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VOLUME 124, NUMBER 18 / October 27, 2013

A CINN Group, Inc. Publication

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Contents [COVER STORY ] 20

MEDMAD Outlook: Profits Flatlining Amid Changes


October 27, 2013 | volume 124 number 18 43



Looking Back: September 17, 1988


In the News: Health Insurance Marketplace Certifcation Course



Foreword: Harold Lee & Sons @ 125 Steve Acunto, Publisher



Insight: Ethics, Conflicts and Justice Steward Peter H. Bickford

LICONY: Disabled by Terrorism, Comforted by Insurance; A Business and a Family Life Preserved


MSO: Distracted Driving


PIA: Calendar of Events


Exposures and Coverages: Flood Insurance Gaps; More on Duty-to-Defend Case; Is Email a Written Record of Settlement Jerome Trupin, CPCU


Guest View: Are We Becoming Ethical in Spite of Ourselves? John R. DiForte, MBA, CPCU


On the Level: Reflections During a Difficult Time N. Stephen Ruchman, CPA


In the Associations: PIANY Honors Ryan with the Hudson Valley RAP Distinguished Insurance Service Award


In the Associations: Big “I” Scores McKinsey Report as “Off Base” on Independent Agency System


On My Radar: Interpleader - When an Insurer Must Interplead Funds Barry Zalma


Courtside: DFS Announces Ban of Harbinger Capital’s Philip Falcone From Involvement in Operations of All New York Licensed Insurers, Including Fidelity New York





Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / October 27, 2013 3

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Steve Acunto

Harold Lee & Sons @ 125


arold Lee & Sons is a credit in a number of ways to the Independent Agency and Brokerage system, but most of all, to the fact that this agency has survived and prospered marvelously as a uniquely ethnic agency, is testimony to the enormous opportunity this country provides. For as long as I have known Steve Boone, he has been a gentleman of the highest order; his sister Sandra and others in his family are great Americans and their agency is a great institution. May it prosper for another 125 years. Unfortunately, I had to miss the Anniversary event which was held at the Chinese Museum and attracted many professionals. We will have a full article in the next issue of the Insurance Advocate... In this issue we discuss the situation facing medical malpractice insurers. In New York State both Novus and Lewis and Clark recently STEVE BOONE, JR. closed here and moved to other states. As you know, risk retention groups are not regulated the same as insurers and can move around with great facility, leaving clients and brokers sometimes in a lurch. New York has two medical malpractice providers – i.e. real insurance companies per se – MLMIC and PRI. In each case these enterprises struggle against incredible odds provided by the trial bar, activists courts, crazy regulations, and crazy requirements – notably the funding of a pool that drains their surplus resources. We applaud MLMIC and PRI for standing tall and staying strong in the marketplace. We believe that they will survive what is seen in the Conning and Company report as a mixed outlook for medical malpractice insurers. We hope so. [IA]











VOLUME 124, NUMBER 18 OCTOBER 27, 2013

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 CONTRIBUTORS Peter H. Bickford Jamie Deapo Sari Gabay-Rafi Michael Loguercio Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x126 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


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.

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By Peter H. Bickford

Ethics, Conflicts and Justice Stewart


eing against ethical standards in our business is like being against apple pie or ice cream! Rooting for conflicts of interest is like a Yankee fan rooting for the Red Sox! We all have rules that must be followed

rules of conduct found in codes of conduct everywhere. Some of these rules are straightforward, common sense rules, prohibiting state employees from: • accepting other employment that could impair the employee’s inde-

Most disciplines of the insurance industry have adopted serious ethical standards or codes of responsibility for their members including, underwriters, brokers, actuaries, claims professionals and others. Our brethren across the regulatory aisle – the employees at the state insurance departments – are also subject to codes of conduct. Peter H. Bickford

in our business and professional lives. These rules are generally set forth in the laws and regulations governing our businesses. But in addition to the rules of laws that we are required to follow, we also have codes of conduct or ethical standards that our respective disciplines issue as the proper way to conduct our professional activities. Some of these codes have serious consequences for violations, usually involving loss of a professional license, such as for lawyers or accountants. Other codes are more for window dressing or exist for their PR value with nominal consequences for breaches, such as the code of conduct for used car dealers. Most disciplines of the insurance industry have adopted serious ethical standards or codes of responsibility for their members including, underwriters, brokers, actuaries, claims professionals and others. Our brethren across the regulatory aisle – the employees at the state insurance departments – are also subject to codes of conduct. The codes for state employees, with a primary emphasis on addressing public trust, are generally found carved in stone in the state laws. An example is the statutory code of ethics for employees of state agencies in New York’s Public Officers Law Section 74. It includes a laundry list of “standards” of conduct that are common

pendence of judgment in the exercise of the employee’s official duties; • disclosing confidential information acquired in the course of the employee’s official duties, or using such information to further the employee’s personal interests; or • using the employee’s official position to secure unwarranted privileges or exemptions for the employee or others. Then there are the more subjective “standards” prohibiting state employees from: • engaging in any transaction with any business entity that might “reasonably tend to conflict with the proper discharge” of the employee’s official duties; • involving in conduct that would give “reasonable basis” for the “impression” that any person can improperly influence or “unduly enjoy his favor” in the performance of an employee’s official duties; • pursuing a course of conduct that would “raise suspicion among the public that [the employee] is likely to be engaged in acts that are in violation of his trust;” or • having any financial or business interest, transaction or activity that is “in substantial conflict with the

proper discharge of his duties in the public interest.” The application of these subjective standards often depends on the viewpoint or bias of those charged with their enforcement. Like former Supreme Court Justice Potter Stewart’s famous definition of pornography (“I’ll know it when I see it”) people will have differing perspectives in determining that an action gives an “impression,” “raises suspicion,” is in “substantial conflict” with proper conduct, or (my favorite subjective test) whether any person might “unduly enjoy” the favor of a state employee. However, too often these abstract concepts are used as weapons rather than standards of conduct. Too often these rules are used by government to stifle legitimate dialogue on issues between regulated and regulator. Too often these rules are used as cover for flawed government policy rather than as codes of conduct to ensure public trust with state employees. The relationship between regulated and regulator in the insurance industry has undergone a transition from open and meaningful dialogue to a strict separation of interest. This is not a new development. It has been evolving over decades. Those of us who have been around for a while remember the days when the NAIC regularly used private sector working groups on major regulatory issues and initiatives. The NAIC leadership eliminated those working groups in the name of preventing undue industry influence over the deliberations by the regulators. Likewise, there was a time when many states, including New York, regularly used private sector expertise in its training of staff professionals such as examiners. Back in the day I had the privilege, along with other private sector industry professionals, of being a panelist for the New York Insurance Department’s associate insurance examiner oral test. There was no hint of concern for undue influence or improper association. It merely made sense to provide exposure to a broad business perspective for department professionals. continued on page 8

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[ INSIGHT ] more insular relationship. Some would argue that this change is appropriate – that there should be no “unnecessary” interaction between them that could in any way lead to undue influence, conflict of interest or interference with the independent judgment of the regulator. While recognizing that reducing the interaction between regulators and regulated is a goal of some industry critics, this isolation comes at the cost of a healthy dialogue between insurance regulators and the industry — a lost

continued from page 6

That program, of course, fell victim to the growing dichotomy between regulator and regulated and long ago stopped using knowledgeable industry panelists, relying primarily on “experts” within the regulatory community. These are but two examples of how the interaction between regulator and regulated has evolved over the years into a much

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While recognizing that reducing the interaction between regulators and regulated is a goal of some industry critics, this isolation comes at the cost of a healthy dialogue between insurance regulators and the industry — a lost opportunity for better understanding of the issues and problems each face.

opportunity for better understanding of the issues and problems each face. Often under the guise of “ethical” considerations, regulatory overlords hide limited knowledge of the business they oversee through forced separation. Some of these efforts can be quite petty, including restricting attendance at conferences, seminars, roundtables, or other traditional educational forums, or even any meaningful contact with industry representatives. These petty restrictions often seem to evidence an insecure bravado by government leadership rather than any sincere concern for improper ethical conduct. A total lack of dialogue was never the intention of the ethical standards for employees of state agencies, but more and more they are being used to restrict contact and dialogue. In the long run, this is a harmful environment for the development of meaningful regulatory schemes that will protect the public while allowing the insurance business to thrive. [IA]

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By Jerome Trupin, CPCU

Flood Insurance Gaps More on Duty-to-Defend Case Is Email a Written Record of Settlement? Is there a Leak in Your Insured’s Flood Coverage? If you’re providing that coverage for your insureds, pat yourself on the back; if you were doing it before Sandy, stand up and take a bow. If your insured requires limits higher than those available from NFIP, you’re probably using commercial insurers whose forms are often broader than NFIP’s. However, even commercial flood coverage is not as water tight as you might think. Most commercial flood coverage forms mimic NFIP’s definition of flood, which reads as follows: Flood, as used in this flood insurance policy, means: 1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from: a. Overflow of inland or tidal waters; b. Unusual and rapid accumulation or runoff of surface waters from any source; c. Mudflow…(definition of mudflow shown in footnote)1 2. Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined in A.1.a. above. It’s not an all-encompassing definition and commercial forms sometimes provide

“Specifically, because the loss arose when water from ‘under the ground’ pressed on and flowed through the building’s foundation walls into the basement, coverage is precluded under the endorsement.” even less coverage. For example, the ISO form does not include number 2 that covers lake shore erosion. The most troublesome gap is subsurface water. Note that the definition of flood links coverage to the inundation of normally dry land. Insureds will often call saying: “My basement is flooded.” It probably is, but if the flooding is due to subsurface water or even a broken water main that hasn’t caused inundation of normally dry land, it’s not a flood under wording like this. A case on point is: Harleysville Ins. Co. of N.Y. v Potamianos Properties., LLC 2 Potamianos Properties owned a commercial building in Syracuse, NY. Its building was severely damaged when an underground water supply line ruptured. The water line measured six inches in diameter. The water pressure resulting from the rupture, together with the washing away of the soil adjacent to the building, caused a large section of the foundation wall to fall, continued on page 12

1 Mudflow is defined as follows: a river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements, such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows. 2 2013 NY Slip Op 05154 [108 AD3d 1110] Appellate Division, Fourth Department July 5, 2013

10 October 27, 2013 / INSURANCE ADVOCATE

Jerome Trupin

Jerome “Jerry” Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property/casualty insurance consulting advice to commercial, nonprofit 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 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

permitting water, mud, and debris to flow into and fill the basement. The appellate court affirmed the lower court’s decision that there was no coverage. It ruled: “Specifically, because the loss arose when water from ‘under the ground’ pressed on and flowed through the building’s foundation walls into the basement, coverage is precluded under the endorsement.” There are insurers that will provide this coverage. See if you can get one for your clients. If not, tell them about the gap.

Another Flood Gap—This Time in National Flood Insurance National flood insurance issued by NFIP excludes damage from earth movement. This doesn’t sound too bad at first blush, but look at the wording of the exclusion: We do not insure for loss to property caused directly by earth movement even if the earth movement is caused by flood. Sandy washed away the ground supporting many homes resulting in substantial damage to the structures. Adjusters working for NFIP/FEMA are interpreting this exclusion to eliminate coverage for the damage resulting from the loss of earth supporting the foundation when the flood is what moved the earth. To make things more difficult for insureds, FEMA is reported to have advised adjusters that it will hold them responsible for errors in adjusting losses. As a result, adjusters are strictly interpreting the policy.3 Depending on the exact wording, insureds with commercial coverage may be able to make an argument that the exclusion doesn’t apply. For example, ISO’s flood form incorporates the earth movement exclusion in the basic, broad, or special form attached to the policy. It contains the following wording: We will not pay for loss or damage caused directly or indirectly by any of the following…Earth movement…

including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include…the action of water under the ground surface That clearly knocks out coverage for underground water, discussed above, but an insured can argue that it creates an ambiguity as to whether it applies to surface water, if that’s what washed away the ground surrounding the foundations. UPDATE: Shortly after this article was written, New York Governor Andrew Cuomo announced that he will use part of the federal Superstorm Sandy aid the state received to “fully compensate” storm victims who had claims denied because of the exclusion of earth movement during a flood.4 We’ll see if New Jersey Governor Chris Christie and Connecticut Governor Dannel Malloy will follow suit. However, it won’t change the exclusion for future claims.

More on Duty-to-Defend Case (K2 Investments v American Guarantee) Last month I wrote about the K2 Investments v American Guarantee court of appeals decision that held an insurer could not deny coverage based on exclusions once it had wrongfully refused to defend the insured. I added an update that a rehearing had been granted after I wrote the article. The rehearing has now been put on the calendar for January, 2014 and a decision is expected in the spring. The case has attracted enormous attention because it may make it much riskier for an insurer to refuse to defend. The dominant interpretation of the decision is that a breach of its duty to defend is deprives the insurance company of the right to argue that the loss is excluded; it must defend the insured and pay any judgment. In effect, the breach of a duty to defend may create coverage. I’ve just seen a different interpretation of the decision. Charles A. Booth, Michael L. Anania and Douglas J. Steinke, leading insurance defense attorneys with Ford

Marrin Esposito Witmeyer & Gleser, contend that this decision is not the cataclysm that most insurance defense attorneys fear.5 They write, in part: “K2 is best understood simply as a routine opinion that reached the right result... [T]he court’s extraordinary action…to grant reargument of K2 confirms that the perceived dominant view of that opinion is not what the court intended…The court, in recent years, has granted less than 1 percent of reargument motions, and to do so here clearly telegraphs the court’s concern over its initial opinion and how it is being construed.” In their opinion, the question of American Guarantee’s liability for the malpractice claim was settled when the prior court entered a judgment against the attorney for legal malpractice. American could not relitigate that point. They contrast the K2 case with the leading case on breach of duty to defend, Servidone Construction Corp. v. Security Ins. Co,6 In that case, as in most duty-to-defend cases, there had been no court determination of liability. The lower courts held that the insurer could not plead exclusions to escape liability. The Court of Appeals, however ruled that “an insurer’s breach of its duty to defend does not create coverage and that ... there can be no duty to indemnify unless there is first a covered loss.” Booth, et al. point out that the Court of Appeals did not mention the Servidone case in the K2 decision. Servidone has been cited, with approval, in more than 350 cases in the 28 years since its issuance. They do not feel the Court of Appeals intended to reverse Servidone and would certainly mentioned it if that was their intent. Booth, et al. point out that there’s no need to reverse Servidone in the K2 case as the underlying facts are different. Insurance industry trade organizations are seeking court permission to file amicus briefs supporting reversal of the decision. continued on page 14

3Ken Serrano “When the Earth Moves, Insurance is Denied” Asbury Park Press August 23, 2013 (accessed 9/18/13) 4 “Cuomo Announces Aid For Homes Damaged By Soil Movement During Irene, Lee, Sandy” NY1 News September 29, 2013—lee—sandy (accessed 9/29/13) 5 Charles A. Booth, Michael L. Anania and Douglas J. Steinke “Another View On K2 Investment V. American Insurance” Law370 September 10, 2013 (accessed 9/18/13) 6 64 N.Y.2d 419 (1985)

12 October 27, 2013 / INSURANCE ADVOCATE

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Senator John Sherman Author, Sherman Antitrust Act

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urgood Marshall U.S. V. Topco Assoc., 405 U.S. 596 (1972)

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[ EXPOSURES AND COVERAGES ] continued from page 12

We’ll see how this turns out. I’ll keep you posted.

An Email Strikes Again—Provides Evidence of Settlement Last month I wrote about a broker’s staff member who essentially pled guilty of malpractice in an email. In explaining why she didn’t notice that the application for insurance for the Cleveland Indians “Family Fun Day” indicated that an inflatable slide , which collapsed and killed a spectator, would be used, she emailed: “I’m so used to quoting up your events I think I hardly look at anything but the dates and the details of the event.” After that, the E&O claim against the broker was an open-and-shut case.7 This month, I came across an even stranger email story closer to home. On November 16, 2008, John Forcelli was seriously injured in three-car accident on the Saw Mill River Parkway in Westchester County. He claimed that a car driven by Steven Kuhn ran a red light and struck a car owned by Gelco, which in turn struck his car causing his injuries. On February 10, 2011, the insurers for all three parties moved for summary judgment. That same day, attorneys for Gelco met in a mediation session with the attorneys for the injured driver, John Forcelli. The

mediation attempt was unsuccessful. On April 22, 2011, Brenda Greene, claims adjuster for Gelco’s insurer, reopened negotiations with Forcelli’s attorney and offered $200,000 to settle the claim against Gelco. Negotiations continued and on May 3, 2011, Greene increased the offer to $230,000. The offer was accepted and she sent an email to Forcelli’s attorney as follows: “Per our phone conversation today, May 3, 2011, you accepted my offer of $230,000 to settle this case… “You also agreed to prepare the release…Please forward the release and dismissal for my review. Thanks Brenda Greene.” On May 4, 2011, Forcelli signed a release, notarized by his attorney. On May 10, 2011, the court granted Gelco’s motion for summary judgment, dismissing all claims against Gelco. Gelco’s attorney notified the other parties of the court’s decision on May 11, 2011. That same day, Forcelli’s attorney sent the signed and notarized release to Greene; she received it on May 16, 2011. In New York, agreements to settle are governed by law, CPLR 2104. It provides that an agreement between the parties or their attorneys, other than one made between counsel in open court, is not binding unless it is in writing.8 If the agreement to settle was binding, the summary judgment exonerating Gelco would not set it aside. The question for the court was

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whether the email satisfied the requirement that the release be in writing. In deciding in favor of Forcelli, the court wrote “On these appeals we address the question of whether an email message can satisfy the criteria of CPLR 2104 so as to constitute a binding and enforceable stipulation of settlement. Under the circumstances of this case, we conclude that the subject email settlement agreement was enforceable.” Therefore, the $230,000 release was binding even though the insurer had obtained summary judgment exonerating its insured.8 Second Thought: My first reaction to this case was: Why did the adjuster offer to settle a case where her insured had a good defense and why didn’t she wait until the declaratory judgment issue was resolved? On reflection, I see some possible reasons: 1. The insured’s defense may not be as strong as the brief description in the decision makes it appear. 2. The claimant’s injuries may have been so severe that an adverse decision would be very costly. 3. The third party may have low limits while Gelco has very substantial limits so that a joint and several award might leave Gelco’s insurer holding the bag. 4. Most summary judgment motions are denied. An adverse decision on the summary judgment motion would eliminate the negotiating leverage of a pending summary judgment case. Nevertheless, when the insurance company asks for a premium increase on renewal, citing “adverse experience,” you’ll be able to hear the insured’s screams without the need of a telephone. Learning Point: Emails equal writing. Be careful what you write and tell your staff to be careful, too. Emails can bite. Don’t feed them. [IA] 7 Cleveland Indians Baseball Co. v. N.H. Ins. Co., et al. US Court Of Appeals 6th circuit No. 12-1589 (8-23-13) 8 McKinney’s CPLR Rule 2104. Stipulations CPLR%202104.doc (accessed 9/24/13) 9 Forcelli v Gelco Corp. 2013 NY Slip Op 05437 July 24, 2013 Appellate Division, 2nd Department /reporter/3dseries/2013/2013_05437.htm accessed 9/24/13


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By John R . DiForte, MBA , CPCU

Are We Becoming Ethical in Spite of Ourselves?


adical shifts in technology are leading to greater transparency in our daily lives. Any time we use an electronic device, we leave a record that can be searched, cross-referenced, duplicated, and potentially shared. This knowledge of transparency often leads to

It is likely more cost-effective in the long run for the hospital to own up to the mistake and inform the family that their loved one did not die of natural causes. By doing the ethical thing, the hospital has imbued within its employees the basic values that promote trustworthiness in the

A change in the legal environment is also causing an evolution in our moral and ethical conduct. Moral decisions are moving from thoughtful calculations to natural, instinctive behaviors. Our moral code of ethics is self-correcting, based on external constraints imposed on us. John R. DiForte

increased ethical behavior. A change in the legal environment is also causing an evolution in our moral and ethical conduct. Moral decisions are moving from thoughtful calculations to natural, instinctive behaviors. Our moral code of ethics is self-correcting, based on external constraints imposed on us. Transparency increases these external constraints. I gave a seminar in New York in March. One of the case studies I presented was on medical malpractice. In the scenario, an elderly patient goes to the hospital with the mfamilies’ expectation of him dying. However, the patient does not die of natural causes but because of the hospital’s malfeasance. His family, unaware of any misconduct, quietly buries him. Following its Best Practices protocol for when a fatality occurs, the hospital determines that an overdose of medication was in fact the reason for the patient’s demise. The question for the hospital is, should it now inform the family that he died from the hospital’s actions? A lively discussion ensued at the seminar. One of the participants, a senior claim executive said, “You have no choice but to tell the truth. If more than one person knows the truth, it will surface. Even if only one person knows, his conscience will eventually demand that the truth be told.” 16 October 27, 2013 / INSURANCE ADVOCATE

or slowed down.”1 The information is out there; it is just a matter of it being found. Dennis Jay, an executive director for the Coalition Against Insurance Fraud, recently reported that the Wall Street Journal and the Center for Public Integrity filed a lawsuit under the Freedom of Information Act to lift a ban that exempted Medicare data. Jay writes, “If the ban is lifted, journalists would have access to data about physician treatments, tests ordered, and a whole host of medical services. The news media would represent another powerful entity crunching medical data and potentially uncovering fraud and abuse by medical providers.”2 Technology adds a level of discipline that compels us to be more ethical.

The Other Shoe institution. In this era of transparency, serious errors are always exposed. Cover-ups, once revealed, are infinitely more expensive than restitution.

Transparency While traveling into Manhattan, I used my E-Z Pass to cross the bridge and go through the tunnel. At my destination’s garage, the attendant scanned me in. I then used my metro-card that is linked to my credit card to enter the subway. I used my debit card to pay for sundries at Walgreens and took some cash back. My mobile phone pinpoints my whereabouts to anyone who wants to know where I am. Not a moment of my day am I offb the grid. My life is transparent. Technology has radically changed our lives and our expectation of privacy. We are approaching the age of perfect information. Voluminous amounts of data (Big Data) are now being generated by expert systems. More importantly, the algorithms developed to process this data into usable form grant us no quarter and give us no place to hide. Don Peppers and Martha Rogers in Extreme Trust: Honesty as a Competitive Advantage explain, “Transparency will increase because of technological progress, and progress is inevitable. It cannot be avoided, averred,

Over the last several years, whistleblowing statues and employee accountability have caused a major paradigm shift away from keeping secrets within an organization. Janet Morrissey reports in Time magazine, “In what could give new meaning to the phrase—‘If you see something, say something’—a clause within the financial reform legislation is offering big cash rewards to whistleblowers who report fraud and other wrongdoing at U.S.-listed companies and Wall Street banks.”3 Tips leading to recovery will result in $100,000 minimum payouts under current law. As a result, corporate culture has changed, and that which heretofore was acceptable, is no longer. A compelling force, both moral and financial, is causing employees to become more ethical.

The Great Recession, Crime and Insurance Fraud Historically, during difficult economic times, we can predict a spike in crime and insurance fraud. If we examine workers compensation losses over the recession period of 2008 to 2011, we would expect to find a significant increase in claims activity. However, this was proven not to be true. Similarly, in other lines of business, although there were some increases in continued on page 18

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fraudulent claims activity, there were not the expected spikes. Frank Scafidi, director of public affairs, National Insurance Crime Bureau says, “… There were dire predictions of rampant crime in general from the recession, and the opposite occurred—crime rates and criminal activity decreased through those years.” Among the reasons why crime is down is that crime is paying less because ethical behavior is paying more.

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Conclusion An evolutionary shift in the legal environment coupled with perfect information has caused people to consciously make decisions that result in an ethical conclusion. Before the days of transparency, people would weigh the variables of a situation to determine their actions. In the age of transparency, all the information is out there, and we are now compelled to make the ethical choice. As the legal environment becomes more vigorous and the information becomes more perfect, doing the ethical or “right” thing will change from weighing the consequences to engaging in instinctive behavior. [IA] Endnotes 1. Don Peppers and Martha Rogers, Extreme Trust: Honesty as a Competitive Advantage (New York: Portfolio/Penguin, 2012). 2. Dennis Jay, “Court to Rule on Medical Data Transparency,” Insurance Fraud Blog, January 24, 2013, blog/?p=2048 (accessed April 4, 2013). 3. Janet Morrissey, “SEC Now Offering Big Payoffs to Whistle-Blowers,” Time, August 19, 2010, article/0,8599,2012066,00.html (accessed April 4, 2013).

John R. DiForte is an independent insurance agent and president of The DiForte Agency Inc., which is located in Staten Island, New York. He is a past president of the CPCU Society New York Chapter, a member of the Ethics Committee, and a director of the CPCU Society Europe Chapter, as well as a published author who has lectured on insurance topics for many years. DiForte completed his CPCU in 1979 and earned a master’s of business administration degree in risk management from The College of Insurance.

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20 October 27, 2013 / INSURANCE ADVOCATE

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[ COVER ] Conning and Company’s work provides the insurance industry with some of the most valuable research and observations available. In the report below we present their outlook on Medical Malpractice for the coming years. The original report was entitled Medical Professional Liability - Looming Threats to Solid Performance 2013 from which we extract a summary and present it here for our readers’ benefit. The situation in New York is a difficult one. As publishers for years of New York Doctor Magazine we reported the affliction visited on doctors by the trial bar, by activist courts, by often absurd regulation, and by the simple requirement on their insurers for use of funds to sustain a pool and other like mechanisms that crowded the system. These need to be radically revisited in New York for our malpractice insurers to thrive. When I say insurers, I mean literally that: there are many risk retention groups and other forms of insuring that of course are not insurance companies. I am mistrustful of these kinds of entities unless they pass some kind of regulatory evaluation or muster. We offer this review with an eye to those who would help implement positive change in the Medical Malpractice marketplace. SA

1. Introduction Over the past several years, medical professional liability insurers have prospered. Underwriting profits have been at historically strong levels, with combined ratios well below 100%. Tort reforms, improvements in risk management, and successful defense of claims have brought down losses. Although insurers are still writing profitable business, the future does not look quite so bright. Conning forecasts profits in this line to deteriorate in the next three years, due primarily to four emerging threats. One threat is the cyclical nature of the market, which alternates between rapid increases and decreases in pricing and premiums. Some of this is driven by competitive forces, and some by volatility and slow recognition of changes in losses. Another threat is the regulatory and judicial environment, most notably the evolving nature of tort reform and, more recently, the Affordable Care Act. These changes could drive up loss frequency and severity for insurers. A third threat is the movement of doctors from private practice into hospitals and other large institutions, many of which self-insure their liability exposures. Insurers that are concentrated in single

states could be especially vulnerable to losing business. Finally, medical professional liability insurers face lower investment returns, bringing down profits. The first part of this study takes an indepth look at the major segments of the medical professional liability insurance market in the context of the coming changes. The major segments include specialists, multiline insurers, and risk retention groups. Each of these segments has different strategies, obtains and uses capital in different ways, and has found various responses to changes in the market. The next several chapters in the study explore the four emerging threats in detail, including the forces that drive them and their expected impact on medical professional liability insurers. How long will insurers be able to write profitable business, especially if rates continue their downward trend? How severely will

changes in legislation, including the Affordable Care Act, affect loss costs; will companies need to contend with larger or more frequent judicial awards? How are insurers adapting to the increasing trend of physicians being employed by hospitals? And to what extent will companies be able to rely on investment income in the near future as a supplement to or replacement for declining underwriting performance? The final chapter explores ways in which the four emerging threats will affect these different segments. How will insurers respond if profit margins decline as Conning has forecast? If market conditions deteriorate to the point where peak losses occur, which segments will see companies withdraw from the market, and which segments will see companies sustain and perhaps ultimately raise rates and lead the industry into a hard market? Conning has published a series of Strategic Studies focused on medical professional liability.

2. Executive Summary The Medical Professional Liability Insurance Market In Conning’s outlook for the medical continued on page 22

INSURANCE ADVOCATE / October 27, 2013 21

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[ COVER ] continued from page 21

professional liability segment of the property-casualty insurance industry, we see a picture of declining profitability, which we believe will lead to returns on capital falling below the average for the overall industry by 2015. This is on the heels of remarkably profitable results over the past six years and represents a continuation of an underwriting cycle that has moved from extreme losses to extreme profitability and back again over the past three decades. The decline in profitability comes from three trends: continued decreases in premium that began in 2007, escalating losses over the past several years that may accelerate in the next several years for a variety of reasons, and continued declines in investment returns that supplement underwriting results and are particularly important in the medical professional liability line. Add to this a historical buildup in capital that has taken place over the past six years, which contributes to the decline in return on capital, which also will influence market dynamics in different ways. If we want to examine how the insurance industry will respond to these emerging challenges in the medical professional liability marketplace, we first must distinguish among at least three major groups of insurers addressing the marketplace: • Specialists make up 70% of the traditional market, write predominantly medical professional liability, and are mutuals, stock companies, or reciprocal exchanges, writing in one or more states. About half of the specialists are single-state companies. • Multiline companies make up 22% of the market and write medical professional liability as a line of insurance or reinsurance, along with other lines of insurance. Most of the multilines write in half the states or more. • Risk retention groups make up 8% of the market, are formed by hospitals or physician groups under the Risk Retention Act of 1986, and report as insurance entities under that Act. Geographic concentration of RRGs is similar to specialists. Alternative risk retention, made up of 22 October 27, 2013 / INSURANCE ADVOCATE

The top ten specialists represent about $5 billion in surplus, with premium-to-surplus leverage just under 0.5:1 and reserves-to-surplus about 1.4:1. Smaller specialists are even less leveraged, but make greater use of reinsurance.

captives and self-insurance, may represent as much as two-thirds of potential market exposures, according to an earlier Conning study. Data are limited for these structures and they are not considered as part of the insurance industry marketplace focus of this study. The top ten specialists grew by about 50% between 2001 and 2006, before falling back 20% through 2012. They make up about 70% of the specialist segment. Some of this growth was through M&A. The top ten specialists represent about $5 billion in surplus, with premium-to-surplus leverage just under 0.5:1 and reserves-to-surplus about 1.4:1. Smaller specialists are even less leveraged, but make greater use of reinsurance. The top ten multiline insurers make up 87% of that segment and consist mainly of admitted companies, excess and surplus lines, and reinsurers. Growth patterns for the top ten multilines are similar to the specialists, although they represent about 20% of the premium volume as the specialists. However, the top ten multilines together represent about $85 billion in surplus. Their surplus applies to other lines of business as well. When surplus is allocated across lines of business, the multilines appear modestly more leveraged than the specialists as a group. Multilines use relatively little reinsurance.

The top five RRGs showed considerable growth, but cumulatively represent premiums and surplus less than $180 million. Leverage ratios of premium-to-surplus and reserves-to-surplus are about equal to midsized specialists, though RRGs may accumulate more loss reserves as they mature. To provide added insight, we list some of the specific characteristics of each of the top ten specialists, top ten multilines, and top five risk retention groups. Each of these segments has performed well in the past five years in terms of loss ratio and combined ratio. However, each will be challenged by changing conditions over the next three years: different market behavior in a continued softening underwriting cycle; changing regulatory and tort environments; a declining and consolidating physician and provider marketplace; and a declining investment environment.

The Threat of the Market Cycle One danger that the medical professional liability insurance industry has faced throughout history is the cyclical nature of profits and losses. These cycles last for several years and consist of four different stages: peak losses, hard market, peak profits, and soft markets. A close examination of the parts of the cycle shows the effect of delayed recognition of changes in loss patterns and the competitive factors of strong profits and strong returns attracting new entrants and aggressive expansion. Cycles can be observed in the volatility of the combined ratio, with the latest peak combined ratio (industry losses) occurring in 2001 and the latest low point (peak industry profitability) occurring in 2006. The combined ratio cycle is made up of two other separate cycles: a cycle of changes in losses (claims)—in turn made up of volatility in claim frequency and severity and also changes in reserves for still open claims—and a cycle of premiums that responds to both a changing claims environment and a changing competitive environment. continued on page 24

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[ COVER ] continued from page 22

Peak loss periods, like the one that the industry faced in 2001, tend to happen when rate changes lag rising loss costs. Loss reserves then need to be strengthened, thus reducing profitability even further. Surplus decreases substantially due to heavy loss activity, and some insurers pull out of the market, as The St. Paul Companies did in 2001. The reduced capacity in 2001 brought on a hard market, with double-digit rate increases very common among policyholders. Higher premium rates, combined with a reversal of loss trends marked by lower frequency and moderate severity growth, led to improvements in cash flows and combined ratios. The hard market led to peak profitability among insurers, with very favorable underwriting results due in part to reserve releases. Industry capital increased substantially between 2005 and 2008, due to the attractiveness of this line of business and the surge in RRGs. Heavy competition and abundant capital drove the softening of the market. Rates have been decreasing for the past several years, despite growth in incurred losses since 2010. Competition extends to the various states, with more companies competing in new markets as they seek to deploy capital and diversify exposure. Rising combined ratios and reduced cash flows in recent years are symptoms of market softening. Recent spikes in accident-year loss ratios and an uptick in incurred claim development also suggest that further loss deterioration is likely.

The Threat of the Legal Environment In the wake of rapidly increasing frequency and severity of medical professional liability lawsuits, particularly since the late 1990s, medical providers and legislators have instituted reforms. Medical providers responded by changing the risk management model to focus on the patient. Patient safety officers encouraged greater transparency among health care professionals and, when errors did occur, many hospitals opted for full disclosure. 24 October 27, 2013 / INSURANCE ADVOCATE

The hard market led to peak profitability among insurers, with very favorable underwriting results due in part to reserve releases. Industry capital increased substantially between 2005 and 2008, due to the attractiveness of this line of business and the surge in RRGs.

Evidence has shown that such a policy was effective in reducing both frequency and severity of claims. Widespread tort reform also played a key role in reducing loss costs. Changes such as the limitation of economic damages, the use of alternative dispute resolution, and prescreening trials contributed to improvements in incurred losses. While tort reform efforts are continuing, they are coming under challenge in a number of states. At the same time, some evidence of increases in severity, and also of potential increases in frequency, is beginning to emerge. Although claim frequency has continued its downward trend, the concern is the 1% of claims that exceed $2 million. In 2012, the 14 largest jury awards totaled more than $1 billion. These “headline” cases have the potential to open the door for future lawsuits as attorneys look for significantly large payments and medical providers look to settle rather than risk possible financial ruin from a catastrophic claim. Adding to the fear of higher jury awards is the likelihood of greater claim frequency resulting from the implementation of the Patient Protection and Affordable Care Act. Physicians and hospitals will have to adapt to the influx of new patients expected when the individual

mandate takes effect in 2014. The impending increase in physician shortages may lead to longer waits for patients to book appointments, thus increasing the chances of complications. Much of the increased patient load will be handled by physician extenders such as nurse practitioners and physician assistants. These professionals have had a growing presence in the medical field in recent years. Not only have they played a greater role in doctors’ offices and hospitals, but also they are commonly used in retail clinics, which are proliferating across the country. One concern is that the public may not be clear about the functions of physician extenders. The lack of understanding about their role could increase risk for medical professional liability insurers. Besides the individual mandate, the PPACA introduces other changes that could affect claim frequency. The implementation of electronic health records could lead to a greater incidence of adverse events, as medical staffs adjust to new systems and experience technical problems. Cost savings by accountable care organizations will make it more difficult for doctors to practice defensive medicine, thus increasing the potential for missed diagnoses. By the end of 2013, almost 25% of all physicians are expected to belong to ACOs. The implementation of a new system could result in additional lawsuits if the service provided by these organizations does not meet patients’ expectations.

The Shifting Health Care Provider Base The expenses and administrative burdens of the PPACA have accelerated another recent trend in health care: the consolidation of doctors into hospitals and other large medical facilities. The movement of physicians from private practices into hospitals and other larger entities has accelerated in recent years due to higher expenses, growing administrative burdens, and a desire for doctors to live a more stable lifestyle. Hospitals, which have greater control over both doctors and continued on page 26

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continued from page 24

While some insurers have made efforts to reduce credit quality and invest more money in equities, they continue to allocate much of their portfolio to highquality bonds and do not often diversify into nontraditional asset classes.

physician extenders, have been motivating physicians to focus more of their time on high-risk cases, thus increasing the possibility of medical errors as physician extenders assume more responsibility for routine cases. The consolidation process presents growth challenges for many insurers that focus most of their business on physician coverage. Physicians who leave their private practices for hospitals usually give up their coverage and become insured by the hospitals. Most hospitals self-insure their liability exposures, thus reducing the potential for organic growth among insurers. While some companies have responded by introducing products that combine physician and hospital coverages, many insurers have found consolidation necessary to compete in this shrinking market. As Chapter 3 indicates, there has been a steady number of mergers and acquisitions among medical professional liability insurers in recent years. In the previous chapters, we discussed two forces that could threaten medical professional liability insurers: the market cycle and legal trends. The movement of physicians into hospitals exacerbates both of these threats. Heavier competition for a shrinking client base brings down rates, thus prolonging the soft market. As hospitals grow, the additional assets create greater incentives for lawyers to seek higher awards, thus increasing the potential for higher claim severity.

Declining Investment Income Adds to Profit Pressures Treasury rates have been declining over the past three decades, with the rate of decline accelerating since 2008. For insurers whose portfolios consist mainly of bonds, book yields have been falling, resulting in lower investment income. Continued decreases in investment income are expected as insurers reinvest their securities at lower rates. The drop in investment income puts more pressure on medical professional liability insurers to write profitable business. In previous years, insurers had an easier 26 October 27, 2013 / INSURANCE ADVOCATE

time writing business at an operating profit, despite high combined ratios. With lower investment income relative to earned premium, insurers have a higher probability of writing business at an operating loss, as they did back in 2001. Different groups of insurers implement various strategies for investments. Multiline insurers have higher durations and lower credit quality relative to specialists and RRGs, which is consistent with generally larger pools of assets to invest and a greater diversification of liabilities. Specialist companies have implemented more conservative investment strategies and, as a result, have had consistently lower investment yields relative to multiline companies. Investment strategies for smaller specialists have been extremely conservative, with many companies not even investing in equities. RRGs have had a slightly more aggressive investment policy, with relatively large allocations of equities in their portfolios and average credit quality that is comparable to that of larger specialists. Despite the drop in yields, it does not appear that medical professional liability insurers are making an aggressive attempt to increase investment income. While some insurers have made efforts to reduce credit quality and invest more money in equities, they continue to allocate much of

their portfolio to high-quality bonds and do not often diversify into nontraditional asset classes. Because of this conservative investment strategy, insurers should not expect increasing investment income to provide much of a solution to falling profitability over the next couple of years. However, there is a range of investment performance among even specialist companies that suggests some companies are more aggressive within categories in seeking added yield. Given the leverage of assets to premiums, a 100 bps (1 percentage point) overall increase in yield can be the equivalent of more than 6 points improvement when comparing the combined ratio to the operating ratio. With combined ratios and margins projected to fall in the current soft cycle, that level of improvement may become an important differentiator. Considerations of asset allocation to include equities and alternative investment classes also may provide a path to improved returns at similar or slightly more aggressive risk levels. Many medical professional liability insurers are very strongly capitalized in the current environment and may be positioned to take additional risk in light of softening underwriting markets.

Two Possible Roads Ahead Conning’s forecast is based on a range of assumptions regarding rate changes, loss trends, exposure drivers, and investment income. The outlook for medical professional liability is for rising combined ratios and operating ratios and declining premium. The forecast is influenced by the four emerging threats previously discussed. The softening market likely will continue to bring down premiums through 2014, with just a small increase in 2015 in response to shrinking profit margins. Growing frequency and severity resulting from the ACA and larger jury awards likely will bring up losses, though continued reserve releases are expected to mitigate these losses. The movement of physicians to hospitals is projected to be offset by growth in continued on page 28

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Disabled by Terrorism, Comforted by Insurance


arry Waizer’s life changed forever on September. 11, 2001. He boarded Metro North in Scarsdale to arrive at his office at One World Trade Center at 8:40 a.m. When the building was hit at 8:46, Harry was in an elevator on his way to his office at Cantor Fitzgerald on the 104th floor. Despite third-degree burns over much of his body from blazing jet fuel, Harry walked down 78 floors to the lobby where he was rushed to a burn center. For the next two months, Harry fought for his life. He spent time in a coma, and staved off numerous infections and pneumonia. He spent three months in a burn center undergoing therapy. When he returned home to his wife and three children, one thing he didn't have to worry about was his financial situation. When disaster struck, Harry was financially prepared. Within 30 days, he was collecting benefits from several long-term disability policies that helped to replace his entire working income. Harry also owned several whole life insurance policies, as well as a term life policy that was converted to a whole life

“Having the insurance gave me an ease and confort I would not have otherwise had.”

policy once the disability occurred. Each carried a disability waiver of premium provision, which meant that his insurance company paid all of Harry’s premiums, assuring him of continued coverage while saving $25,000 a year to pay for retirement and his kids' college educations. “Having this insurance gave me an ease and comfort I would not have otherwise had,” Harry says.■

ner had the foresight to purchase disability insurance. The policy replaced a portion of Jerry’s lost income, and a buy-sell provision guaranteed that Jerry’s partner could buy out his share of the business at a fair price. Indeed, insurance has allowed Jerry and his family to maintain the lifestyle they enjoyed before his disability struck. Jerry and his wife, Barbara, still live in their same Webster, New York, home, and two of their three children attend college. When Jerry and his partner took out the disability policy it was one of hundreds of business decisions they made, but one he still vividly remembers. “It has just been a – I want to say, a gift, but I can’t

A Business and a Family Life Preserved


ife insurance companies paid $24 billion in many types of benefits to New York State residents in 2010. Some of it went to folks like Jerry Sullivan, who was diagnosed with a tumor on his optic nerve at age 46. Surgery revealed an aneurysm and set off a chain of complications that ended Jerry's working life and left him feeling as if he were in a dream, unable to wake up. He had to relearn ordinary activities that most people take for granted, such as shaving and feeding himself. Though he appears healthy and is able to maintain his 20-mile-a-week jogging regimen, simple tasks may take him hours to accomplish. Doctors say Jerry will never return to his old business of selling electronic components. Fortunately, Jerry and his former part-

The policy replaced a portion of Jerry’s lost income, and a buy-sell provision guaranteed that Jerry’s partner could buy out his share of the business at a fair price. thank myself enough,” he says. “I’ll never forget signing that thing and how phenomenal it has been.”■

These articles are based on realLIFEstories from the LIFE Foundation.

O: (212) 986-6181 F: (212) 986-6549 551 Fifth Ave., 29th Floor, New York, NY 10176 website:

INSURANCE ADVOCATE / October 27, 2013 27

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[ COVER ] continued from page 26

physician extenders and retail clinics, while lower investment income is expected to drive down ROEs. Because of these market drivers, the medical professional liability insurance industry as a whole will not be expected to make an underwriting profit in 2015. Multiline insurers may pull back some capital because ROEs for other major commercial lines are expected to be higher. However, most companies will still be expected to make a profit due to investment gains; no significant market movement is expected. Nevertheless, a number of factors could bring down profitability further than expected. Rates could decrease even further, the trend of physicians moving to hospitals could continue at its current pace, large jury awards could continue their growth, claim frequency could rise more than expected, and medical inflation could outpace expectations. The convergence of these forces could drive up loss ratios rapidly. Upon seeing this sudden change in trends, insurers may be less willing to release reserves, thus compounding growth in incurred losses. In this scenario, insurers would be writing business at both an underwriting and an operating loss. The above scenario would have a significant impact on medical professional liability insurers. Multiline companies likely would reduce business even further, with some companies withdrawing from the market completely. Others would respond by opportunistically increasing pricing in excess-of-loss insurance and reinsurance. A number of RRGs and other captive insurers could shut down, thus reducing capital even further. Companies and providers that seek to navigate this scenario successfully would first need to have mechanisms in place to monitor trends in losses (frequency, severity, and source of losses) in a rapidly changing health care marketplace. This will be difficult in a long-tailed line undergoing inflection points and change and will require monitoring not only claims experience, but also claims notices, tort trends, geographic differences, and provider trends. As part of this, companies would 28 October 27, 2013 / INSURANCE ADVOCATE

Rates could decrease even further, the trend of physicians moving to hospitals could continue at its current pace, large jury awards could continue their growth, claim frequency could rise more than expected, and medical inflation could outpace expectations.

need to look for ways to improve loss experience by improving their risk management services to clients, educating medical providers on patient safety, and lobbying for tort reform. Competitive information will be important not only to monitor needed pricing responses, but also to defend against the potential for aggressive competitor moves looking for market share. Relating to this, product development skills will be important in bringing effective products to new providers and provider structures. This includes focus on the needs of existing insureds to emphasize retention. Finally, companies will need to look closely at investment strategies in the context of operating trends. With continued declines in core investment yields and a declining underwriting margin environment, companies will need to look at opportunities to use their investment risk capacity to help support capital preservation and growth. Capital preservation will be important for positioning companies through the cycle and to take advantage of opportunities as they emerge. [IA] This publication has been prepared for and distributed exclusively to specific clients of Conning. Further distribution, sale, or reproduction, in whole or in part, and by

any means, is prohibited. Statements and information in this report were compiled from sources that we consider to be reliable or are expressions of our opinion. The report is not intended to be complete, and we do not guarantee its accuracy. It does not constitute and must not be considered investment advice. About Conning Conning ( is a leading investment management company for the global insurance industry, Cathay Conning Asset Management, and its Goodwin Capital Advisers subsidiary. The Company’s unique combination of asset management, risk and capital management solutions, and insurance research helps clients achieve their financial goals through customized business and investment strategies. The company is headquartered in Hartford, Connecticut, with additional offices in Purchase, London, Cologne, and Hong Kong. Insurance Research Conning publishes a number of insurance industry research services, including its Insurance Segment Reports semiannual line-of-business 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 our webbased research portal Conning Library (

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Distracted Driving DISTRACTED DRIVING is a hazard to everyone. National Highway Transportation Association (NHTSA) statistics show that, in 2011, distracted driving was the cause of more than 3,300 deaths and 387,000 injuries in the United States. ( ) Distracted driving can lead to serious consequences. Educating your clients about these dangers is another value-added service of the professional insurance agent. What is distracted driving? Any time drivers take their eyes off the road, hands off the wheel, or engage in any non driving activity, they are distracted. Although a lot of attention has been paid off driving). Texting According to the to the dangers of talkrequires visual, maning on the phone or ual and mental parNational Highway texting while driving, ticipation, so it is Traffic Safety distracted driving probably the most also includes activities dangerous of all disAdministration’s such as eating, tractions. Sending a grooming, reading, text takes the driver’s (NHTSA) National talking to other occueyes off the road for pants of the vehicle, Occupant Protection about 4.6 seconds, or adjusting the radio, or Use Survey (NOPUS), the same amount of driving while drowsy. time it takes to travel at any given According to the the length of a footNational Highway ball field at 55 miles daylight moment, Traffic Safety Adminper hour. Many states approximately istration’s (NHTSA) have speed limits far National Occupant in excess of 55 mph, 660,000 drivers Protection Use Surso in 4.6 seconds, devey (NOPUS), at any pending upon the ac(or about 5% given daylight motual driving speed, of total drivers) ment, approximately that football field dis660,000 drivers (or are using cell phones tance could easily about 5% of total double or more. or manipulating drivers) are using cell Most states have phones or manipulatlaws about the use of electronic devices. cell phones while ing electronic devices. 7% of drivers driving. For example, age 16-24 admitted to using such deNew York bans the use of handheld devices while driving. Only 1% of drivers vices and texting while driving. Conover 70 years of age use electronic devictions for texting while driving or cell vices while driving. phone use will result in five driver vioThere are three classes of distraction: lation points against the driver’s record. visual (taking your eyes off the road); For drivers with probationary licenses manual (taking your hands off the or learners’ permits, such as teenagers, wheel) and cognitive (taking your mind a conviction means loss of license or

permit for 60 days. ( New Jersey and Connecticut ban texting for all drivers. They also prohibit cellphone use (handheld and hands-free) for bus drivers and novice drivers. On a federal level, the Federal Motor Carrier Safety Administration prohibits texting while driving by commercial vehicle operators. Federal employees are not allowed to text while driving on business or using government equipment. Distracted driving is a significant hazard to everyone on the road, and it can injure or kill innocent people. Using a hands-free device is only slightly less dangerous than a handheld, so the best way to avoid distracted driving from a cell phone is to turn it off when the ignition is turned on. Educating your clients to the true dangers and potential consequences of distracted driving from the use of electronic devices and other activities, is another sign of the true insurance professional.

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By N. Stephen Ruchman, CPA

Reflections During a Difficult Time


am writing this article at the end of a difficult week for me. I attended the wake and services for my long-time friend and assistant, Roberta. It’s difficult to describe the depth and importance of the relationship Roberta and I shared. I was lucky enough to hire my Roberta 45 years ago. At that time, she was a collections

I’ll do my thing.” Roberta knew she was an indispensable part of our business: While my strength, like most agents, is my ability to sell, hers was to make sure I could focus on doing so. We often hear the adage: “Nobody does anything ‘till somebody sells something.” It’s important to remember, that while the adage

They tell me it’s difficult to find qualified people who could use the work and do a good job. But in the long the run, I think investing in finding the right people is worth it. Like Roberta, great employees save agencies time and money and they keep our reputations (our livelihood) intact. person for TransAmerica, and when she came to me for a job, she was looking to switch to part time. The part-time job she filled at my office turned into a full-time position very quickly. And with her, my business grew successful. I always had confidence that my bills were paid, that my employee records were up-to-date, and if I had a problem and I needed a second opinion, I knew I could always rely on Roberta to be an honest advisor. I considered her my private consultant and counselor. In February of this year, Roberta was stricken with sickness and on Oct. 1, she passed away. In the days preceding her passing, I was privileged to talk to her and thank her for her support and loyalty and for all the work she gave to me and my organization. But I saw she was in pain and it was time to leave. My words seemed insufficient, and I wish I could have told her more. Remembering Roberta, there are a few things that surface immediately to my mind. She was resistant to change and I wouldn’t say she embraced technology quickly. But, when I made the decision to upgrade equipment or change processes, she was the one who made sure it was implemented in the office. I relied on her. She was savvy and she knew how to get things done without requiring oversight. In fact, she preferred not to be overseen. “Let me do my thing,” she told me. “You get out of the office and

N. Stephen Ruchman

32 October 27, 2013 / INSURANCE ADVOCATE

is true, nobody can run an agency alone. The reason I’m writing this is that all agents have their own Roberta. Agents are go-getters and great sales people, but most of us need someone who can keep us organized and on track; to take care of problems when we aren’t in the office or available when situations arise with clients. I would submit that almost every successful agent has a person in the office who they can fall back on; who they rely on most and whom they trust; a long-term employee who really is a partner in their success. Roberta helped me interview potential employees. She was the office leader, cheerleader and project manager. Other staff at my agency had confidence that they could talk to her. She was direct and always honest with me. She was the most honest individual I’ve ever met – one of her greatest traits. She never would intentionally hurt a fly; she was always sympathetic to our clients, who loved her and in return, stayed with my agency. One would call her simply a “good person.” And this became my office culture. Now, I know as agents we are always seeking new, innovative ways to make our offices run efficiently and at the same time save on our expenses. In the midst of Roberta’s passing, I experienced an example of how important client sympathy is in developing loyalty. My AOL account was somehow attacked by an unknown party overseas and thousands and thousands of

emails were disseminated over my name. AOL notified me of the situation and closed down my account until the problem could be resolved. I hired a great group of techies to clear the problem up. We thought the problem was resolved and my account was opened and within 24 hours my email was shut down again because of the same problem. Every time I had to call AOL, we were sent to their support center, which was obviously oversees. We spoke with the support center more than 10 times—and each time, we heard exactly the same script, verbatim. While I had adept technical support, I missed Roberta, who I knew would have dealt with this with more grace than I could. Obviously, the support people at AOL were unequipped to work with me and solve the problem. So I opened a new gmail account. I’ve heard several agents discuss saving labor costs by having certain processes taken care of overseas. They could send information that needs to be processed overnight and the next day, the outsourced work would be completed and on their computers in their office. Sometimes I wonder if this is a good idea: The savings may not be worth it; you may not be able to control what you’ve done; and you certainly can lose the two biggest assets your agency has: 1) your unique and local connection with your clients and 2) the relationship and professionalism your staff brings to your business. I’ve spoken with fellow agents who also are conflicted about outsourcing. While sending work out may result in an initial cost savings, they struggle with their desire to keep work here in the US. They tell me it’s difficult to find qualified people who could use the work and do a good job. But in the long the run, I think investing in finding the right people is worth it. Like Roberta, great employees save agencies time and money and they keep our reputations (our livelihood) intact. It’s true that investing in your staff is difficult. When I hired Roberta, our part time agreement reflected my struggle starting out. When she increased her hours to full time, I paid Roberta more than I continued on page 36

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REGISTRATION REGISTRATION CE-approved Weebinars must m be taken on an individual basis to earn CE credit. Unless stated otherwise, registration fees are $25 per person, per CE credit hour for members, $50 for nonmembers. CE applies only to live Weebinars, ebin NOT for Webinars e On Demand. Every person who needs CE must sign up individuallyy, be at his/her own computer and pay the appropriate registration fee. For CE attendance verification, PIA will monitor attendance.

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Using a “virtual classroom,â€? you will log on to the course via computer each week to get the training you need. No travel, no interruption to daily agency activity and no time out of the ofďŹ ce. Yoou can connect co with other rookies and d bounce questions offf the faacilitator, just like you would in an in-person class setting.

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PIANY Honors Ryan with the Hudson Valley RAP Distinguished Insurance Service Award

brought home. And nowadays, times are tough; an agent’s first instinct is to cut our biggest expense—that’s usually our staff and their benefits. But, I urge agents to think about their biggest asset—because these are one and the same. Client retention is, and should be, a priority for every agency. After all, your staff are your agency’s communication and media to your clients. And, your company’s attitude toward its staff will be reflected to your clients—as the saying goes: Happy CSRs (efficient CSRs) make happy clients. Roberta was my human resources department—she helped to build a culture of trust and encouraged employees by empowering them and rewarding them for identifying and enacting efficiencies. Agencies should reward creative thinking and a culture of service. I think this is one of the best investments you can make. These are things that are difficult to measure, but as agents, we know in our guts to be true. When I sat down to write this column, I started out wondering if I had time to thank Roberta for everything she did for me. She was my right arm. And, I know I am a richer man for having hired her, worked with her and for having been her friend. My thoughts are with her husband, Andy and her two children Lauren and Matthew, as well as her sister Fran, who also worked at my agency. [IA]


LENMONT, N.Y.—The Professional Insurance Agents of New York State Inc. is presenting Kevin M. Ryan, CIC, CPIA, with its Distinguished Insurance Service award at its 10th Hudson Valley Regional Awareness Program. This award is presented to individuals in the insurance industry who have a history of significant contributions and support to the regional insurance community. “With this KEVIN M. RYAN award, PIANY honors Kevin for his long-standing commitment to his community and the insurance industry,” said Alan Plafker, CPIA, president of PIANY. “The award also commemorates his dedication and hard work, as well as his loyalty to our industry. Kevin’s professionalism is to be admired and respected.” Kevin Ryan is president and chief executive officer of The Valley Group Inc., Kingston, N.Y. A PIANY member since 1976, Ryan served as president of the association in 2009-10; president-elect in 2008-09 and first vice president in 2007-08. Currently, he is a member of the Company/Industry Relations, Nominations and Government Affairs Committees. Ryan also is a member of the PIANY Political Action Committee and is an ex-officio member of PIANY’s Kingston Advisory Council. Throughout his presidency and beyond, Ryan worked tirelessly to represent New York’s producer community in meetings and discussions with the NY Insurance Department stating PIANY’s opposition to and seeking clarification of the state’s compensation disclosure regulation. In 2011, Ryan was named PIANY’s Professional Agent of the Year. This award 36 October 27, 2013 / INSURANCE ADVOCATE

“With this award, PIANY honors Kevin for his longstanding commitment to his community and the insurance industry. The award also commemorates his dedication and hard work, as well as his loyalty to our industry. Kevin’s professionalism is to be admired and respected.” - Alan Plafker, CPIA President of PIANY

is given to an agent who has demonstrated excellence and achievement in insurance marketing and service; has shown a personal commitment to professionalism; and has contributed to PIA and the community. In 2005, Ryan was named Committee Chair of the Year by PIANY for his time and effort guiding the association and implementing programs to benefit its members, while chair of the Government Affairs Committee. In his community, Ryan is chairman of the Board of Health Alliance of the Hudson Valley, an organization that resulted from the new alliance of Kingston and Benedictine Hospitals. He is a former chairman of the Benedictine Hospital and past president of the Benedictine Health Foundation board of directors. He also is a past president of the YMCA of Ulster County and a past board member of the Ulster County Chamber of Commerce.[IA] PIANY is a trade association representing professional, independent insurance agencies, brokerages and their employees throughout the state.

continued from page 32

N. Stephen Ruchman, CPIA, is a retired partner of B&B Coverage LLC. A past president of the Professional Insurance Agents of New York State Inc., he is an active supporter of PIANY, and has sat on, or chaired, nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. A graduate of Michigan State University, with a major in insurance, Ruchman is past president of the Peninsula Counseling Center and a member and past president of the Rockville Centre Chamber of Commerce board of directors. He is division chair for the Insurance Division of the United Jewish Appeal and has served on the business advisory board of The First National Bank of Long Island. He can be reached via email at

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Big “I” Scores McKinsey Report as “Off Base” on Independent Agency System


LEXANDRIA, Va.— Robert Rusbuldt, Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) president & CEO, finds serious flaws with much of a recently released study titled “Agents of the Future: the Evolution of Property and Casualty Insurance Distribution” by McKinsey & Company. “McKinsey’s proclamation that it is ’The End of an Era for the Local Insurance Agent’ is dead wrong,” says Rusbuldt. “A number of studies over the last several decades have decreed the demise of the independent agency system, and they have all been wrong. Independent agents are resilient entrepreneurs who know how to adapt to marketplace changes.”   In remarks before the Big “I” board of directors at their recent meeting in San Antonio, Texas, Rusbuldt made the following points regarding flaws in the McKinsey study: • The report ignores the growing trend to “buying local” and the independent agents’ use of social media to magnify their local presence and involvement in the community to drive more traffic to their agency. • McKinsey uses an oversimplified comparison to travel agents and disintermediation. Despite rhetoric to the contrary by the direct carriers, personal lines is more complex than basic travel reservations. • McKinsey doesn’t adequately take into account the IA channel market segmentation towards affluent customers who prefer relationships for personal lines. • McKinsey assumes that the investment in digital capabilities marginalizes the agent rather than aids the agent-customer relationship to add value. • Agents have the opportunity to organically leverage SEO so that they are well positioned for digital consumer searches. McKinsey’s conclusions encompass all agents, exclusive and independent, and there are fundamental differences between them: 38 October 27, 2013 / INSURANCE ADVOCATE

“ is quickly becoming the way more consumers search for an agent, and everything points to the fact that consumers still want to do business with a local agent if at all possible.” - Robert Rusbuldt Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) President & CEO,

independent agency carriers compete for the business of their agents, causing them to take different considerations into account in managing their agency force vs. exclusive carrier relationships with their agencies. “The Consumer Agent Portal, LLC is providing consumers an electronic pathway to finding and doing business with independent agents, and they are working with agencies on digital marketing, social media, local optimization, and much more, enabling agencies to do business the way consumers want to do business, while adding the value that independent agencies provide,” continued Rusbuldt. “ is quickly becoming the way more consumers search for an agent, and everything points to the fact that consumers still want to do business with a local agent if at all possible.” To McKinsey’s credit, noted Rusbuldt, their study does provide agents with several recommendations as to how they can position themselves for success in the future including: • Develop a value proposition that is compelling for both carriers and consumers. • Define and reach target markets, rather than just being a generalist in your local market. • Increase your digital presence.

• Be more flexible in how you communicate with your clients. • Develop new ways to get in front of your audience, both to develop new prospects and to reach out to your existing clients. • Deliver more tailored and deeper expertise, such as bundled insurance packages for personal lines & industry-tailored advice for small commercial risks. • Use technology to be positioned to do more with less. • Increase scale, whether through organic growth, mergers, banding together, outsourcing certain functions. Rusbuldt noted the Trusted Choice® co-brand for independent agencies dovetails with, the way consumers are looking for local agencies now. The Trusted Choice® co-brand, the consumer agent portal, Best Practices, and much more are preparing independent agencies to effectively compete both now and in the future.  ”While independent agency market share in personal lines has been relatively static in recent years, many things are converging for the IA system to increase its personal lines marketshare,” continued Rusbuldt. “While McKinsey says ‘Auto insurance – which accounts for 70 percent of personal lines premiums – is fast becoming commoditized,’ agents can successfully counter the emerging perception of auto insurance as a commodity by ‘going opposite’ with their marketing strategy and fully embracing a local, relationship based strategy leveraging technology and fully embracing the Consumer Agent Portal (CAP).” Rusbuldt also noted the independent agency system is growing. The 2012 Future One Agency Universe Study showed that between 2010 and 2012 more than 1,000 new independent agencies were formed. [IA]

INA 10-27-13_INA 10-27-13 10/28/13 9:31 AM Page 39

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By Barry Zalma

Interpleader When an Insurer Must Interplead Funds


hen an insurance company is faced with competing claims for the proceeds of a life insurance policy and cannot determine which claim is proper, it may deposit the benefits of the policy into court and ask that the competing interests litigate the right to the proceeds. Since it has no interest in the funds, once deposited, the insurer asks the court to release it from any obligation to the competing interests and is entitled to its fees and costs for bringing the action from the deposited funds. In Farmers New World Life Insurance Co. v. Rees, B241099 (Cal.App. Dist.2 08/30/2013), the wife was found dead in the street outside the home she shared with her husband. Her death was investigated as a homicide. Husband, who was the sole beneficiary on the wife’s life insurance policy, was a suspect. The life insurance company filed an interpleader action and deposited the policy benefits plus interest with the trial court. The wife’s mother, who would be entitled to the policy benefits if husband were found to have feloniously and intentionally killed wife, defaults in the action. The court awards husband the interpleaded funds less attorney fees and costs requested by the life insurance company. Husband contended that the attorney fees and costs award was erroneous because his right to the policy benefits never was in dispute.

FACTUAL BACKGROUND Frank and Rosamaria Rees married in 1997. In May 1998 they each obtained from Farmers New World Life Insurance Company (Farmers) a life insurance policy with benefits of $150,000. Rosamaria’s policy insured her life, and Frank’s policy insured his life. They named the other as the sole primary beneficiary and listed no contingent beneficiaries. According to the terms of Rosamaria’s policy, if Frank predeceased Rosamaria, the benefits were to be paid to Rosamaria or to her estate. On September 18, 2009, Rosamaria, on her way to pick up Frank from a Gamblers Anonymous meeting, was shot and killed 40 October 27, 2013 / INSURANCE ADVOCATE

A police officer’s suspicions, like a fraud investigators suspicions, are just that – suspicions. They are not evidence. The Lesson from this case is that interpleader should be filed if there is evidence to support it.

in the street outside the home she shared with Frank. She died intestate. Farmers’ insurance agent informed the company of Rosamaria’s death on September 23, 2009. A claims officer contacted Frank, who indicated that the Los Angeles Police Department (LAPD) was investigating Rosamaria’s death as a homicide. Farmers sent Frank a claim form for the policy benefits. On October 1, 2009, a Special Investigation Unit Manager (manager) for Farmers spoke with an LAPD detective regarding Rosamaria’s death. According to the manager’s notes, the detective reported that “no one has been ruled out in this death. He said that [Frank] is a big gambler and has a couple million dollars in life insurance on his wife.” About two weeks later, on October 14, 2009, Frank submitted a claim to Farmers for the $150,000 in life insurance benefits. For six months Farmers sent letters to Frank informing him that, according to the LAPD, the investigation of Rosamaria’s death still is ongoing and no one has been ruled out as a suspect in her homicide and that it would await the results of the investigation before discharging its obligation. Frank retained counsel and asked for confirmation that Frank’s “claim was complete and that [it] [had] received all the supporting documents needed to process his claim….” Based on the receipt of this

letter, and the fact that Frank was still considered a “prime suspect” in the murder of Rosamaria. The manager referred this matter to Farmers’ legal department and, subsequently, a decision was made to interplead the life insurance proceeds. On August 3, 2010, Farmers filed a complaint in interpleader identifying Frank’s claim for the policy benefits and alleging that, based on LAPD’s investigation of Frank as a suspect in the homicide of Rosamaria. Farmers alleged that, because LAPD has not ruled out Frank as a suspect, Farmers has been unable to determine the appropriate payee for the death benefit proceeds. Frank answered the complaint and filed a first amended cross-complaint, asserting a cause of action for declaratory relief against Farmers and Rosamaria’s mother, as the person who would receive the policy benefits through Rosamaria’s estate if he were found to have feloniously and intentionally killed Rosamaria. Frank asked for a judicial determination that he was entitled to the $150,000 in benefits on Rosamaria’s policy. Frank also asserted causes of action against Farmers for breach of contract and bad faith based on its failure to pay him the policy benefits despite his filing a claim for them. Frank, opposing the motion of Farmers to be discharged from the case, submitted the declaration of an insurance industry expert, who opined that Farmers did not act reasonably and within the standards of the insurance industry in the handling of Frank’s claim in its investigation and payment of benefits. Regardless, the trial court issued an order discharging Farmers from the interpleader action. The court awarded Farmers attorney fees of $7,506.30 plus $491.19 in costs and directed the clerk to pay Farmers that amount, which was the balance of the interpleaded funds.

DISCUSSION In an interpleader action, the court initially determines the right of the plaintiff to interplead the funds; if that right is sus-

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[ ON MY RADAR ] tained, an interlocutory decree is entered which requires the defendants to interplead and litigate their claims to the funds. Interpleader proceeding is traditionally viewed as two lawsuits in one. The first dispute is between the stakeholder and the claimants to determine the right to interplead the funds. The second dispute to be resolved is who is to receive the interpleaded funds. Frank contends that the attorney fees and costs award was improper because the funds Farmers deposited with the court were never “in dispute” as required by statute. The first amended complaint in interpleader defined the dispute over the policy benefits. On the one hand, Frank filed a claim to obtain the benefits as the sole beneficiary on the policy. On the other hand, Frank was a suspect, at one point “a ‘prime’ suspect in the death of his wife, ” and LAPD had an ongoing investigation into Rosamaria’s death. If Frank were found to have feloniously and intentionally killed Rosamaria, he would not have been entitled to the policy benefits, and they would have been payable to Rosamaria’s mother through her estate. A defendant in interpleader has the right to put in issue the question as to whether or not the facts were such as to entitle the plaintiff to compel the defendants to interplead. If the defendants in interpleader have fully litigated their claims without objection, they will be deemed to have consented to the remedy invoked and granted, and will not later be heard to object that the plaintiff ’s complaint did not state a cause of action for interpleader. Frank did not question Farmers’ use of the remedy of interpleader, but rather litigated the matter in the trial court. Frank did not contest Farmers’ decision to interplead the funds. Rather, he answered the original complaint, without asserting any affirmative defenses, and stipulated to the filing of the first amended complaint adding Rosamaria’s mother as a defendant. The statutory scheme for interpleader contemplates an award of attorney fees in the trial court’s discretion. Nothing in that scheme suggests that life insurance companies should be exempt from such an award as a routine cost of doing business. Indeed, to read such an exception into the provision for attorney fees and costs would conflict with the statutory language.

ZALMA OPINION Farmers was lucky that Frank agreed to and litigated the interpleader action. By so doing he allowed the court to determine the actions of Farmers was appropriate in refusing to pay Frank and to interplead the policy proceeds because he was a prime suspect in the death of his wife. My concern is that the appellate decision does not reveal that Farmers did a thorough investigation of the claim presented by Frank but relied, apparently solely, on the representations of the LAPD officers investigating the death of the wife that Frank was a “prime suspect.” Farmers apparently did no investigation of its own. Police officers have a different function than insurance investigators. They seek evidence of a crime that can be proved beyond a reasonable doubt. They have no interest in the rights and obligations of persons insured or their insurer. The insurer must make a decision based on its own investigation and does not have the five years police officers have to complete an investigation. If the insurer did a thorough investigation, determined that there was admissible evidence that indicated a probability that Frank killed his wife and that, therefore, the wife’s mother had a viable claim, interpleader was appropriate. A police officer’s suspicions, like a fraud investigators suspicions, are just that – suspicions. They are not evidence. The Lesson from this case is that interpleader should be filed if there is evidence to support it. [IA]

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 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 Getting-the-Whole-Truth_p_254.html. Mr. Zalma recently published the ebooks, “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 zalmabooks.htm. Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, INSURANCE ADVOCATE / October 27, 2013 41

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DFS Announces Ban of Harbinger Capital’s Philip Falcone From Involvement in Operations of All New YorkLicensed Insurers, Including Fidelity New York Fidelity New York Also Agrees to Put in Place Enhanced Policyholder Protections – Modeled on Those DFS Established at Other Insurance Firms Owned by Private Equity Companies


EW YORK, N.Y. – Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York, announced that Philip A. Falcone is banned from exercising direct or indirect control over the management, policies, operations, and investment funds of Fidelity & Guaranty Life Insurance Company of New York (“Fidelity New York”) or any other New York-licensed insurer for a period of seven years. Mr. Falcone is also banned during that period from serving as an officer or director of Fidelity & Guaranty Life and its subsidiaries or any New York-licensed insurer,

The SEC settlement stated that it “may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations.” as well as participating in the selection of

any such officers or directors. The ban of seven years from these activities shall also apply to the employees of Harbinger Capital Partners, LLC. The ban stems from a settlement that Mr. Falcone and Harbinger Capital Partners entered into with the Securities and Exchange Commission, which detailed admitted facts and wrongdoing that demonstrate serious issues related to Mr. Falcone’s fitness to control the management, operations, and policyholder funds of a New York insurance company. The SEC settlement stated that it “may have collateral consequences under federal or state law and the


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[ COURTSIDE ] rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations.” Superintendent Lawsky said: “It is vital to ensure that those who operate insurance companies will always put retirees and policyholders first and act with the utmost integrity. DFS will continue its work to protect retirees and annuitants when private equity firms purchase insurers. We look forward to continuing to work with other insurance regulators on these important issues.” Fidelity New York has also agreed today to put in place a series of enhanced policyholder protections – modeled on those that other insurers owned by private equity firms and investment companies have established at the request of the New York State Department of Financial Services (DFS). Earlier this year, Guggenheim Partners, LLC and Apollo Global Management, LLC agreed to similar policyholder protections in their acquisitions of annuity companies. Recently, DFS has highlighted a spike in private equity firms and other investment companies moving into the annuity business. This trend raised concerns since such firms typically have a more shortterm oriented business model than traditional insurers, and the annuity business is focused on ensuring long-term security for policyholders. The key heightened policyholder protections to which Fidelity New York agreed include: • Heightened Capital Standards. Fidelity New York will maintain RiskBased Capital Levels (RBC Levels) at an amount not less than 450 percent. (Capital serves as a buffer that insurers use to absorb unexpected losses

“It is vital to ensure that those who operate insurance companies will always put retirees and policyholders first and act with the utmost integrity. DFS will continue its work to protect retirees and annuitants when private equity firms purchase insurers.…” and financial shocks – better protecting policyholders.) • Backstop Trust Account. Fidelity New York will establish a separate backstop trust account totaling approximately $18.5 million to provide additional protections to policyholders above and beyond the heightened capital levels. If Fidelity New York's RBC levels fall below 450 percent, the funds in the backstop trust account will be used to replenish (“top up”) Fidelity New York’s RBC levels to at least 450 percent. The $18.5 million in the trust account will be held separately from other Fidelity New York funds for seven years and dedicated to the sole purpose of protecting policyholders. • Stronger Disclosure and Transparency Requirements. Fidelity New York will file quarterly RBC level reports to DFS – rather than just the annual reports required under New York Insurance Law. [IA]

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LBANY, N.Y.—Following up on their earlier success, The Independent Insurance Agents and Brokers of New York (IIABNY) and the New York State Association of Health Underwriters (NYSAHU) have announced another joint project to certify insurance producers for the state’s new individual health insurance marketplace. The organizations are offering a course for producers in six locations across New York through the end of October. “Our partnership with NYSAHU paid off with the success of the course we offered earlier this year,” said Kathy Lawler, IIABNY’s assistant vice-president of education. “The new course builds on the first one and will enable producers to help individuals and households get the coverage they need. Instructors Dan Colacino and Gerry Gershonowitz have done a fine job on the first course, and we’re excited to have them presenting the new one.” The Federal Affordable Care Act, also known as “Obamacare,” requires every state to have health insurance marketplaces, known as “exchanges.” The exchanges started enrolling residents in health plans on October 1, 2013. They may have two separate marketplaces for buying coverage—one for individuals and another for small businesses. New York’s marketplace, called New York State of Health, will have separate marketplaces. Insurance producers who wish to arrange coverage for their clients on either exchange must take and pass a certification course. IIABNY and NYSAHU have jointly offered the small business marketplace certification course to hundreds of producers since August. The new individual marketplace certification course launched on October 4th. NYSAHU President Renee Guariglia said, “We are pleased to be able to offer this opportunity to New York insurance agents and brokers. The response to the opening of New York State of Health

“We are pleased to be able to offer this opportunity to New York insurance agents and brokers. The response to the opening of New York State of Health shows that New Yorkers want health insurance protection. Those individuals want and need the knowledge and expertise of a certified agent or broker to help them achieve this.…”

shows that New Yorkers want health insurance protection. Those individuals want and need the knowledge and expertise of a certified agent or broker to help them achieve this. After taking this course, our members will be ready to help those individuals obtain it.” New York State Department of Health has reported that its web site received millions of visits shortly after enrollment opened. NYSAHU, IIABNY and New York State of Health staffs have been in communications about both courses all year. The organization consulted on the core curricula for producer certifications. More dates beyond the original six may be added. The schedule and online registration are available on the IIABNY web site. [IA]

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