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VOLUME 123, NUMBER 14 / August 20 2012
A CINN Group, Inc. Publication
New York • New Jersey • Connecticut • Pennsylvania • Washington D.C.
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August 20, 2012
[LETTERS] RE: Deapo and Ruchman Articles Dear Steve: I have not felt the need to write for a long time, but Jamie's Tragic Lesson clarified what I attempt to provide in my business. Jamie's guilt is understandable, but it seems that he like many of us conducts our business as professionals. We in the insurance industry have been stereotyped as trying to sell, rather than as professionals attempting to advise. Sure we make revenues from our business, but this is no different than a lawyer or doctor, and I do not mean to say that we are all the same but with the years of knowledge that we possess, we can provide the coverages that clients should be afforded. How appalling is the Progressive commercial, "We will give you coverage for what you want to spend." You would think that our association or Insurance Department would jump all over this as being negligent behavior as no client is really aware of what they should have besides the minimums. I am sure that my professional liability carrier will be happy to know that I recommend the "Tiffany" coverage and shun requests for minimum limits. This does not mean that an insured will accept your proposal against the Gekko and others, but you can sleep at night knowing you have done the proper job. The lesson Jamie discusses should be part of insurance 101, not just closing the sale and filing it away until the next renewal. With regard to Steve Ruchman’s column on the State Fund, Steve was correct. The NYSIF, which has been around since the early part of the 20th century, was formed to provide a residual market, and was provided powers that the voluntary market cannot obtain. Obviously, this is not the case. Management has changed, but what is going to be different? Will the State Fund pay compensation? It is hard to justify taking on the E & O exposures trying to work with NYSIF with no financial incentive. Will the people who you speak with both in New York City and Albany be responsive to problems or will it take many calls and complaints to the continued on page 16
[ COVER STO RY ]
[DE PA RTMENTS] Letters ..................................................................................................................3 Forward .............................................................................................................. 4 Guest View, By G. Keith Smith, M.D. .................................................................8 Exposure and Coverages, By Jerome Trupin, CPCU ...................................10 Guest Article, By Richard H. Murray ..............................................................18 Insight, By Peter H. Bickford .............................................................................34 Industry News.................................................................................................35 Face to Face, By Michael Loguercio................................................................36 Courtside, By Lawrence N. Rogak ...................................................................40 Law Review......................................................................................................42 Classiﬁeds.........................................................................................................43 Looking Back...................................................................................................44 On the Level, By N. Stephen Ruchman ..........................................................46
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www.insurance-advocate.com INSURANCE ADVOCATE / August 20, 2012 3
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[ FORE WORD ]
VOLUME 123, NUMBER 14 AUGUST 20, 2012
overnor Cuomo has had a busy month while the rest of us have been...busy. It is a difficult time to be an independent business with the economy and so many other pressures pending so work we all must. We did build it and continue to… In any case, it is good news that the Governor has signed into law legislation that will allow producers to raise to $25.00 “gifts” that they and property casualty companies may provide during the insurance process (see chapter 291 of the laws of 2012). The new law lifts prior restrictions. While not going so far as to allowing illegal rebating, reducing commissions or other inducements, the law does show a little flexibility and a realistic approach for keepsakes. We salute the Governor for this action, as well as the legislators who made it happen. A little realism will go a long way. The Governor also acted on a homeowners matter. He called upon New York’s homeowners to take steps to protect their properties in the event New York is hit by any of the nine to 15 storms the National Oceanic and Atmospheric AdminisGovernor Cuomo tration (NOAA) predicts for the 2012 Atlantic hurricane season. As many as three of those storms are predicted by NOAA to strengthen to hurricane force with top winds of 111 miles per hour or higher. Hurricane season extends officially through November 30. Superintendent Lawsky cautioned, as well: “People should never take it for granted that they are covered against all possible losses. Insurance policies contain limitations and exclusions. It’s particularly important that homeowners understand how deductibles work. As we continue to study the homeowners’’ insurance market in New York’s coastal areas, the Department is committed to ensuring Supt. Lawksy homeowners in these areas understand the terms of their policies and take every feasible step to protect their homes. Cuomo suggested homeowners consider a number of actions to protect themselves in the event of storm losses and make filing claims easier should losses occur: 1 Keep copies of all insurance policies, insurance cards and the contact information for your insurance agent, broker or company, in a safe place that is easily accessible in the event of an emergency. Remember to take the information with you if you need to evacuate your home, 1 Document the contents of your home by compiling a home inventory that lists information such as the cost and date of purchase of major items. A sample inventory form is available on the Department of Financial Services’ website, http://www.dfs.ny.gov/insurance/homeown/pdf/home_ invchklst.pdf, 1 Buy flood insurance if you do not already have this coverage. Typically, there’s a 30-day waiting period from date of purchase before your policy goes into effect, 1 Take practical steps to minimize potential loss and damage to your home from fire and theft – as well as windstorms continued on page 6
4 August 20, 2012 / INSURANCE ADVOCATE
EDITOR & PUBLISHER Steve Acunto, 914-966-3180, x110 firstname.lastname@example.org CONTRIBUTING EDITOR Peter Molinaro CONTRIBUTORS Peter H. Bickford Jamie Deapo Michael Loguercio Sari Gabay-Raﬁy Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog, 914-966-3180, x113 email@example.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x117 firstname.lastname@example.org PUBLISHED BY CINN Group, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 Fax: (914) 966-3264 President and CEO Steve Acunto
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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 2012. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.
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[ FORE WORD ] continued from page 4
– by doing such things as trimming dead or overhanging tree branches, installing storm shutters and dead holt locks, and equipping your home with a fire extinguisher. He noted that renters should consider how to protect their possessions because their personal property is not covered by their landlords’ insurance policies. In addition to providing protection for their possessions, many renters’ policies cover the cost of additional living expenses if there is damage to the property and the renter needs to live elsewhere while the property is being repaired...Connecticut has stepped ahead in the Captive insurance marketplace, launching its first captive, Thomson Reuter’s Captive. Announced on August 2nd this program marks the beginning of what seems to be a promising marketplace in the Nutmeg state. We followed Nick Pearson’s (Edwards Wildman) testimony before the Connecticut legislature to support the rationale for attracting captives to Connecticut. We note that this captive launch jump-starts Connecticut’s efforts to attract captives. International media and information company Thomson Reuters relocated its U.S. Insurance subsidiary from Delaware to Connecticut. The subsidiary, Thomson Reuters Risk Management, Inc. (TRRMI), is the state’s first captive insurance company, taking advantage of key changes in the Governor’s sweeping jobs reform legislation of 2011. TRRMI insures Thomson Reuters’ workers’ compensation, general liability, auto liability, property, terror-
ism, errors and omission and personal accident/travel risks in the U.S. “The Governor has made it clear from the start that Connecticut is serious about growing the industry,” Insurance Department Commissioner Thomas B. Leonardi said. “Through professional and consistent regulation, the Insurance Department will make certain that Connecticutbased captives will be noted for their quality and financial stability.” In October 2011, Governor Malloy convened a special legislative Jobs Session aimed at creating jobs and strengthening the state’s competitiveness. The result was a major jobs bill that included revisions to the state’s 2008 captive insurance law. The revisions expanded the types of insurance captives can transact in the state and established a special regulatory unit at the Insurance Department to focus on captives. Marsh Captive Solutions is Thomson Reuters’ captive manager... Coming back to New York, the Governor has announced that Tech Valley Communications, a leading provider of data and high speed internet services in Upstate New York, will consolidate and expand its operations into new corporate headquarters located in downtown Albany. The move will create more than 60 new full-time jobs, retain 62 existing jobs in the downtown area and infuse more than $36.5 million in payroll into the local economy over the next five years. Tech Valley Communications (TVC) owns and operates an extensive fiber optic network throughout Upstate New York’s “Tech Valley” and serves many of the region’s
leading enterprises with it FirstLight® fiber-to-the-premise service. The company explored several options for its expansion plans, including moving operations out of state, but ultimately chose to remain in downtown Albany. “This significant investment by Tech Valley Communications is a direct result of our efforts to ensure businesses have the tools and resources they need to be successful and create much-needed jobs for New Yorkers,” said Empire State Development President, CEO & Commissioner Kenneth Adams. “The fact that this growing, cuttingedge telecommunications company was founded in downtown Albany and will grow here is a huge win for the local workforce. It further demonstrates that New York’s Tech Valley has the critical mass of talent and infrastructure to attract the companies, investments and jobs that strengthen the regional economy.” In addition to the assistance from the State, the Company has been offered $100,000 from Albany County to incentivize the expansion and keep TVC headquartered in downtown. Tech Valley Communications has so far invested between $10 to $20 million on infrastructure to support FirstLight® for its customers in the Capital Region alone. As part of “The New New York Works for Business” campaign, the state has launched a new website – www.thenewNY.com – which provides quick access to information for all areas of business assistance available from New York State...The slogan for August might well be Cuomo works for N.Y. businesses. Nice work. [IA]
Marketing Reimbursement Program: Up to $500 Available. www.iiabny.org/TrustedChoice 6 August 20, 2012 / INSURANCE ADVOCATE
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[ GUEST VI EW ]
By G. Keith Smith, M.D., Association of American Physicians and Surgeons
Which Government Healthcare Plan is Better?
hen politicians promote the superiority of their government plan to “replace” ObamaCare, my reaction is simple: I don’t care what a mugger does with my money. The difference between the thought processes of the Austrian economists and
1. The consequences will be borne by patients. Talk of how this negatively affects doctors is beside the point. The UCA or other scheme may hurt physicians’ business, but that matters only because patients will be denied, delayed, and euthanized as a result.
I choose liberty because I want to be free. Not because I want to get rich. And not because liberty results in the best and most rational allocation of scarce resources, even though it does. This is simply a bonus.
Dr. Keith Smith
those of other schools is this: the Austrians say in essence that they don’t care what you do with money robbed from them. All they care about is that they were robbed. Any discussion distal to the robbery is superfluous. I like the Austrian approach—very simple but extremely powerful. When statists are arguing the merits of their various plans, one simple question moots the discussion of the details: “But you have to rob me first either way, right?” This issue must be confronted first. Any discussion downstream from a rotten premise is at best a waste of time, at worst very distracting and destructive. Human beings long for liberty. This means the right not to be robbed, or conscripted into a scheme to serve the common welfare, or even “for their own good.” I choose liberty because I want to be free. Not because I want to get rich. And not because liberty results in the best and most rational allocation of scarce resources, even though it does. This is simply a bonus. The loss of liberty in government schemes such as the Unaffordable Care Act (UCA) has many bad effects. Here are some anchoring general premises that apply to the UCA as well as governmentrun replacements: 8 August 20, 2012 / INSURANCE ADVOCATE
2. Almost anything that oozes out of Washington will line the pockets of those who wrote or promoted it. 3. Coverage doesn’t mean care. This is a basic fact that needs constant repetition. 4. The UCA is unworkable. This is not unintended. The plan is meant to fail. A single payer system is the ultimate goal of the statists and they hope to accomplish this by creating chaos in the medical economy. 5. The electronic medical record systems, a key feature of most Plans, will serve as the KGB of medical intelligence. It is ironic that the propaganda surrounding this intrusion succeeded in getting physicians and facilities to provide the state with this information voluntarily, rather than hiring goons to gather it! 6. Physicians working as employees of hospitals are key to the success of a state-run plan, because, rather than working for their patients, these quasi-physicians serve the interest of their employer and the state. 7. As the state becomes even more involved in medical care, people’s illnesses will represent a liability on the balance sheet of the state and its
private partners. Those with chronic illness will be targeted for neglect or extermination in order to save face for the increasingly bankrupt state health plan. Those physicians who brave this storm, stay dedicated to their patients, embrace and follow free-market principles, and eschew the leverage of third-party payment will thrive as the distinction between the care they render and that of their employed counterparts will become even more stark as time goes by. It’s another example of the premise that a good tree yields good fruit, and a bad tree, bad fruit. [IA]
Dr. G. Keith Smith is a board certified anesthesiologist in private practice since 1990. In 1997, he co-founded The Surgery Center of Oklahoma, an outpatient surgery center in Oklahoma City, Oklahoma, owned by 40 of the top physicians and surgeons in central Oklahoma. Dr. Smith serves as the medical director, CEO and managing partner while maintaining an active anesthesia practice. In 2009, Dr. Smith launched a website displaying all-inclusive pricing for various surgical procedures, a move that has gained him and the facility, national and even international attention. Many Canadians and uninsured Americans have been treated at his facility, taking advantage of the low and transparent pricing available. Operation of this free market medical practice, arguably the only one of its kind in the U.S., has gained the endorsement of policymakers and legislators nationally. More and more self-funded insurance plans are taking advantage of Dr. Smith’s pricing model, resulting in significant savings to their employee health plans. His hope is for as many facilities as possible to adopt a transparent pricing model, a move he believes will lower costs for all and improve quality of care.
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Thank you for putting your clients first r edlander
Gain and Retain Clients
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[ EXPOSURES AND COVERAGES ]
By Jerome Trupin, CPCU
“Righting” Insurance For Coops and Condos—Who Insures What?
ea and Ben Aden purchased a vacation condo in western New Jersey and were looking forward to some peace and quiet in the country. When their unit was devastated by fire, what they got was exasperation and expense. First they were faced with the ordeal that any homeowner must deal with following a fire, but then they discovered that, under the terms of the condo association agreement, they were responsible for restoring the interior of the unit at their own expense. The cost of restoration was $21,000. The amount of insurance provided by their insurance: $1,000. Result: an errors and omissions lawsuit against their broker.1 Amazingly, the case went all the way to the New Jersey Supreme Court. The court ruled against the broker and awarded the insured damages plus interest, saying that the insurance broker was a professional and that insureds were entitled to depend on his expertise.2 It’s very doubtful that New York courts would impose a similar duty on the broker to advise the insured, but you don’t want to get dragged through the courts to find out. And if you do business in New Jersey, be forewarned. But, even ignoring possible professional liability, is this the way to treat your clients and build an insurance practice? Get good word of mouth instead of bad; write the insurance the right way.
Find Out What the Condo or Coop Agreement Says Does a coop or condo unit owner need an HO 3 policy? Silly question. The HO 3 is for a homeowner; the HO 6 is for a unit owner. But that doesn’t always happen. My practice is centered on commercial insurance, so I don’t get to see many HO policies. Yet in the handful I’ve looked at as a favor for a client, I’ve come across two HO 3 policies written for condo unit owners. In both cases, the condo agreement
Insuring their personal property is universally the unit-owners’ responsibility. If the association is required to insure the structure, the next question is who is responsible to insure the real personal property within the unit?
called for the association to insure the structures, so my clients were paying for unnecessary coverage. Once in a great while, a condo agreement will put the burden on the unit owners to insure the buildings, but that’s rare. It’s more common in the case of homeowners associations, but even homeowners associations agreements may require the association to insure the structures. How do you find out? As with so much else in insurance, review the documents. You should request a copy of the insurance requirements portion of the coop or condo agreement or ask your clients to find out from the board or the managing agent what they, as unit owners, are responsible to insure. Insuring their personal property is universally the unit-owners’ responsibility. If the association is required to insure the structure, the next question is who is responsible to insure the real personal property within the unit? There are two sides to condo/coop insurance: insurance for the unit owner continued on page 12
1 Full Disclosure: Bea and Ben Aden were part of our circle of friends when we lived in New Jersey. I wasn’t involved with their insurance and I had moved to New York before this loss occurred. I saw a report of the lawsuit in the insurance trade press; I didn’t hear about it from friends. 2 Benjamin Aden, etal. V Robert Fortsh, etal. NJ Supreme Court 169 N.J. 64 (2001)
10 August 20, 2012 / INSURANCE ADVOCATE
Jerome Trupin, CPCU
Jerome Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, non-proﬁt and governmental entities. He is, in effect, an outsourced risk manager. Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses. Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Interest Group Newsletters, the Insurance Advocate, and other publications. He can be reached at firstname.lastname@example.org. Thanks to Jerry Trupin for this article and to the CPCU Society’s Risk Management Interest Group newsletter for letting us reprint it.
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[ EXPOSURES AND COVERAGES ] continued from page 10
and insurance for the coop and condo. Some basic principles apply to both and we’ll look at those first. Then we’ll review special problems in arranging insurance for unit-owners and for the association.
Bare Walls vs. Original Specifications vs. All-In There are three different ways that the responsibility for insuring the real property within the “four-walls” is handled in condo and coop agreements: Bare Walls, Original Specifications, and All-In. Bare Walls The most usual arrangement in our area is referred to as “bare-walls.” Under this approach, the unit owner is responsible for the cost to restore everything from the bare walls in even when the damage is caused by an insured peril. This includes kitchen and bath cabinets, appliances, plumbing fixtures, decorating and more. In the Aden case discussed at the beginning of this article the association agreement made the association responsible up to the bare walls. The repairs beyond that were the unit-owners’ responsibility. It cost them $21,000. And this was for a oneroom studio in a seasonal resort. Imagine what it would be for a five-room high-end New York City apartment. Most coops in New York City use the bare wall approach. Agreements drafted by attorneys who pattern the condo agreement on work they’ve previously done for coops are also likely to call for a bare walls approach.
Original Specifications Original specifications coverage requires the association to insure the building additions that were part of the structure when it was originally developed. This is true even if the building additions are owned by the unit owner and not by the association. This option is often called for by condo agreements. If the Adens’ condo agreement had called for original specifications coverage, the $21,000 cost for inte-
If you don’t know what it says about insurance requirements, how can you properly write insurance for your clients? If the unitowner is responsible for building additions, the solution is to include an adequate amount of dwelling (real property) coverage in addition to the personal property coverage.
rior repair would have fallen on the association. (Original specifications coverage is also sometimes referred to as single-entity coverage.) All-In All-in coverage is similar to original specifications coverage except that it includes improvements and upgrades made by the unit owner as well as those that were part of the original specifications. Again, it doesn’t matter whether the building additions and improvements are the property of the unit owner or the association. All-in coverage is not common in the tri-state area. I’ve reviewed numerous coop and condo agreements and I’ve never seen one that called for all-in coverage; I did come across one association that arranged its insurance as if it was required, despite the absence of anything in the agreement to that effect.
Insurance Coverage for Unit-Owners Most insurance policies for unit-owners handle this problem quite simply. The Unit Owner Policy Form, HO 6, contains a dwelling coverage item that allows the unit owner to select an amount of insurance to cover those items that are the unit owner’s responsibility. Policies generally
make clear that the insurance can apply regardless of who is the owner of the property if the agreement calls for the unitowner to insure it. Here’s what the ISO form HO 00 06 05 11 says … Property which is your insurance responsibility under a corporation or association of property owners agreement…3 Note the reference to the condominium association agreement as the basis for determining coverage. If you don’t know what it says about insurance requirements, how can you properly write insurance for your clients? If the unit-owner is responsible for building additions, the solution is to include an adequate amount of dwelling (real property) coverage in addition to the personal property coverage.
Insurance Coverage for the Association The Condominium Association Coverage Form, CP 00 17, takes a similar approach. It defines building coverage to include: (6) Any of the following types of property contained within a unit, regardless of ownership, if your Condominium Association Agreement requires you to insure it: (a) Fixtures, improvements and alterations that are a part of the building or structure; and (b) Appliances, such as those used for refrigerating, ventilating, cooking, dishwashing, laundering, security or housekeeping. But Building does not include personal property owned by, used by or in the care, custody or control of a unit-owner except for personal property listed in Paragraph A.1.a.(6) above, (A.1.a.(6) Personal property owned by you that is used to maintain or service the building or structure or its premises…4 Warning: At least one major writer of condo insurance uses ISO form CP 00 10 instead of CP 00 17 for condominiums. That’s a potential problem. CP 00 10, the
3 Copyright Insurance Services Office, Inc., 2010 4 Copyright ISO Properties, Inc., 2007. 5 Based on email correspondence with James Orlando, Office of Legislative Research, Hartford, CT May 21, 2012. 6 Christopher Boggs “Condo Insurance Requirements Not Cookie-Cutter” Insurance Journal June 30, 2008 http://www.insurancejournal.com/news/national/2008/06/30/91454.htm
12 August 20, 2012 / INSURANCE ADVOCATE
continued on page 14
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[ EXPOSURES AND COVERAGES ] continued from page 12
most frequently used commercial building and business personal property form, does not include the wording quoted above. Therefore, in the event of a loss the insurer may refuse to pay for building additions and improvements installed by the developer no matter what the condo or coop agreement says. If you see a policy for a condo or coop written on the 00 10 form,
try to get it changed to 00 17. Failing that, try to get a written commitment that the policy will be interpreted to meet the requirements of the condo or coop agreement. If you can’t do that, take two aspirin and call me in the morning.
Effect of State Law Some state laws go into much more detail about condominium insurance than New York law does. If your client is in
I feel that original specifications coverage is the way to go for all condos and coops, particularly in the New York metropolitan area where so many coop and condo unit-owners have more of a tenant than owner mentality.
another state, you’ve got to check the state law in addition to the association documents. Connecticut, for example, requires that developer-installed improvements be insured by the association for multi-story or town house buildings.5 The National Conference of Commissioners on Uniform State Laws drafts recommended laws for state legislatures to adopt in numerous areas to create greater uniformity between states. The Conference published a Uniform Condominium Act that, in essence, calls for at least original-specifications coverage for multi-unit attached or stacked condominiums.6
My Preference: Original Specifications Coverage I feel that original specifications coverage is the way to go for all condos and coops, particularly in the New York metropolitan area where so many coop and condo unit-owners have more of a tenant than owner mentality. It’s one thing to specify in the agreement that the unitowners will insure the building additions and improvements that are their responsibility, it’s quite another for the unit-owners to actually purchase adequate insurance. Without insurance, it becomes a fight over who pays for what. Even if there is insurance, there can easily be four or five units damaged in one loss in a multi-tenant structure. That means that there may be five or six adjusters (one for each unit plus one for the building). Simplifying the continued on page 16 7 ibid.
14 August July 23, 20, 2012 2012 / INSURANCE / INSURANCE ADVOCATE ADVOCATE
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[ EXPOSURES AND COVERAGES ] continued from page 14
adjustment of losses was one of the principal reasons for adopting the Uniform Condominium Act.7
My Recommendations If the coop or condo agreement does not call for original-specifications coverage or is unclear, suggest changing the agreement. Insurance requirements often read as if they were drafted in the middle of the last century by people who were getting paid by the word. It’s common to see currentlydrafted insurance requirements that call for “extended coverage,” despite the fact that extended coverage endorsement hasn’t been used by standard insurers since 1986. Amending an agreement can often require a super-majority of the unit-owners—not easily done. Sometimes the insurance provisions are so ambiguously worded that it’s worth the effort. To just change to original specifications, I’ve found that some insurers will accept a resolution passed by the condo board as a sufficient amendment. Check with the insurer to be sure that they’ll accept that as triggering coverage for original specifications, if your client goes that route. Coincidentally, just as I was finishing up this article, one of our clients sent us the insurance requirements for a new condo to review. Surprisingly, I like it. Here’s an excerpt: The all-risk hazard policy shall cover the interests of the Board of Managers and all Unit Owners and Permitted Mortgagees, as their interests may appear. Coverage shall be for 100% of the insurable replacement cost of the Improvements (excluding land, foundations, excavations, footings and other items normally excluded from such coverage), including fixtures (to the extent they are Common Elements), building service equipment and supplies, and other personality comprising Common Elements. The hazard policy maintained by the Board is not required to cov-
Setting the amount correctly can reduce the amount of insurance by 10 percent or more. Nothing makes you look more like Super-Insurance Man or Woman than showing clients how to reduce their insurance cost.
er, but may cover, in the sole discretion of the Board of Managers, improvements and betterments made by Unit Owners in their Units, fixtures that form part of Units and other interior elements of Units… (emphasis added)8 This lets the Condo Board choose bare walls, original specifications, or all-in coverage, whichever they feel fits their needs the best.
Setting the Amount of Insurance for Unit-Owners If your client is the unit-owner, find out what their responsibilities are and tailor the insurance accordingly. (Did I mention that you want to check the insurance provisions in the coop or condo agreement?) This can be a win for all parties. The producer writes more insurance and has more satisfied clients, the insurer collects more premiums and, when the loss occurs, the insured gets reimbursed promptly and adequately. I’ve asked three brokers that I know how they set the amount of insurance for condo or coop unit-owners. Two passed the exam with flying colors; they ask HO6 applicants about the need for real property coverage—one even suggests $100 to $150 sq. ft. if the unit-owner is responsible for the interior. That’s high, but high-end kitchens and baths renovations in our area can run $100,000 to $200,000 or more.
8 From an Offering Plan drafted by Erica R. Forman, Esq., Bryan Cave LLP, New York, NY and used with her permission.
16 August 20, 2012 / INSURANCE ADVOCATE
Setting the Amount of Insurance for Coop or Condo Associations Setting the amount of insurance for coop or condo associations is more problematic. It’s not unusual to find a new coop or condo that’s over-insured. The amount of insurance was set using details supplied by the developer and the developer’s costfigures included the cost of interior work in the unit. If that’s the obligation of the unit-owner, it should be deducted in setting the amount of insurance. I’ve even seen cases where marketing costs were included in the building-cost calculation. The same problem often exists with older units, but often inflation has eaten up the cushion. In any case, the amount of insurance should be set based on just what property the association is obligated to insure. Setting the amount correctly can reduce the amount of insurance by 10 percent or more. Nothing makes you look more like Super-Insurance Man or Woman than showing clients how to reduce their insurance cost. [IA]
[LETTERS] continued from page 3
Insurance Department? New management does not necessarily mean a change the prevailing mind-set of people who have been with NYSIF for many years. Relationships with safety group management does not necessarily mean that the relationship with the Fund is for the betterment of the insurance producers or policyholders. I hope that Mr. Poppa's hope of a new era comes through, but in my 40years in this business I have had nothing by frustration with the NYSIF along with clients who were forced by the voluntary market to seek coverage with them. Jeffrey Gordon Wells J. Gordon Wells Intl. Brokerage New York, NY
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[ GUEST ARTICLE ]
By Richard H. Murray
Climate Liability Risk: Will it be the Next Chapter in the Global “Blame Game”?
t has long been accepted that the “compensation culture” that arose in the U.S. about 40 years ago has in this century taken on global dimensions. A simplistic but accurate description of a compensation culture is a society in which most injuries can be traced to a causal agent from whom damages for the harm may be recovered. The history of the relationship between injury and compensation may be briefly summarised in four stages.
Europe, supplied compensation for injury through statutory schemes that generally awarded less than the common law, but set no requirements of proving breach of duty or causation. Both systems supported the commercial needs of the last century. • As life became generally more sheltered, and the comforts expected by the growing middle class gained political influence, a “compensation culture” emerged that demanded
As life became generally more sheltered, and the comforts expected by the growing middle class gained political influence, a “compensation culture” emerged that demanded wider and better payment for all manner of injuries, including pain, suffering and behaviour-controlling penalty damages. Richard H. Murray
• The pre-Industrial Revolution era of “caveat emptor”—the longstanding principle that injuries occurred without recourse. The concept may offend our sensibilities today, but it was consistent with the economic model and social norms of the many centuries in which it ruled. Life in those times was harsh, and one protected oneself from others as best one could. • Caveat emptor proved a poor vehicle on which to spread commercial activity, far beyond the communities of production. The common law jurisdictions (primarily the English-speaking British Empire) fostered commerce by creating what we came to know in the 20th century as the civil justice system, encompassing “tort law” that awarded damages to those owed a duty of care by those who injured others through negligent breach of that duty. The civil law jurisdictions, with roots in continental 18 August 20, 2012 / INSURANCE ADVOCATE
wider and better payment for all manner of injuries, including pain, suffering and behaviour-controlling penalty damages. The existence of liability insurance facilitated these movements. In the U.S., the last second half of the 20th century saw the standards of the civil justice system eroded to add a dimension of wealth transfer. Those operating under civil law schemes found the demands for compensation exceeded the state’s ability to pay, leading to various forms of transferring liability schemes onto the private sector and their insurers. • The new century has been stunned by the frequency and severity of weather-related extreme events which have been partly attributed to climate change and in turn to the emission of greenhouse gasses into the atmosphere. The sharp escalation of widespread suffering and the decades of frustration by those con-
cerned about the effects of global warming have introduced a new era best described as “The Blame Game”—a search for those who could be punished for contributing disproportionately to CO2 emissions through use of liability claims or criminal prosecution. The two remedies often operate in tandem. Liability law has thus seen a remarkable set of transformations in a short time. From no compensation for injuries caused by others (caveat emptor) we have moved through successive phases of liability for economic loss where the negligent cause was clearly demonstrable (Civil Justice) and then wealth distribution by generous liability for pain, suffering and exemplary damages (Compensation Culture) to the socialisation of losses caused by natural causes (The Blame Game). At each stage of this evolution the causative forces have been similar: economic, political and social. Each has had its turn of dominant influence. The needs of commerce demanded that buyers receive some protection from distant and unknown sellers. With the rise of the middle class, the scope and amount of available compensation became a political priority. Most recently, the magnitude of human suffering, communicated visually around the world via television and the internet, has stirred passions of sympathy and anger that must be assuaged. At each of these mileposts, it has been the creativity of the legal profession and the pressures on the judiciary that have enabled shifting legal standards to accommodate necessity via liability law. These are essential conditions for insurers to understand today, because the pace of change has accelerated, the period of latency between event and injury has shortened and the law has grown comfortable with the retroactive application of rules that ease and amplify recovery. For insurers, the result is the ever greater frequency of retrospective application to continued on page 20
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[ GUEST ARTICLE ] continued from page 18
insurance. A contract of insurance is formed at a point in time, with the price of coverage set by the known exposures of the day. When those exposures are enlarged by shifting legal standards prior to the maturing of latent claims, the cost of the promises contained in the contract rises without commensurate increase in the previously paid premium. One need only consider the painful history of asbestos insurance claims to recognise the risks embedded in the blame game. We are in the very early days of the blame game. But manifestations of it are evolving rapidly. We consider first the use of criminal law. Stephan Schmidheiny is best known to the world as a passionate supporter of environmental protection. He was the founder of The World Business Council for Sustainable Development and coorganiser of the 1992 Earth Summit in Rio de Janeiro. Mr Schmidheiny is unrivalled in green credentials. He is also a member of a very affluent Swiss family with a wide variety of business interests including an Italian asbestos producer. When Mr. Schmidheiny became Chairman of that company’s Board he ordered the discontinuance of asbestos manufacturing, all of which was ended and cleansed by 1986, six years before Italian regulation banned asbestos manufacture. None of this prevented the Italian government from launching a criminal prosecution against Mr Schmidheiny for personally contributing to asbestos-related injuries and deaths attributed to the company’s prior decades of production. In February of 2012 he was convicted and sentenced to a 16-year prison term and a fine of €100 million. His business partner, the Belgian Baron de Cartier de Marchienne, was sentenced to the same punishment. Italy had found a headline-generating and affluent target of blame. Italy is equally willing to blame Italians. The country established a “Major Risks Committee” of leading scientists to advise on earthquake risks. One would have seen this as a prestigious assignment. Seven members of the Committee might now doubt the value of such prestige. In the spring of 2009 they were asked to advise whether minor trembles in the vicinity of 20 August 20, 2012 / INSURANCE ADVOCATE
Negligence theories are being explored in the U.K. as well. It has been proposed, for example, that liability should be imposed on all who were responsible for the development of flood plains exposed to climaterelated extreme events, whether caused by wind and rainfall or the rise of ocean levels.
L’Aquila, a medieval town in Abbruzzo, warranted evacuation of the region’s population. The experts concluded that evacuation of such massive scale was not warranted. Six days later a major quake struck, killing hundreds. There are no known errors or omissions in the Committee’s work, the prediction of seismic events not yet being a science. Nevertheless the seven scientists were indicted on manslaughter charges. The trial began in late 2011 and the ruling is expected for summer 2012. Hopefully these will remain rare uses of criminal charges to establish blame. But the application of blame-based civil liability claims is more frequent and growing. The following are a few illustrations: • In the U.S., numerous liability claims seeking damage recoveries have been filed against power companies and other greenhouse gas (GHG)-emitting industries, based on new applications of the old principles of nuisance and public nuisance—principles developed in the common law to address disputes between neighbours. The most noted involves a suit against American Electric Power Company which reached the U.S. Supreme Court in 2011, on the question of whether nuisance principles would support the recovery of damages for climate-related extreme events. In a decision that is unclear in many respects, the Court did declare
unanimously that such claims could be brought on nuisance theories in state courts. U.S. claims are also exploring the adaptation of negligence theories for placing climate risk blame—and liability. • Negligence theories are being explored in the U.K. as well. It has been proposed, for example, that liability should be imposed on all who were responsible for the development of flood plains exposed to climaterelated extreme events, whether caused by wind and rainfall or the rise of ocean levels. • Sea level rise is at the heart of many proposed forms of new liability theories. The prospects for a complete loss of the low lying nation state of the Marshall Islands has attracted much attention. With assistance from The Center for Climate Change Law at Columbia University, U.S.-based attorneys for the islands have lodged a complaint with the Czech Republic on the grounds that it commissioned Europe’s largest coal-fired power plant on the basis of a flawed Environmental Assessment Study. The alleged flaw is the failure to have considered the plant’s impact on accelerating the drowning date for the Marshall Islands. Such an assertion has all the hallmarks of a precursor to a liability claim of great magnitude for the destruction of a nation. Other examples of newly conceived forms of blame and consequent liability abound. But their number and particulars are of less importance than the fact that this pattern of “blame and sue” is becoming commonplace. Most such claims will fail in their first endeavour. But so did all the early tobacco and asbestos claims. The time between the initial assertion of new tobacco and asbestos claim theories and the first success by settlement was several decades. The blame game has accelerated in relation to climate-related liability, where the first settlement arose out of Hurricane Katrina and occurred four years after the first claim assertion. The social order of this new century continued on page 22
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[ GUEST ARTICLE ] continued from page 20
no longer tolerates injury without searching for those to blame and from whom recovery may be had. The search focuses on the sources from which substantial recovery can be obtained. Those two objectives are intertwined. For recovery to take place, we still require a connection between the harm and a target of blame that satisfies today’s cultural norms. But those norms are easily satisfied. So the availability of resources for obtaining recovery becomes a factor in assigning blame. There would be no reason for the Marshall Islands to sue Inuit Indians for their contribution to CO2 emissions, since they have little resource and are themselves seeking a blame and recovery source from the energy industry for their relocation woes. Blame and liability tend to converge at the deepest asset pools, as Stephan Schmidheiny discovered. The implications of this convergence for insurers are significant: • A study conducted for UNEP FI by the consultancy TruCost estimated in 2011 that the annual average cost of climate-related extreme events is US$6.6tn, of which over US$2tn annually is attributed to human activity. The study then compared that
amount to the profits of the world’s 3,000 largest for-profit companies. The circuitry for potential blame and liability is thus identified. • With the hardship of climate-related damage often falling on the least developed economies, situated in the Southern Hemisphere, and far exceeding available property insurance and public sector resources, the search for additional sources of recoveries via liability claims will be fuelled by powerful humanitarian impulses and mostly fall onto economic actors in the Northern Hemisphere. • The innovative application of liability theories and the inevitable carbon footprint of all industries threaten insurers with exposure to liability claims that will be pervasive and difficult to avoid through traditional exclusionary clauses. • Liability claims have a longer latency period than property insurance, exposing insurers to the future lowering of legal barriers with retroactive effect, a condition that was painfully recognised in asbestos claims. • As social and economic forces carve new channels of accepted liability theories to foster the humanitarian
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The Fund is a not-for-profit corporation, which by law, is the employer of all thoroughbred jockeys and exercise people in the State of New York for workers’ compensation purposes. Each year the Fund obtains proposals for providing the workers’ compensation insurance for the following year. The Fund is now seeking offers for providing this coverage for the 2013 policy year. The current premium is in excess of $3 Million Dollars. The New York Jockey Injury Compensation Fund, Inc. (Fund) will commence its twenty second year of actual operation on January 1, 2013. The Fund was created by the New York State Legislature in 1990. It went into operation on January 1, 1991 to provide workers’ compensation insurance coverage for all licensed jockeys, apprentice jockeys and exercise people working at thoroughbred racetracks in the State of New York. The workers’ compensation benefits are provided from one policy, which affords coverage throughout the state. Details of the terms and conditions of the policy and specifics regarding presentation to the Fund may be obtained by contacting Karen A. Fenzl, CIC, consultant, First Niagara Risk Management, Inc., 726 Exchange Street, Suite 900, Buffalo, New York 14210; or email Karen.firstname.lastname@example.org; or phone 716-819-5506; or phone Gail Gray, Manager of the Fund at 585-367-2722.
22 August 20, 2012 / INSURANCE ADVOCATE
urgencies of windstorm damage, those theories could easily migrate into other aspects of liability exposures well beyond their direct application to climate claims. The blame game and the ancillary liability issues provide insurers with opportunities for revenue generation through new resiliency-based products, and for demonstrating the value of insurance expertise and pricing tools for the benefit of all. Those opportunities are significant and important as a 21st century phenomenon if insurance is to escape a liability tsunami before the opportunities can be explored [IA]. Mr. Murray has pursued his interest in legal liability as a broadly influential social, political and economic force throughout a career of unique responsibilities. His appointments have included 15 years as General Counsel for Touche Ross, the one of the Big 8 audit firms, 5 years as Chairman and CEO of the London based Minet Group (now part of Aon), 8 years as Global Head of Legal and Regulatory Affairs at Deloitte and Touche and 8 years as Chief Claims Strategist at Swiss Re. Following retirement from Swiss Re, Mr. Murray formed Liability Dynamics Consulting LLC in New York, has worked with the Geneva Association as head of the Liability Project and of the Liability Sub Committee of the Climate Risk and Insurance initiative, and has been the Chairman of the Center for Capital Markets at the US Chamber of Commerce in Washington DC. Mr. Murray serves on the Boards of the Center for Strategic Financial innovation in London, Oxford Analytica in the UK and was a Member Of the US Treasury Committee on the Audit Profession. He was educated at Harvard, practiced as a trial lawyer in the US and served for 10 years on the Board of IMD in Lausanne.
This article first appeared in The Geneva Association’s Risk Management Newsletter no 51, published May 2012and is here reprinted with the permission of the author and the Association.
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[ COVER ]
DEMOTECH - RATINGS: A Strong, Straight Line in a Complex Grid A conversation with Joseph L. Petrelli, and Sharon Romano, co-founders, Demotech, Inc. 24 August 20, 2012 / INSURANCE ADVOCATE
For a man who deals in complexities, Joe Petrelliâ€™s life has been a straight line to success. Born and raised in Rochester, New York, he graduated from The College of Insurance and had his first full-time job in Syracuse, New York. Joe earned a Masters of Business Administration from The Ohio State University in 1986, having earned membership in the Casualty Actuarial Society, American Academy of Actuaries and Conference of Consulting Actuaries previously. After several years at the Insurance Services Office in a work-study program, four years at Agway Insurance Company in Syracuse, he moved to Columbus, Ohio in 1978 to work for Nationwide Mutual and after two years at Nationwide, he became a consulting actuary in June 1980. In the fall of 1985, Joseph and Sharon Romano Petrelli formed Demotech, Inc. today, the countryâ€™s second largest rating agency by client count in the US, and, according to a Florida State University study, an accurate and reliable service. We held a Q & A with Joe and Sharon in New Paltz, N.Y. after the 2012 NYIA Annual Meeting.
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[ COVER ] SA: What spurred your creation of Demotech? JLP: Simple. The market cried for reasonably priced financial analysis and actuarial services to regional and specialty insurance companies. Sharon and I wanted to ensure that regional and specialty insurance companies were able to access and utilize actuarial consultants. Keep in mind at that time, around 1984-1985; ISO, AAIS and NCCI were transitioning from promulgating rates to promulgating loss costs. There was a flurry of carrier insolvencies and, in response, regulatory financial reporting requirements were being expanded on a regular basis. The national and international actuarial consulting firms were focused on the larger, national and international carriers to the disadvantage of the 1,000 or more smaller companies. We had the solution, we believed, and that hunch proved true. SA: You knew regional carriers, so the prospecting had already begun. JLP: Yes, we were familiar with several regional carriers. I worked at one for four years and when I formed my consulting practice; my initial clientele consisted of a dozen regional and specialty carriers. We understood their strengths and nuances, especially now with more than 350 clients and hundreds more to come. SA: The 1980’s found banks looking at the insurance industry as an area for expansion. JLP: Absolutely, that was some decade! One of my motivations for earning an MBA in 1986 was that banks knew what an MBA was – I was not certain they were familiar with actuarial science. SA: Why did Demotech develop a rating service? That must have been an uphill battle. SMR: Right. Actually it is a great story about being in the right place at the right time. Joe had contacted Rupert Knape, president of German Mutual Insurance Company in Napoleon, Ohio. Joe was looking for pricing, product development or loss reserving work. German Mutual was then, and is today, an example of a solid regional insurer. Joe’s call was placed through to Mr. Knape and they scheduled a meeting. Joe discussed his capabilities, credentials and experience. Mr. Knape politely described why every consulting service Joe had offered was not necessary for German Mutual because of their internal capacity and resources. Mr. Knape acknowledged that other carriers might need some of these actuarial services but not German Mutual. He politely ended the meeting. Two days later he called back to inform Joe that many smaller companies were experiencing difficulty with the acceptance of their hazard insurance policies by lenders, Federal National Mortgage Association, Fannie Mae, and The Federal Home Loan Mortgage Corporation, Freddie Mac. In effect, these carriers were unacceptable to the secondary mortgage marketplace due to their lack of a financial rating.
SHARON ROMANO, CO-FOUNDER, DEMOTECH, INC.
SA: Excuse me for interrupting but didn’t A.M. Best Company or any other entity rate these companies? SMR: They did not. In fact, we were told that Best had advised Fannie, Freddie and the National Association of Mutual Insurance Companies that it was impossible to rate these companies. Fannie, Freddie and NAMIC had all but begged Best to review and rate these smaller insurers, but they were advised that it was impossible to review and rate so many smaller insurers. SA: But most of these smaller mutual and others had been in business forever, so why did they all of a sudden need a rating? JLP: Back then, when lenders sold their mortgages to the secondary mortgage marketplace, which consisted predominantly of Fannie Mae and Freddie Mac, the buyers of the obligations that were created and resold, wanted their investments protected by financially stable insurers. In those situations where A.M. Best was unable or unwilling to provide a rating, Fannie Mae and Freddie Mac personnel were performing that function internally. It’s my understanding that the situation reached the point where Fannie and Freddie viewed an independent, outside service as necessary. Today the insurance experts at Fannie and Freddie focus on managing insurance requirements and standards. Once Demotech blazed this trail, Standard & Poor’s, Moody’s and Fitch followed our lead. SA: When did you begin to offer ratings? JLP: Financial Stability Ratings® made their debut in 1989 and have been effectively identifying financially stable insurers for nearly twenty-five years. Demotech’s ability to discern financially stable carriers has been documented through a continued on page 26
INSURANCE ADVOCATE / August 20, 2012 25
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comparison to industry icons as well as extensive independent analysis. Although our success is based on several factors, we believe that two major differences distinguish Demotech: simply, our concentration on function and fundamentals; in other words, insurance fundamentals and functionality in this sense: if a small insurer has the proper quality and quantity of reinsurance, and we have performed our financial tests and deem them to be stable, we will assign a high Preliminary Financial Stability Rating (PFSR). Reinsurance is clearly an important feature of the insurance transaction. Other rating services seem to believe that if you cede off the potentially profitable business, you are hurting the profitability of the ceding carrier. In contrast, Demotech believes that insurers should be free to customize their insurance relationships, including reinsurance, in a manner that is consistent with their business model. Clearly smaller insurers, of necessity, use reinsurance
SA: Elaborate further, please. JLP: The concept of FSRs was developed to highlight the financial stability of well-managed, financially stable regional and specialty insurers. Keeping with our focus on regional and specialty insurers, Demotech was the first to review, rate and issue FSRs to smaller, independent, regional insurers, health maintenance organizations and public entity liability insurance pools. The mission of Demotech continued to grow as we issued FSRs to public entity liability self-insured pools through the development of our Management Audit Process. In many ways the Management Audit Process that we have utilized since 1989, was the precursor to enterprise risk management, own risk and solvency assessment and other solvency management processes. By 1989, we were the first company to have its Property and Casualty insurance company rating process formally reviewed and accepted by Fannie Mae. A similar review was completed by Freddie Mac in 1990 and HUD in 1993. HUD then accepted Demotech’s rating process for professional liability insurance under Notice H04-15, Professional Liability Insurance for Section 232 and 223(f) Programs in 2005. SA: What do these acceptances provide to your “rated clients”? JLP: In general, Demotech secures accreditations to level the playing field for insurers that are unrated or underrated by the larger services. This is typically in response to rating requirements imposed by third parties. Whenever an insurer is boycotted, coerced to obtain a rating or otherwise is a victim of restraint of trade, we present the carrier’s case to the third party and demonstrate that the carrier we have reviewed and rated is financially stable. Although, we often update our list of major successes, Demotech is seeing an increasing number of “believers” join the ranks of the enlightened as the logical consequence of our impressive track record identifying financially stable insurers.
more than larger carriers. Equally important, in our evaluation process, the quality of those reinsurers is critical. Similarly, we focus on the quality of invested assets, liquidity, maturity and duration, among typical characteristics. The size of the carrier is relative. Think of boxing, where there are multiple levels of weight and size; heavyweight, middleweight, lightweight, bantam weight. Each level has a champion and a championship belt. We believe insurers should be viewed in a similar manner. In 2007 our Demotech think tank created our Company Classification System that categorizes all P&C insurers into one of 11 categories based on an analysis of data reported by the companies. The 11 categories that comprise the system are: Nationals, Near Nationals, Super- Regionals, Regionals, State Specialists, Coverage Specialists, Strategic Subsidiaries, Risk Retention Groups, Surplus Lines Carriers, Reinsurers and companies with less than $1 million in direct premium written. A company cannot be assigned to more than one category. 26 August 20, 2012 / INSURANCE ADVOCATE
SA: What happened to Demotech with the establishment of the Financial Stability Ratings®? JLP: During the 1990’s we expanded by offering loss cost analysis and rate, rule and form filing assistance to Property and Casualty (P&C) companies and Title underwriters. We also were the first to analyze the financial stability of Title underwriters. SA: Why Title underwriters? SMR: A bit of a natural progression, when Joe decided to obtain an MBA, he wanted to do so to be able to communicate his professionalism to banks and lenders. Right at the intersection of asset-backed lending, real estate and insurance was Title insurance, which insures the marketability of title to real property. He did his MBA research project on Title insurance. Let me add, that in 1985, when he did that research project, the continued on page 28
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Title insurance industry consisted of $1,000,000,000 of premium per year. It reached a peak in 2006 of $16,000,000,000. Demotech began our review, analysis and the promulgation of ratings in 1992, two full years before Title underwriter ratings were required by the secondary mortgage marketplace. SA: Another niche is born… and Demotech developed it. SMR: Yes, more evidence that our boutique size provides flexibility and speed in addition to expertise. JLP: Today, Demotech provides ratings and analysis that assists Title underwriters qualify to do business with lenders. No one has reviewed the Title industry longer than us and no one covers more Title underwriters. This enabled Demotech to be named as an approved Title underwriter rating service when Fannie Mae issued Title underwriting guidelines way back in 1994. Our work within the Title industry continued as we disseminated Commercial Real Estate Recommendations (CRERs) to provide additional financial due diligence to Title underwriters involved in larger real estate transactions.
Today, Demotech provides ratings and analysis that assists Title underwriters qualify to do business with lenders. No one has reviewed the Title industry longer than us and no one covers more Title underwriters.
SMR: Given our expertise in the P&C industry as well as the Title sector, no one is a more effective “translator or interpreter” of Title insurance related issues than Joe and Demotech. SA: Where are you today with the Title industry? JLP: We have continued our analysis of the Title insurance industry through a variety of projects during the last decade. We began in 2001 by completing the initial loss and loss adjustment expense review of the Iowa Finance Authority – Title Guaranty Division. We revitalized the Ohio Title Insurance Rating Bureau, OTIRB, in 2002 and assisted the North Carolina Title Insurance Rating Bureau with the development of Closing Services insurance products in 2003. That year we also filed the first rate revision within Ohio since 1980. In 2004, we formed Louisiana Title Statistical Services Organization, Inc. which we still administer today. SA: Ratings of the Title industry are in line with expectations, I assume. JLP: Yes, we publish the Demotech Performance of Title Insurance Companies. This is the only independent source 28 August 20, 2012 / INSURANCE ADVOCATE
of Title industry information. As of the 2012 edition, all publicly traded Title underwriters and regional and local underwriters representing more than 99% of the Title industry’s Direct Premium Written are included in the publication. This publication also presents comparative statutory operating results, as well as the statutory financial positions of each Title underwriter. SA: Serious About Solvency is your corporate motto. Tell me something about that. JLP: The motto evolved as we directed our analytical abilities internally to evaluate our FSRs. As we did so, discussion ensued on our rating process and what our ratings had proven over the long term. Serious about Solvency – Financial Stability Rating® Survival Rates 1989 through 2004 was published to outline our analysis process, hold us accountable for our assignment of FSRs and analyze the survival rates of insurers we had reviewed and rated during our first fifteen years of issuing ratings. SA: So, you calculated the score card on the accuracy of your ratings? SMR: Yes, that's essentially what we did. SA: What were the survival rates for this period? JLP: From 1989 through 2004, Demotech prepared 23,118 Preliminary Financial Stability Ratings®. In order to calculate the survival rates presented in this analysis, we defined survival as the avoidance of economic failure. For an insurance company, that meant that it continued to pay claims on its own. Over the period 1989 through 2004, 70.46% (16,290 companies) of the FSRs we assigned were Stable, A or above and 29.54% (6,828 companies) were below Stable, S or lower. SA: Insurer economic failure is a reality. What was your definition of economic failure? JLP: Economic failure was in the form of rehabilitation, liquidation, involuntary receivership or conservatorship, license suspension or revocation, supervision or other legal or regulatory remedy instituted by a Department of Insurance for the purpose of protecting the interests of policyholders or claimants. This is what keeps Chief Executive Officers up at night. Voluntary action by an insurance company, including surrender of its license, merger into an affiliate, purchase by a solvent insurer, a capital infusion by a third party or other activity that resulted in the carrier’s continuous ability to honor meritorious claims was considered survival. Our focus was the protection of policyholders, insurance agents, claimants and reinsurers. The central question is can the insurer honor or defend meritorious claims? SA: Claims paying ability weighs heavily? JLP: Yes, and financial stability is independent of size. We believe well-managed, properly reinsured, regional P&C insurers continued on page 30
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Back to School Tips THE WEATHER AND CALENDAR still say “summer”, but students are already heading back to school. There are important insurance considerations for students of all ages. Helping clients address these issues is another value-added service of the professional insurance agent. High tech toys such as cell phones, laptops, and video games are attractive targets for theft. Although generally covered under the parents’ homeowners policy, values will often not exceed the policy deductible. The cost of specific scheduled coverage may be prohibitive. These items should be left at home whenever possible, especially since their use on school property may subject the item to confiscation by school officials. In addition to property exposures, liability is also a consideration. Damage to school property, or acts of bullying by students older than 12 are excluded under most homeowners policies as intentional acts. For students living away from home, damage to their dorm room or apartment is also a concern. Parents could end up paying for these damages or injuries. Back to school also means automobile exposures. According to SafeKids USA, one out of every six drivers in school zones is distracted. Students must exercise caution when walking through parking lots and crossing streets. Commuters must use extra care in parking lots to avoid collisions with other cars or pedestrians, and avoid distractions while driving. Cars should be locked when unattended, with electronics and other valuables out of sight. Transporting other students for a fee to help with expenses is common. However, doing this to make a profit could be considered “business use” and void the automobile coverage. Students with cars away at school should notify their insurance carrier, since this change of garaging location could change the premium. Students away from home without access to a car could make their parents eligible for a reduced auto insurance premium. Students away at school may not be
covered under the parents’ homeowners policy. Full time students up to age 24 are generally considered “insureds”. However, coverage under the homeowners policy for property at a residence other than the primary home is usually limited to 10% of the contents limit. Students living in apartments, especially those they must furnish, often need their own tenant’s policy in order to adequately protect their contents. An added benefit of the tenant’s policy is the liability coverage afforded for unintentional injuries they cause to other people, or damage they do to someone else’s property. Students living away should familiarize themselves with the nearest and alternate exits. A fire extinguisher is always a good idea. Microwaves, toasters and other heating appliances should never be left unattended. Subsequent damage caused by these or open flames (candles, cigarettes, incense or potpourri burners, etc.) could be a liability exposure, especially if use is a violation of school policy. Health insurance is another area for consideration. Requirements vary by state, but there is usually an age limit at which the student is no longer eligible for coverage under their parents’ policy, even if they are technically still a resident of the household. In addition, students away at school may be outside of their plan’s service area. There are a number of affordable health insurance programs that cater to college students. Studying abroad is becoming a more
and more popular option at institutions of higher education. There are special insurance policies that provide coverage if the course is cancelled, and also pay for travel home should the student become ill or injured. Coverage is also available for students who travel abroad during holidays and breaks. College students are asked to share a lot of personal information. Identity theft coverage, which can usually be included on the tenant’s policy, helps pay for expenses incurred to repair the credit record when a person’s identity is stolen. Some identity theft policies offer services to do the time consuming legwork - an important consideration to a student with a full course load. Social security cards and other personal information should be kept in a safe, locked location. For parents and students, back to school time is not just for purchasing new clothes and supplies. It is a good time to review insurance policies to ensure they have proper coverage for students’ exposures. Informing clients of potential issues and ways to prevent problems is the mark of the true insurance professional.
139 Harristown Road Glen Rock, NJ 07452, Suite 100 (800) 935-6900 www.msonet.com INSURANCE ADVOCATE / August 20, 2012 29
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can be more financially stable than larger, highly leveraged P&C insurers. In other words, the financial stability of regional P&C insurers can be accurately analyzed and measured, and furthermore, can support the assignment of a Stable FSR of A or better. This is one of the reasons that Demotech was accepted by Fannie Mae and Freddie Mac back in 1989 and 1990, respectively. We demonstrated our ability to assess the financial stability of regional insurers, particularly their reinsurance treaties and programs. At the time of this study, Demotech had been analyzing the financial stability of Property and Casualty insurance companies for approximately sixteen years. Our retrospective analysis of 23,118 Financial Stability Ratings® indicated that insurers earning FSRs of A or better, Stable companies, had survival rates at or above expectations. Although the 23, 118 included carriers of all sizes, because Demotech focuses on the assignment of Financial Stability Ratings® to regional and specialty insurance companies, our histor-
From its inception, Demotech has worked within the insurance industry as an advocate for regional and specialty insurers.
ical record of financial analysis is evidence that regional and specialty insurance companies assigned Stable Financial Stability Ratings® present no more financial risk than larger insurance companies earning Stable FSRs. Due to the proven predictive ability of Financial Stability Ratings®, FSRs can be utilized to identify financially stable regional and specialty insurers, regardless of size. SA: Your Company Classification System works. You have said so in public appearances.. Would you explain what that is? JLP: Our reputation as experts in the regional and specialty insurance industry had grown over the years. This reputation presented the opportunity for us to define Super Regionals. Insurance Journal came to Demotech with the idea of establishing objective financial standards for stratifying P&C carriers. As we attempted to define Super Regionals™, we developed the Demotech Company Classification System. Insurance Journal published the introductory article on Super Regional P/C Insurers™ as a Special Report, Salute to Super Regionals in February of 2007. We continue to publish an update of this popular report each year. Although Super Regional™ seem to be the most popular classification, the Demotech Company Classification System categorizes all P&C insurers into one of 11 categories, based 30 August 20, 2012 / INSURANCE ADVOCATE
on Demotech's analysis of the data, reported by the companies to the National Association of Insurance Commissioners. Demotech believes that insurers should be categorized by function, not by size. SA: At the beginning of our discussion you stated that Demotech was founded to provide financial analysis consulting services to regional and specialty insurers. How have you developed that idea within the industry? JLP: From its inception, Demotech has worked within the insurance industry as an advocate for regional and specialty insurers. We strive for cooperative relationships with the National Association of Insurance Commissioners (NAIC), the departments of insurance, American Land Title Association (ALTA), Commerce Clearing House, Ohio Title Insurance Rating Bureau, North Carolina Title Insurance Rating Bureau, Insurance Journal magazine, Florida State University and other centers of insurance professionalism. We are often the thought leaders who evaluate how to implement changes in regulations. For example, in 1990, we responded to the NAIC's requirement for P&C insurers to submit Statements of Actuarial Opinion related to loss and loss adjustment expense reserves by assisting regional insurance companies that had not previously utilized an actuary for this purpose. On the insurer ratings side, in 1996, the State of Florida Office of Insurance Regulation contacted Demotech. Subsequent to the numerous insolvencies in 1993, 1994 and 1995, the property insurance market had encouraged the formation of a large number of newly established insurers that did not meet traditional rating agency requirements. Demotech developed evaluation procedures for the assignment of FSRs to newly formed P&C companies. SA: Doesn't Demotech has a large presence in Florida, if I recall correctly. JLP: Demotech has been quite effective in Florida since our initial effort in 1996. In the mid-1990s, hurricanes devastated properties along the Florida coastline and simultaneously devastated Florida’s property insurance marketplace. A large number of the insurance carriers rated by A. M. Best were forced into liquidation. To enhance availability, the State of Florida developed the (then) Florida Residential Property Casualty Joint Underwriting Association ( JUA) to provide homeowners insurance and related property coverage. The JUA, which evolved into Citizens Property Insurance Corporation, became the leading writer of homeowners insurance in Florida. In 1996, the State of Florida, Florida Office of Insurance Regulation (OIR) and the JUA initiated an effort to depopulate the JUA. The depopulation effort included legislation to permit the State of Florida to offer financial incentives to insurers that depopulated the JUA. The legislation includcontinued on page 32
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