify MTS in the BMI suit, and that the UNIC policy precludes coverage for the thefts of the copper under the UNIC policy.

ANALYSIS claims of third parties. Even in bailment situations, where the policy insures against the risk of loss of property of others, it does not insure against suits by the property owner for its loss. In United National Insurance Co. v. Mundell Terminal Services, Inc., 13-50052 (5th Cir. 01/23/2014) the Fifth Circuit was called upon decide claims seeking coverage under a first party policy for defense and indemnity of a subrogation claim.

FACTS Mundell Terminal Services, Inc. (“MTS”) and Keith D. Peterson & Company, Inc. (“KDP”) and Scarbrough Medlin & Associates, Inc. (“SMA”) appeal from the district court’s grant of summary judgment in favor of United National Insurance Company (“UNIC”) in this declaratory judgment insurance coverage dispute. The case involves certain property owned by BAL Metals International Incorporated (“BMI”) that was stolen while MTS stored it in its warehouse. The district court held on summary judgment that UNIC’s first-party property insurance policy issued to MTS is excess to BMI’s own insurance policy and, therefore, no coverage exists under UNIC’s policy. MTS operates a warehouse business in El Paso, Texas. In 2008, BMI entered into a contract with MTS to store copper sheeting at one of MTS’s warehouse facilities. 30 February 10, 2014 / INSURANCE ADVOCATE

a first-party property insurance policy from UNIC (the “UNIC policy”). The “Building and Personal Property Coverage Form” in the UNIC policy defines “Covered Property” to mean MTS’s “Business Personal Property located in or on the building described in the Declarations… ¶ Personal Property of Others that is: (1) In your care, custody or control; and (2) Located in or on the building described in the Declarations…” The parties expanded coverage to include “Stock,” elsewhere defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” Moreover, the “Supplemental Declarations” page provides a $500,000 coverage limit for “Stock, including Property of Others while in the insured’s care, custody and control.” Aon Risk Solutions issued an insurance policy to BMI (the “Aon policy”), which covers the stolen copper. The Aon policy has a policy limit of $25 million. The UNIC policy has a policy limit of $500,000. In response to MTS’s timely claims for the copper thefts, UNIC sent a “reservation of rights” letter to MTS on December 31, 2010. On January 5, 2011, pursuant to the Aon policy, Aon paid BMI $483,389.00 for the loss. On February 24, 2011, Aon, as subrogee of BMI, filed a law suit against

Texas courts (which the Fifth Circuit must follow) construe insurance policies according to the same rules of construction that apply to contracts generally. When interpreting insurance contracts, courts seek to ascertain the true intentions of the parties as expressed in the instrument. To this end, Texas courts examine and consider the entire writing in an effort to harmonize, give effect to all the provisions of the contract so that none will be rendered meaningless, and give policy terms their ordinary and commonly understood meaning unless the policy itself shows the parties intended a different, technical meaning. At issue is whether the theft of the copper is covered under the UNIC policy. The parties do not dispute that the copper is property described in the policy and states a limit in the amount of $500,000. The policy contains an excess “other insurance” clause, which will vary, limit, or eliminate the insurer’s obligation to reimburse the insured where other insurance may cover the same loss. The well-known and evident purpose of such “other insurance” clauses is to avoid and guard against the moral hazards and attendant temptations to fraud which might be reasonably expected to arise out of the existence of undisclosed continued on page 32


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[ ON MY RADAR ] continued from page 30

concurrent policies of insurance having identity of scope and of subject matter. The parties further, did not dispute that the two policies cover the same property — BMI’s copper — against the same risk of theft. The parties agree that, by storing BMI’s goods in MTS’s warehouse, the two formed a bailor-bailee relationship. Texas law allows a bailee to insure bailed goods for their full value, for the benefit of itself and the bailor. Under Texas law, MTS insured both its interest and BMI’s interest. Even if SMA can point to distinct “insurable interests” between the UNIC policy and the Aon policy, their coverage need not be completely coextensive to be considered “other insurance” as to each other.  Both policies cover at least BMI’s interest in the copper itself. This sufficiently constitutes coverage of the same interest under the “other insurance” test.  Wherever there are two separate insurers liable for the same loss the fact that one policy covers more property or wider risks than the other does not prevent the insurance being double on the subjects covered by both. The Fifth Circuit held that both the UNIC policy and the Aon policy are in favor of BMI. The UNIC policy provides that UNIC’s payment for loss of or damage to personal property of others will only be for the account of the owner of the property. As the district court correctly noted, the plain meaning of the phrase for the account of suggests that the UNIC policy covers the personal property of others on behalf of, or for the benefit of, the owners of the property. Furthermore, the policy limits any payment “only” to the account of the owner of the personal property, thereby demonstrating the parties’ intent to solely benefit the owner of the property and not the insured. Consequently, because the owner of the copper is BMI, any loss incurred under the UNIC policy would actually be paid to BMI, and thus the UNIC policy is in favor of BMI. As there is no dispute that the Aon policy is also in BMI’s favor, this element of the “other insurance” test is also satisfied. The UNIC policy and the Aon policy thus cover the same property and interest therein, i.e., BMI’s interest in the copper; against the same risk, i.e., theft; and in 32 February 10, 2014 / INSURANCE ADVOCATE

Property insurance policies are intended solely to indemnify the insured for his actual monetary loss by the occurrence of the disaster. Liability policies, on the other hand, insure against loss arising out of legal liability, usually based upon the assured’s negligence.

favor of the same party, i.e., BMI. The Fifth Circuit concluded that the Aon policy constitutes “other insurance” with respect to the UNIC policy. Pursuant to the clear and unambiguous exclusion no coverage exists under the UNIC policy for the thefts of BMI’s copper. MTS now must face a subrogation claim without liability insurance coverage has no bearing here because the UNIC policy is a first-party property policy and does not provide liability coverage of any kind. Property insurance policies are intended solely to indemnify the insured for his actual monetary loss by the occurrence of the disaster. Liability policies, on the other hand, insure against loss arising out of legal liability, usually based upon the assured’s negligence. While a liability policy may insure against a loss arising out of the subrogation claim MTS now faces, MTS chose not to procure such insurance.

ZALMA OPINION Available to a warehouseman like MTS are first party policies that provide coverage for its property and property of its customers in its care, custody, and control to avoid liability suits. Also available are third party liability policies that would promise to defend and indemnify the insured if suit for its negligence caused a loss to its insured. It either failed to acquire liability insurance or refused to make claim to its liability insurer. The failure to buy the coverage they needed leave MTS open to a suit from BMI’s insurer out of its own pocket.

First party insurance is different from third party insurance as an apple is from an automobile. Never the twain shall meet and the only similarity between the two is the use of the work “insurance.” Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/ Getting-the-Whole-Truth_p_254.html. Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insuranceclaims-a-comprehensive-guide-online. Mr. Zalma recently published the ebooks, “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm. Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv or at the bottom of the home page of his website at http://www.zalma.com.


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[ LIFE ] continued from page 28

insurance policy has more than a minimal amount of cash value (usually in the range of $2,000), the owner must liquidate it and apply any money received towards their LTC cost of care before qualifying for Medicaid. In 2013, several states began discussing legislation that would require the disclosure or recommendation of life settlements to people who might be considering lapsing or surrendering their policies in order to meet Medicaid eligibility requirements. These proposals build on NCOIL’s (National Conference of Insurance Legislators) 2010 Life Insurance Consumer Disclosure Model Law. That model law would require that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in force policy.

The Assisted Living Care Funding Opportunity Over the past two decades, a wider range of home and community-based serv-

ices have become available to older Americans who need assistance with activities of daily living. Assisted living in particular has rapidly emerged as a housing and long-term care option for older Americans. However, individuals need to rely on self-funding for assisted-care expenses. This creates an opportunity for life settlements to broaden its market and provide funding to these consumers. A 2011 study by the National Center for Health Statistics reported that 733,300 persons were residents of assisted living facilities nationwide for each day in 2010. This is over 50% of the size of the nursing home population. Individuals in assisted living facilities are older. According to the 2010 National Survey of Residential Care Facilities more than one-half of residents were aged 85 and over. Because the majority of individuals self-fund their assisted living care expenses, this creates an opportunity for life settlements. Many states have been cautious in expanding Medicaid coverage for services in assisted living facilities. Instead,

these expenses typically are financed from a resident’s income, including Social Security, Supplemental Security Income, state supplements, private pensions, federal housing subsidies, and—in some states— family contributions.

The Long-Term Care Impact on Life Settlements Currently, the life settlement industry is suffering from a lack of new capital flowing into the asset class. Concerns about longevity risk linger among investors. Adding to those concerns are the length of time capital is tied up in relatively illiquid investments. If the long-term care market represents a new opportunity for life settlements, would it help address these challenges? What new challenges would it create for investors?

A Positive Impact on Longevity Risk Moving towards the long-term care market may help reduce the longevity risk facing life settlement investors. Longevity risk is the life settlement investor’s risk

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[ LIFE ] used by the life expectancy assumptions when purchasing policies that may no longer be valid. As payments continue beyond the life expectancy, the policy may become less profitable, or even unprofitable, to the investor. Because many of the policies in the long-term care market have a smaller face value, it would be possible to accumulate a larger number of policies/lives in a portfolio, reducing the impact of any given policy exceeding its life expectancy. At the same time, the variety of illnesses among nursing home and assisted living facility patients enable the construction of a diversified portfolio of illnesses. This reduces longevity risk caused by concentration among a limited number of illnesses.

Potentially Reduced Liquidity Risk Life settlements are an illiquid asset class. Policies do not generate cash returns until the death claim is processed and the insurer pays the claim. If a fund manager needs to sell a policy to raise operating cash or pay client withdrawals, it may take time.

This lack of liquidity, combined with the length of time an investor’s capital is tied up in a life settlement fund, has contributed to lower interest in life settlements. However, a shift to funding the long-term care market may reduce some of those concerns due to the shorter life expectancies among these patients. The traditional life settlement transaction involves an insured with a life expectancy of close to eight years. For example, the AAP Life Settlement Market Update reported that the average life expectancies for new settlements were 98 months in August 2013, an increase from 91 months in June 2011. In comparison to life settlements, studies have reported that patients in nursing homes have much shorter life expectancies. One 2010 study published by the Journal of American Geriatric Society found that out of the 8,433 study participants who died between 1992 and 2006, 65% died within 1 year of nursing home admission.

continued on page 38

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[ LIFE ] continued from page 35

Challenges in the Long-Term Care Market The development of life settlements as a viable source of long-term care funding faces several key challenges. Transaction costs reduce the appeal of smaller face value policies for investors. Commissions paid to brokers can reduce the appeal to the owners of small face value policies. Finally, insurers have been developing long-term care riders for life insurance products that are a significant challenge to the long-term development of life settlements in the long-term care funding market. The popularity of these products represents a challenge to the future development of life settlements as a funding source for LTC. In many of these combination products, LTC benefits are provided as accelerated benefits that reduce both the cash value and death benefits.

A More Complex Life Settlement Process The life settlement process for longterm care funding is more complex than that used by traditional investors. The reason for increased complexity is the need to establish a Separate Account that makes monthly or periodic payments to a longterm care facility. In addition, the need for life settlement investors to make a reduced death benefit payment to the insured’s beneficiaries increases the complexity. This complexity adds to the costs of managing a life settlement portfolio. We cannot estimate the potential additional costs from this increased complexity for two reasons. First, there is simply not enough data to make this estimate. Second, a life settlement investor could decide to perform these tasks in-house or use a thirdparty provider in the same manner that they do to administer the premium payments. Given that many of the policies in the longterm care market are smaller in face value, this complexity would suggest that investors with efficient processes and the ability to achieve scale would generate a higher return than those without such processes or scale.

Seizing the Life Settlement LTC Funding Opportunity 38 February 10, 2014 / INSURANCE ADVOCATE

As elderly individuals, and their families, look for ways to pay for LTC, life settlements offer an additional source of LTC funding.

in force life insurance policies, as of end of 2012, also are leading states in terms of face value. In addition, these states also have the majority of individuals aged 85 or older and the majority of the nursing home population. This concentration of policies, elderly individuals, and nursing homes enables life settlement groups to target selected states rather than pursue a national distribution strategy.

Reaching the Customers As elderly individuals, and their families, look for ways to pay for LTC, life settlements offer an additional source of LTC funding. This creates a new opportunity for life settlement investors. Understanding the size of this opportunity begins by estimating the number of elderly people that own cash value life insurance. After sizing the market, understanding the distribution of the potential customers helps identify whether or not to pursue a state-specific or national marketing effort. With that understanding, life settlement investors also need to consider how to reach these customers.

Sizing the Nursing Home Funding Opportunity Identifying the life settlement opportunity in nursing home funding requires understanding several trends. First, how many people are in long-term care, and is that number growing? How many individuals in nursing homes use Medicaid? Finally, an analysis of nursing home ownership is useful in identifying the potential ease of distribution. A state-level understanding of these questions further helps identify where investors might find the greatest opportunity.

Older American Own a Sizable Pool of Policies There are a large number of cash value policies owned by older Americans. However, the rates of ownership and policy size vary by both age and product. This may have an impact on which types of products a life settlement investor might favor.

A State Specific Distribution Opportunity Life insurance policies and the number of nursing home and assisted care facility patients are not divided evenly among the states. The ten largest states with the most

The concentration of elderly customers in some states offers the potential to develop a targeted marketing strategy. The challenge is in finding an effective way to reach these potential consumers and introduce the life settlement option. One avenue of approach would be using the care facility as an initial contact point with the policy owner. The facility already discusses payment options with the patient and his/her family. It would make sense, especially in states that have legislation regarding life settlements and Medicaid, for the facility to include life settlements as part of that discussion. The facility could not act as a broker or provider, unless it sought the appropriate licensure. It would instead be acting as a referral.[IA] Conning (www.conning.com) is a leading investment management company for the global insurance industry. Conning is focused on the future, supporting the insurance industry with innovative financial solutions, investment experience, and proprietary research. The company’s unique combination of asset management, risk and capital management software, and advisory solutions, as well as insurance research, helps clients achieve their financial goals through customized business and investment strategies. The company is headquartered in Hartford, Connecticut, and serves its global client base from additional offices in Purchase,NY, London, Cologne, and Hong Kong. Conning publishes a number of insurance industry research services, including its Insurance Segment Reports semiannual lineofbusiness reviews; its Forecast & Analysis service, which offers a forward look at the industry; and its well-known Strategic Study series of executive reports on key products and trends and issues of critical industry importance. All are available in print and online through Conning.


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February 10, 2014